Accounting Adjustments

Generally accepted accounting principles (GAAP) refer to a common set of rules and standards that public companies must follow when preparing financial statements. Increasingly, companies reference non-GAAP financials, which can come with a number of adjustments to GAAP. Many proponents claim non-GAAP a better representation of how a company does business in 2023. Others say it is selectively used to distract from a bad story.

Accounting is important because it helps to understand cash flows and make better capital allocation decisions. They can be communicated ex post, in the case of quarterly earnings calls. Or ex ante, in the case of many financial planning projections.

But accounting is a tool. And like other tools, how they are used matters.

Let's say someone is adamant about retiring at 60. They've had the date circled on their calendar for years. We sit down for a financial planning review, and it is determined from our point of view that the client hasn't prepared enough to stop collecting a paycheck from their employer. We would feel more comfortable if they worked until at least 62.

But is there a world where projecting a retirement at 60 looks good? You bet. Future return assumptions can be raised, inflation expectations can be lowered, life expectancy can be lowered, or expenses can be cut. And if you don't believe that moving numbers around by 1% annually won't massively change outcomes two or three decades out, remember the 1 in 60 rule pilots are taught. If you're off course by one degree, you'll be an entire mile off course sixty miles into the trip, and so on. Hence the importance of making adjustments to stay on track. I digress. 

But the inputs matter. And while it's totally appropriate and encouraged to look at a problem through multiple lenses and scenarios (predicting the future is difficult, after all) it's another thing entirely doing whatever it takes to fit a pre-determined narrative someone wants to hear. But it's often the path of least resistance. 

As a shareholder, I want the truth about a companies financials. I can then make a decision to sell or keep my stock. 

As a client, you should want the same direct feedback based on numbers most representative of reality. You can then make a decision how to move forward from there.