WALL STREET JOURNAL.
on the Street
‘Tailored’ Accounting Takes Companies Into Alternate Reality
Recent moves by the Securities and Exchange Commission serve as a
reminder that non-GAAP corporate results should be digested with a
grain of salt
The Tennessee headquarters of Brookdale Senior Living Inc., one
of the companies that was recently called out by the SEC for its
PHOTO: KRISTOFFER TRIPPLAAR/SIPA USA/ASSOCIATED PRESS
Updated Feb. 23, 2017 12:36
In these days of
alternative facts, some companies are pushing alternative accounting.
The Securities and
Exchange Commission is increasingly calling out companies that offer a
different flavor of “non-GAAP” accounting—reporting their numbers as
if they could calculate them using assumptions or practices not
permitted under generally accepted accounting principles. This goes
the SEC’s crusade against companies using
more traditional tactics like stripping out costs from
their customized measures, generally making their numbers look better
than under GAAP.
SEC staffers say what they call “individually tailored”
accounting is a particularly worrisome variant of the non-GAAP issue. More
examples have emerged in recent days, as the commission released previously
confidential comment letters it sent to companies criticizing their practices.
One area highlighted by the SEC is deferred revenue—revenue
received by a company before it delivers its product to a customer. Under
standard GAAP rules, that revenue is recognized when the product is delivered,
but some companies are adjusting their non-GAAP numbers to account for that
Barracuda Networks Inc. and mobile-game
Glu Mobile Inc. were both criticized for
doing that in SEC letters to the companies made public last week. When
Barracuda’s deferred revenue rose by nearly $6 million in its fiscal quarter
ending last August, that boosted a measure of its non-GAAP earnings. Both
companies have since told the SEC they would stop the practice.
Tesla Inc. had a similar issue.
As reported last fall, Tesla had touted its
non-GAAP revenues as if it was allowed to recognize deferred revenue from
lease-type arrangements immediately—a practice that added $747 million to
Tesla’s preferred measure of revenues for the first half of 2016. After the SEC
questioned the move, Tesla said it would stop reporting non-GAAP revenues.
There are other examples:
Brookdale Senior Living Inc., which owns
senior-citizen residential communities, included in its non-GAAP metrics cash
from ventures it hadn’t consolidated on its balance sheet. The company argued it
was making its results comparable to real-estate investment trusts, against
which it competes. But Brookdale isn’t a REIT; the SEC said the move was
unacceptable, and Brookdale said it would revise how it calculates the metrics.
The company, which is under pressure from activist shareholders, is
negotiating to sell itself.
The SEC lets companies give out numbers that don’t follow
standard accounting rules, as long as they are accompanied by and reconciled to
the GAAP figures.
That is a pretty forgiving standard. Investors who need to manage
risks in this world shouldn’t rely on companies that want to pretend they are in
a different one.