Concerned about the way that some drug makers report earnings in their financial statements, the US Securities and Exchange Commission recently indicated plans to evaluate pharmaceutical industry accounting practices.
The plans were disclosed in a Jan. 11 letter that the agency sent to Allergan over GAAP, or generally accepted accounting principles. Specifically, the SEC expressed reservations about the use of so-called non-GAAP to report earnings per share and maintained that, while other companies “make these types of significant adjustments, it does not suggest that the magnitude of your departure from GAAP results … is at all common.” The letter was first reported by the Wall Street Journal.
Reporting earnings or conveying other financial information that does not follow GAAP rules is permissible. And many companies do so because they believe income statements do not always reflect ongoing performance and want to provide a metric that investors may find useful. Numerous companies, in fact, take this approach.
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