Discussion Questions: Week 5

Accounting’s Tower of Babel: Key Considerations in Assessing Non-GAAP Earnings

1. Why did the authors use Tower of Babel metaphor to describe non-GAAP earnings?

2. What are the problems with non-GAAP earnings?

3. How and why financial analysts use non-GAAP earnings?

4. What is Regulation G? What are the conditions for use of non-GAAP earnings?

1. The Tower of Babel metaphor illustrates the confusion and lack of comparability created
by non-GAAP earnings. Just as the Tower of Babel story depicts a loss of a common
language, non-GAAP earnings introduce a variety of earnings measures that are not
standardized, making it difficult for investors to compare financial performance across
companies.

2. Problems with non-GAAP earnings include lack of comparability, potential to mislead

investors about profitability, and varied adjustments that companies make, which
diminish the usefulness of these metrics for making time-series and cross-company
comparisons (lack of consistency).

3. Financial analysts use non-GAAP earnings to provide insight into a company's

operational performance by excluding items they consider non-recurring or not
representative of ongoing operations. However, reliance on non-GAAP earnings can be
due to coercion (following majority practice), self-interest (enhancing company's
perceived performance), or simplification (making analysis appear more insightful).

4. Regulation G governs the presentation of non-GAAP earnings in the U.S., requiring

equal prominence of GAAP earnings, a quantitative reconciliation between GAAP and
non-GAAP measures, and explanations for the usefulness of non-GAAP measures. It
aims to ensure transparency and comparability in financial reporting, though it does not
address the construction of non-GAAP earnings themselves.