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CFO Journal: Firms Drop Prettied-Up Results

Shumsky, Tatyana. Wall Street Journal, Eastern edition [New York, N.Y] 30 Aug 2016: B.5.

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Among the S&P 500 companies reporting results since the start of July, 81% have given prominence to GAAP
figures, a sharp rise from the 52% that did so when reporting first-quarter results, according to an Audit Analytics
analysis conducted for The Wall Street Journal.

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More companies are giving investors the bad news first, in response to heavier regulatory scrutiny of their
financial reporting.
Over a quarter of the companies in the S&P 500 index have shifted results that conform with Generally Accepted
Accounting Principles to the top of news releases outlining their most recent financial performance.
Among the S&P 500 companies reporting results since the start of July, 81% have given prominence to GAAP
figures, a sharp rise from the 52% that did so when reporting first-quarter results, according to an Audit Analytics
analysis conducted for The Wall Street Journal.
The uptick follows guidance the Securities and Exchange Commission issued in May that requires companies to
give GAAP figures greater weight than their own customized metrics. The agency's move addressed concerns
that adjusted or non-GAAP figures make companies look healthier.
Companies that have changed their reporting to reflect the new instructions include Halliburton Co.
Walgreens Boots Alliance Inc. and videogame maker Electronic Arts Inc.

The SEC's timing offered some breathing room, giving companies a chance to comply with the guidance for
subsequent reporting periods, officials said.
But the guidance leaves little room for flexibility. If a paragraph or table contains standard and adjusted figures,
companies must make sure that sentences or columns with the standard, or GAAP, information precedes
everything else.
Both types of numbers also must be presented in the same style, meaning customized metrics can't be bolded or
printed in a larger-size font, nor can they be described as "record" or "exceptional" unless GAAP results are
characterized in a similar way.

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"There's little appetite at the SEC for companies who don't assess the guidance and self-correct," said Paula
Hamric, a partner in accounting firm BDO USA's national SEC practice.
Halliburton 's reporting illustrates the change in parameters. In its first-quarter news release, the Houston oilfield services company highlighted $64 million in "income from continuing operations excluding special items." in
its first-quarter press release.
But when reconciled to standard accounting principles, the company had a loss of $2.4 billion.
By contrast, the company led its second-quarter release with a standard-accounting loss of $3.73 per share, or
$3.2 billion.
A Halliburton

spokeswoman confirmed that the change stemmed from the SEC's guidance.

Over the past two quarters, drugstore operator Walgreens

has switched around the sentences atop its

earnings news release.

The company led its fiscal second-quarter earnings release with an 11% increase in "adjusted net earnings,"
adding that standard per-share results had plunged 56%. The following quarter, Walgreens

put standard

results first, reporting a 14% drop in per-share earnings.

"We did make some small changes to our most recent quarterly earnings announcement based on the new SEC
guidance and to further enhance our disclosure to investors," said a Walgreens

spokesman.

Some companies haven't yet made the shift.

Software provider Ellie Mae Inc. said in its second-quarter earnings release in July that it hadn't yet modified
"adjusted net income" to reflect certain tax impacts -- a change now required by the SEC.
In a statement recently, Ellie Mae said it plans to comply with SEC guidelines and modify the "adjusted"
benchmark, but is currently considering timing of the change. "Our measured approach to transitioning the
reporting of this financial metric will balance our investors' expectations with the concerns of the SEC staff," the
company said.
Companies that don't make the necessary changes run the risk of additional regulatory scrutiny in the form of
letters and forced revisions. in letters made public through Aug. 5, the SEC questioned 166 companies this year
regarding their use of non-GAAP figures, up 13% from a year earlier, according to Audit Analytics.
The SEC makes such written exchanges public 20 days after the matter is resolved. The letters that have
become public so far concern financial reports from before the new guidance was announced. Accountants
expect such correspondence to surge as the SEC evaluates how companies handle the new requirement.
"The preparer community, the audit community, the legal community as well as the SEC will be learning over the
next couple of months where the lines are," said Jeffrey Jones, a partner in KPMG 's SEC practice.
Corporate chief financial officers may face a steep learning curve. The SEC banned several metrics previously
considered acceptable, on the ground that results adjusted inconsistently or for recurring expenses could be
misleading.
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For chief financial officers, complying with the new guidelines is more challenging and time consuming than
simply putting GAAP results at the front of the press release.
"You have investors and analysts that are used to seeing certain metrics, so in order to change the presentation,
[CFOs] have to rethink what's meaningful going forward," said BDO USA's Ms. Hamric.
In July, Electronic Arts Inc. became the first of three videogame makers to announce it would drop nonGAAP information from its reporting to comply with the guidance. Rivals Activision Blizzard Inc. and TakeTwo Interactive Software Inc.

followed suit.

"We're trying to do exactly what we have been asked to do by the SEC, and we feel like we're doing that in a very
proactive way," CFO Blake Jorgensen said in advance of EA's Aug. 2 earnings report, which showed that revenue
rose 6% during the fiscal first quarter.
--Michael Rapoport contributed to this article.
Credit: By Tatyana Shumsky
Word count: 875
(c) 2016 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or
distribution is prohibited without permission.

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