The Zhitong Finance App learned that a recent analysis found that large US companies have increased their adjusted earnings per share by excluding litigation costs and intangible asset amortization from net profit. Currently, regulators are scrutinizing such practices.
The analysis, compiled by data provider Calcbench Inc. and Suffolk University, surveyed approximately 260 companies randomly selected from the S&P 500. According to data, these companies made adjustments totaling nearly $182 billion in 2023, with an average value of $110 million per project.
Calcbench said that the average adjusted net profit of each company in 2023 was close to US$3.1 billion, down from about US$4 billion per company in 2022. The overall decline in net profit under GAAP (generally accepted accounting principles) was consistent.
It is understood that listed companies must follow generally accepted accounting standards — a set of accepted accounting indicators when reporting financial results. In addition to that, they can choose to provide non-GAAP metrics. The US Financial Accounting Standards Board (FASB) plans to ask the public whether non-GAAP metrics should be defined before the end of the year, given the inconsistencies that may arise when businesses use these alternative accounting measures.
In recent years, US regulators have been increasingly concerned about the use of non-GAAP metrics by companies. The US Securities and Exchange Commission (SEC) has written to a number of companies asking why certain fees are excluded.
Calcbench found that in 2023, companies reported average non-GAAP profit of $698 million, which was 29% higher than the GAAP figure, which directly translated into an increase in adjusted earnings per share. Compared to the previous year, this increase was smaller. In 2022, each company's non-GAAP net profit was on average $1,095 billion higher than GAAP.
The report listed an average of 6.3 reconciliation projects per company in 2023, compared to an average of 5.9 in the previous year. In 2023, each company's adjusted net profit items were: intangible asset amortization (33.3%), impairment (22.6%), stock compensation (14.7%), structural adjustment (11.3%), and litigation (13.5%).
Calcbench CEO Pranav Ghai said, “One thing to keep in mind is that the average number of adjustments in 2023 is higher than in 2022, and non-GAAP will continue to exist.”
Litigation, amortization adjustments
Calcbench listed several notable adjustments, including $11.6 billion in lawsuit costs for manufacturer 3M (MMM.US), amortization adjustments for pharmaceutical company BMY.US's $9 billion acquisition of intangible assets, and pharmaceutical operator Walgreen-WBA.US (WBA.US)'s $7.5 billion legal and regulatory accruals and settlement adjustments.
Walgreen-United Bosch responded by stating that in 2023, the company “recorded costs associated with the opioid lawsuit resolution framework and certain other legal matters.” 3M, on the other hand, said it did not consider litigation costs to be normal operating expenses related to its ongoing operations, revenue-generating activities, business strategy, industry and regulatory environment.
A representative from Shi Guibao did not comment.
“The report's findings continue to question the informational value of net profit reported by GAAP,” Calcbench said. As an example, Ghai said that in 2022, AT&T (T.US) and Fande Information Technology (FIS.US) experienced two major impairment cases totaling 41 billion US dollars, but there were no impairment in 2023, resulting in a lower amount of impairment in that year.
The analysis showed that most (86%) of the companies surveyed had an increase in adjusted profits in 2023, which meant that non-GAAP profits were higher than GAAP, while 14% of companies' profits declined.
edit/emily