G requires that companies reconcile such non gaap

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G requires that companies reconcile such non-GAAP information to GAAP numbers so that ial statement readers can have a basis for comparison and can determine if the excluded truly are one-time items. For example, in 2010 Merck & Co., Inc., reported the following forma" (non-GAAP) information in its Form 1O-K. millions) 2010 -- income as reported under GAAP " .. " " . (decrease) for excluded items: -= dlase accounting adjustments " " " = cturing costs . ager-related costs. .. . _ . items: fox)( Liability reserve " " !::lEinon AstraZeneca asset option exercise . ='n related to the MSP Partnership , " . , , . , , , . , , , . in on Merial divestiture , , " , .. , , . - in on distribution from AZLP , , . on income as reported under GAAP , " .......... ........ ted tax benefit (expense) on excluded items. , " " . benefit from foreign entity tax rate changes , , " , . - charge related to U.S. health care reform legislation , . P taxes on income , , " , . ~P net income. , , .. , , . , , .. $ 1,653 9,007 1,986 396 950 (443) 13,549 671 1,798 391 (147) 2,713 $10,836 -:-his footnote indicates that Merck considers over $10 billion of net expenses, including the "onrestructuring costs, as one-time charges that, if included, portray an inaccurate picture performance during the period. Pfizer's non-GAAP income of $10,836 million is more than " es larger than the reported GAAP income of $982, Pro Forma Earnings: Incidence and Outcomes 2010, more than half the companies that comprise the Dow Jones Index reported non-GAAP bers when reporting quarterly net income. (See listing at: Larcker, D. and B. Tayan, "Pro Forma -- ings: What's Wrong with GAAP? August 20,2010, .) Despite -g potential for abuse, investors often perceive certain non-GAAP earnings as more permanent GAAP earnings because pro forma numbers allegedly provide better indication of future earn- power. For this reason, Wall Street analysts' earnings estimates typically use non-GAAP met- , or "Street" earnings. Recent research reports two results that show how investors' use of pro a earnings is changing. First, investors appear to pay more attention to pro forma earnings in -'" post-SOX period (after 2003), which suggests that SOX improved the credibility of non-GAAP losures. Second, investors discount earnings announcements in which managers make aggres- " e exclusions that are potentially misleading and, hence, stock values seem to reflect investors' := "Iity to discern accounting quality. (Black, D., E. Black, T. Christensen, and W. Heninger "Has the Regulation of Pro ~a Reporting in the U.S. Changed Investors' Perceptions of Adjusted Earnings Disclosures?" November 23,2010, http:// =sm.com/abstract=1818903) ~SEARCH INSIGHT erate Manager Intervention y, all reported numbers are free from deliberate managerial intervention. This implies that the bers are unbiased because managers have been impartial when choosing accounting policies
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and when exercising their discretion over reported numbers. However, history is rife with example where this is not the case: managers can and do "manage" earnings and balance sheet numbers.
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