The authors focus on the implications of non-GAAP earnings presentations and adjustments in financial reports prepared in accordance with the International Financial Reporting Standards (IFRS). Apparently, there are various measures of non-GAAP earnings, which are designed to make financial statements more informative. The widespread use of non-GAAP earnings indicates that the practical application of the IFRS—namely, the fair value principle—is not an obvious fact. There are a number of entries whose presence may distort the true image of a company. These include one-offs, unusual or nonrecurring items, volatility associated with events beyond the managerial control, and the effects of accounting treatments.

The non-GAAP earnings, according to management’s belief, remove such items to disclose the true, underlying performance of a company. The authors investigate the extent to which the release of non-GAAP earnings metrics is associated with fair value measurement under the IFRS. Another area of interest is the relationship between the adjustments made by management and those made by analysts as well as to what extent the adjustments are actually useful to the analysts.

The authors touch on one of the fundamental questions in the area of accounting and reporting. As the results of their research show, companies providing non-GAAP earnings are more likely to have a greater incidence and magnitude of IFRS remeasurements included in their financial statements. However, analysts are active in making similar adjustments. The companies offer them a helping hand by providing their own estimates of these adjustments. Obviously, non-GAAP adjustments can also be used by managers as a tool for reaching their personal goals. This misuse may happen when the results calculated in accordance with the IFRS are less than the previously set targets. But the results of the authors’ research indicate a relatively high value of the adjustments, proven by the lower forecast error and dispersion made by the analysts.

The most important question concerns the underlying rationale for making such adjustments. It appears that both managers and analysts do not see IFRS remeasurement items as part of the underlying earnings. Although the scope of the research is limited to Australian companies, the results should be carefully analyzed by any standard-setting bodies.

The authors study large Australian companies from the ASX 200 Index. They collect data about non-GAAP earnings from companies’ annual reports, earnings announcements, and investor presentations. The authors follow the Australian Securities & Investments Commission’s definition of non-IFRS financial information (i.e., any information that is presented other than in accordance with financial standards). The authors search for non-GAAP earnings using the Adobe Acrobat Pro text search. The total sample includes 576 firm-years from 2008 to 2010. Out of the sample, 371 firm-years contain non-GAAP earnings information. The profit or loss information is sourced from the Aspect FinAnalysis database. The analysts’ adjustments are sourced from the list of adjustments compiled by Aspect Huntley analysts. Share prices are obtained from the share price and price relative database from the Securities Industry Research Centre of Asia-Pacific. Other financial data are sourced from Aspect Huntley’s database.

The authors apply quantitative methods for the research. In particular, to test the relationship between IFRS remeasurements and non-GAAP earnings releases, they apply a binary logistic regression. The forecast error and dispersion are measured by using multiple linear regressions.

An obvious limitation of the research is its scope, which is limited to only large Australian companies, and the observations include only a limited time period of three years. Hence, it would be necessary to retest the models as well as the validity of the hypotheses in a broader context. Also, there is no information about how the companies included in the sample may represent the whole population of companies.

The authors raise a fundamental issue from the practice of financial analysis. The fair value remeasurements and the way the financial market participants understand and include them in their analyses has been a regular discussion point since the recent global financial crisis. My personal assessment of the paper is high, and I look forward to further research in the area, particularly with relation to the European financial markets.