N OV E M B E R 2 013

Building a better income statement If neither companies nor investors find GAAP reported earnings useful, it’s clearly time for a new approach.

Ajay Jagannath and
Tim Koller

A company’s annual income statement should be

Eliminating that duplicated effort should be

a transparent disclosure of its revenues and

simple. A commonsense revision of GAAP-based

expenses that investors can readily interpret.

income statements would divide the report

Most aren’t, largely because income and expenses

into two parts: recurring operating income in the

classified according to generally accepted

first and nonoperating income or expenses

accounting principles (GAAP) can be difficult to

and nonrecurring items in the second. Such a

interpret. In fact, many sophisticated investors

structure would provide investors with a

tell us they have to reengineer official statements

clearer summary of income and expenses. It

to derive something they’re comfortable

would also be consistent with two core principles

using as the starting point for their valuation and

for financial-statement presentation proposed

assessment of future performance. In response,

by a joint project of the Financial Accounting

many companies—including all of the 25 largest

Standards Board (FASB) and the International

US-based nonfinancial companies—are

Accounting Standards Board (IASB) in 2010,

increasingly reporting some form of non-GAAP

which state that financial-statement information

earnings, which they use to discuss their

should be presented “in a manner that

performance with investors.

disaggregates information so that it is useful in

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predicting an entity’s future cash flows” and
“portrays a cohesive financial picture of an entity’s activities.”1 to customers less the costs of