Following Google’s lead, Facebook is making a significant change in how it talks about its financial health with investors.
Facebook will, for the most part, only report numbers that come from Generally Accepted Accounting Principles or GAAP. It will limit the numbers it reports that don’t follow GAAP rules.
Specifically, Facebook is no longer reporting non-GAAP expenses, income, tax rate, and earnings per share (EPS), it says. It will still use non-GAAP numbers in limited ways, such as to share with investors the impact of foreign exchange rates on its revenue, and to give insight into free cash flow.
But it is getting rid of non-GAAP numbers for the meat-and-potatoes portion of its results.
Non-GAAP numbers can be useful, because it helps investors understand how the managers see the business, some accountants say. What expenses or income streams do they think are reliable and which ones do they are unusual, extraordinary things, not to be counted on?
Then again, “non-GAAP” results can also mislead investors, McKinsey suggests. By cherry picking numbers, a company can paint itself in a better light.
All about the stock
In Facebook’s case, the issue appears to be mostly stock-based compensation for employees.
It’s pretty common for tech companies to exclude the cost of stock-based compensation from non-GAAP numbers. But tech companies almost always pay their employees a significant chunk of their total pay in stock. By excluding that expense, a company can look like it’s more profitable than it is, since paying employees is an inescapable expense not some kind of unusual event.
In fact, the accounting industry’s regulating body, The Financial Accounting Standards Board, has changed the rules on how companies deal with stock compensation, particularly in how they deal with taxes (a provision known as ASU No. 2016-09). Public companies are supposed to be adopting those new rules starting in 2017.
Still, Facebook is using the rule change to follow Google CFO Ruth Porat’s lead and saying to investors, “Judge us only on our final GAAP numbers, not the cherry picked ones.”
Facebook, like Google, has the luxury of a healthy bottom line, which makes it easier to enact the change. For tech companies with less reliable profits, or worse, companies that are losing money, including stock compensation expenses would make financial results look pretty ugly in the eyes of investors.
It’s worth noting that Facebook’s accounting change comes just as Snapchat, a money-losing rival, prepares to deliver its first quarterly financial results as a public company next week.
That, as much as anything else, may explain Facebook’s new philosophy.
Already, the change is generally being met with praise.