What is the difference between GAAP and non-GAAP earnings?

GAAP follows the standardised accounting rules every US public company must apply. Non-GAAP — also called adjusted earnings — is the company's own calculation, typically excluding stock-based compensation, restructuring charges, and amortisation of acquired intangibles. The two numbers can differ substantially; the SEC requires a reconciliation so readers can see exactly what was removed.

What does Regulation G require companies to disclose?

Regulation G, the SEC rule governing non-GAAP disclosures, requires that (a) the most directly comparable GAAP figure is presented alongside any non-GAAP metric, and (b) the GAAP number is given at least equal prominence. It also mandates a line-by-line reconciliation — a bridge from the GAAP figure to the adjusted one — published in every earnings release or 8-K where the non-GAAP figure appears.

Is non-GAAP always misleading?

Not always. Excluding a genuinely non-cash item or a truly one-off event can sharpen the picture of underlying performance. The red flags are different: recurring "one-time" charges that appear every year, stock-based compensation that grows faster than the business, and adjusted profitability that exists only because of the add-backs. The wider and more persistent the gap between GAAP and non-GAAP, the more scrutiny it deserves.

Why is stock-based compensation the most contested add-back?

Companies exclude stock-based compensation because it is non-cash — no money leaves the bank. Critics counter that it is a real, recurring cost: shares granted to employees have value, they vest year after year, and they dilute existing shareholders every quarter. Excluding it can make a structurally unprofitable business appear profitable on an adjusted basis, which is why large, persistent SBC add-backs draw the most investor scrutiny.

Where can I find the GAAP-to-non-GAAP reconciliation?

Companies must include the reconciliation in every earnings press release (the 8-K filed with the SEC) where a non-GAAP figure appears. Look for a table labelled something like "Reconciliation of GAAP to non-GAAP results" near the back of the release. The SEC's EDGAR database (sec.gov/cgi-bin/browse-edgar) holds all filed 8-Ks for every public company.

GAAP vs non-GAAP explained: what adjusted earnings really mean

GAAP and non-GAAP in one line

GAAP earnings (Generally Accepted Accounting Principles) are calculated using the standardised rules every US public company must follow. Non-GAAP earnings — also called adjusted earnings — are the company's own version: the same result with certain costs stripped out, most commonly stock-based compensation, restructuring charges, and amortisation of acquired intangibles.

Every listed company in the US reports GAAP numbers. Many also publish a non-GAAP figure alongside it, arguing that stripping those items out gives a cleaner picture of the underlying business. Whether they are right depends on which items were removed — and whether they are genuinely non-recurring.

What the gap looks like: a real example

Salesforce's fiscal 2023 (year ended 31 January 2023) shows how wide the divide can get. On the exact same revenue of $31.4B, two very different profit figures appeared in the same 8-K:

GAAP diluted EPS

$0.21

GAAP income from operations: $1.0B — operating margin roughly 3%.

Non-GAAP diluted EPS

$5.24

Non-GAAP income from operations: $7.0B — operating margin roughly 22%.

Source: Salesforce — Form 8-K, Q4 and full-year fiscal 2023 results (filed with the SEC, 1 March 2023). Figures as reported; income from operations rounded to $0.1B.

Three add-backs account for nearly all of the $6.0B difference in operating profit. Stock-based compensation added back $3.6B, amortisation of acquired intangibles $1.6B, and restructuring charges $0.8B. Together they turned a 3% GAAP margin into a 22% adjusted margin — on the same revenue.

Under Regulation G, Salesforce was required to publish exactly this reconciliation in its earnings release, so any reader could see the precise bridge from $1.0B to $7.0B. The numbers were not hidden; the question is whether removing them is a fair representation of the business.

When adjusted is fair — and when it is a red flag

The same three categories of add-back can be legitimate or misleading, depending on the company and the pattern over time.

How to read common add-backs

Stock-based compensation

Fair: Always real and recurring — scrutinise the size relative to revenue and the growth rate, but removing it is widespread practice

Red flag: Growing faster than revenue; it is the only item keeping the company out of a GAAP loss

Restructuring / one-time charges

Fair: A genuine single event: a facility closure, a one-time litigation settlement

Red flag: The same "one-time" charge appears every year — by definition no longer one-time

Amortisation of intangibles

Fair: Non-cash accounting cost of past acquisitions; widely accepted to exclude

Red flag: For serial acquirers, buying companies is the model — excluding its cost flatters the economics

A practical heuristic: the wider and more permanent the GAAP-to-non-GAAP gap, the more it deserves scrutiny. A small, stable, mostly-non-cash gap is usually benign. A gap that is large, growing, and converts a GAAP loss into an adjusted profit year after year is where the real questions live.

Frequently asked questions

Earnings Season: GAAP vs Non-GAAP — Which Earnings Are Real? — the full course lesson with a reconciliation walkthrough, quality-of-earnings tells, and a quiz.
Earnings per share (EPS) explained — the headline number that GAAP vs non-GAAP adjustments directly affect.
Profit margin explained — why the same revenue can produce very different GAAP and adjusted margins.
Earnings Season course — seven lessons on how to read a real earnings report from headline numbers to guidance.