Difference between GAAP and Non-GAAP Earnings: A Case Study of Qantas Airways and Star Entertainment Group Limited

This research study analyzes the difference between GAAP and Non-GAAP earnings with a case study of Qantas Airways and Star Entertainment Group Limited. The study focuses on the impact of GAAP and Non-GAAP earnings on the share price of the companies. The methodology used is the event study method. The data is collected from secondary sources like academic journals and financial documents. The study concludes that GAAP earnings are more reliable and informative than Non-GAAP earnings.

Running head: RESEARCH PROJECT
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Table of Contents
Introduction......................................................................................................................................2
Quantas Airways Limited................................................................................................................2
Star Entertainment Group Limited..................................................................................................2
Distinction between the Earnings method utilized by the different corporate entities....................3
Literature Review............................................................................................................................4
GAAP earnings and Non-GAAP earnings..................................................................................4
Quantas and Star Entertainment Group Limited.........................................................................5
Methodology....................................................................................................................................5
Conclusion.......................................................................................................................................5
References........................................................................................................................................7

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Introduction
The Generally Accepted Accounting Principles had been developed by the Financial
Accounting Standards Board for the purpose of standardizing the process of financial reporting
by the providence of formats and rules and is essentially carried out for facilitating of the
financial position of an organization by the creditors and investors. The utilization of the
Generally Accepted Accounting Principles method of earning facilitates the reflection of the fair
image of the business entity. Moreover, the annual reports of the different business entities that
have been prepared on the basis of the GAAP can be reliably compared and analyzed.
The Non–GAAP earnings on the other hand, refers to the accounting regulation that has
been utilized by the corporate entities for the purpose of displaying their own accounting figures.
Such an accounting regulation is also legally supported as long as these accounting treatments
have been disclosed as Non-GAAP in the annual report of the company and the providence of
the reconciliation is carried out between the adjusted and regular results.
This particular study aims to focus on the difference between the GAAP and the Non-
GAAP earnings. Moreover, the organizations that have been further selected for the better
understanding of the research study are the Quantas Airways Limited and Star Entertainment
Group Limited. These examples of the corporate entities have been utilized for the purpose of
developing the particular research proposal that whether the accounting regulation of GAAP
earnings are more useful in comparison to the Non-GAAP earnings.
Qantas Airways Limited
The first company that has been selected for the purpose of the study is the Quantas
Airways Limited that has been a domestic and international airline service provider. This airline

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service provider has been operating globally and is based out of Australia. The profitability
graph of the selected company has gone through regular crests and troughs until the financial
year of 2016.
Star Entertainment Group Limited
The Star Entertainment Group Limited has been one of the largest entertainment and
gaming groups on Australia. The Star Entertainment Group Limited has essentially been a
corporate entity that has demerged from the parent entity in June 2011. The initial name of the
corporate entity had been Echo Entertainment Group Limited. The demerger from the parent
entity resulted in the occupying of the casinos business and from November 2015, the parent
entity came to be known as Star Entertainment Group Limited. The Star Entertainment Group
Limited has been listed under the top 100 listed corporate entities of Australia and operates under
three major hotels and casinos of Australia namely Treasury Casino and Hotel in Brisbane, The
Star Gold Coast on the Gold Coast and The Star, Sydney. The net profit that has been derived by
the firm for the financial year of 2017 revolves around the figure of $264.4 million.
Distinction between the Earnings method utilized by the different corporate entities
The particular distinction between the corporate entities utilizing the particular mode of
accounting regulations is that Quantas Airways does utilize the Non-GAAP methods while the
corporate entity of Star Entertainment Group Limited utilizes the GAAP earning method. The
particular rationale that has been provided by the executives of the particular airlines entity is
that the utilization of the non-statutory metrics for the purpose of preparation of the financial
statements have resulted in the resolving of the particular issues like the arrival at the adjusted
underlying profit and is generally higher than the reported number that is arrived at, by utilizing
GAAP. The management of the corporate entity further claims that the utilization of the Non-

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GAAP standards that is non-regulated and the non-audited standards have been more informative
and reflective in nature (Baginski caes et al 2016).
On the other hand, the firm utilizing the traditional process of accounting that is the
generally accepted accounting principles, have to go through a defined and detailed guideline of
accounting standards for the purpose of preparing the financial statements. The reflection of the
performance of the corporate entity is better reflected by the provision of the regulatory
guidelines that has been established by the regulatory bodies in Australia. The Star Entertainment
group has been utilizing the generally accepted accounting principles for the preparation of the
financial statements. The management of the corporate entity has been of the opinion that the
utilization of the accounting regulatory principles as prescribed by the regulatory bodies like the
Australian Accounting Standards Board not only results in the preparation of the accounting
statements that reflect a fair view of the financial position of the company but also help the firm
to acquire the trust of the stakeholders thus increasing the number of potential shareholders of
the firm. This can be further explained with the help of the fact that the preparation of the
accounting statement on the basis of the prescribed accounting framework provides the
stakeholders of the firm with the required level of trust and confidence in the financial position
of the firm as they are aware of the particular guidelines that have been followed in regards to the
preparation of the accounting statements (Baginski caes et al 2016).
Literature Review
GAAP earnings and Non-GAAP earnings
The generally accepted accounting principles effectively reflect standards, regulations
and rules that have been utilized by the standard setters for the purpose of governing the
accounting practices and the preparation of the financial statements. The generally accepted

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accounting principles can be summarized as a set of accounting regulations that have been
established for the purpose of financial reporting. These principles ensure the fundamental
features of the books of accounts that are transparency, reliability and consistency. It can be
further stated that GAAP imposes a certain degree of uniformity in the financial reporting. The
utilization of the GAAP framework also ensures or facilitates the feature of comparability of the
accounting statements (Bentley caes et al 2016).
Figure: Percentage of disclosure of Non-GAAP earnings
Source: (Isidro and Marques 2015)

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The particular figure that has been demonstrated above show the percentage in regards to
the number of firms that utilize the Non-GAAP earnings method in the preparation of the
financial statements. Furthermore, these are among the top 500 ASX listed firms. It can be
observed that the percentage has declined in 2014.
However, it must be noted here that the particular feature of GAAP imposing a degree of
uniformity over financial reporting has resulted in the negative effect over the corporations
especially with substantial heterogeneity of economic and activities and the essential operations
of business. This is because the earnings that are reported by these corporate entities in regards to
the accounting system might fail to provide a reflection at the right time in regards to the
underlying operating performance of the firm. Therefore, this has been the major reason behind
the firms switching from GAAP to non-GAAP earnings mode (Bentley caes et al 2016).
The other reasons that can be cited behind the prevalence of the Non-GAAP earnings are
that the firms, which are featured with low GAAP earnings, reflect less profit when utilizing the
GAAP earnings method. Moreover, when the GAAP earnings are less relevant in regards to the
value and where there has been a history of prior losses (Christensen caes et al., 2017).
However, this particular trend had been observed by the accounting regulatory bodies and
the required amendments had been carried out by the regulatory bodies in Australia in order to
increase the number of the firms adopting the generally accepted accounting principles or the
particular standards that have been established by the Australian Accounting Standards Board in
the reflection of the same. This can be further evidenced by the fact that particular reporting
standards like the AASB 1018. Moreover, the particular announcement that the all publicly listed
Australian companies will be mandatorily required to adopt the Australian standards equivalent
to the International Financial Reporting Standards (Christensen caes et al., 2017).

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Figure: Frequency of Non-GAAP Disclosures
Source: (Isidro and Marques 2015)
The above graph depicts the firms providing proper disclosures for utilizing the Non-
GAAP disclosure method. It must be noted here that the companies have been categorized on the
basis of their industries.
In contrast to the GAAP reporting, the non-GAAP disclosures in the country of Australia
have been largely unregulated in nature. A major reason behind this has been that the accounting
standards and the Corporations Act do not necessarily restrict the presentation of the non-GAAP
disclosures in the financial report of the organizations (Parrino 2016).
The feature of no restriction is a potential loophole that is utilized by firms for the
purpose of preparing the financial report on the basis of Non-GAAP earning method. The
regulators like the ASIC has mandated the adoption of the GAAP regulatory standards for the
purpose of the preparation of the accounting statements.

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Figure: the absolute value of Non-GAAP exclusions in relation to the equivalent GAAP earnings
result
Source: (Isidro and Marques 2015)
The above figure shows the mean and the median in regards to the GAAP and Non-
GAAP earnings. Moreover, potential concerns were raised in regards to the Non-GAAP
reporting when the particular scandal in relation to the corporate entities of Enron and
WorldCom scandals came into the light. Therefore, it can be evidently concluded that the
preparation of the financial statements on the basis of GAAP reporting is expected to be carried
out by the financial entities (Parrino 2016).
It can also be stated that the importance of accounting disclosures that form an essential
part of the GAAP regulations play a major role in helping the stakeholders and the third party
investors to take the important economic decisions. This is because the accounting disclosures
facilitate the true and fair view of the financial report of the corporate entity. This is not
guaranteed by the non-GAAP earnings regulatory method.

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Methodology
This research study has been based upon secondary information that has been collected
from different financial documents and academic journals. Therefore, the particular method that
has been utilized for the purpose of conducting the required research in this particular study is
that a number of academic journal articles have been referred to and other related financial or
documents related to accounting have been considered. It must be noted here that the nature of
the data that has been collected for this particular study is secondary in nature. This means that
the information has not been derived from primary sources therefore, may suffer due to certain
limitations. The particular limitations that this particular study is exposed to is that as
information has not been collected from the primary sources the data is vulnerable to biasness,
objectivity and error on the part of the researcher who has prepared the particular academic
journal.
The method that has been applied to study the effect of the GAAP and Non GAAP
earning announcement on the share price of the selected companies are the event study method.
The statistical methodology and process are applied for performing event study analysis. The
most common model that is used for the event study is the market model. In this method, the
actual return of the baseline reference and the stock is compared to understand the effect of the
event. The event study aims to measure the effect on valuation because of corporate
announcement. It is a process of measuring the response of the share price movement in case of a
merger or earning announcement. The main assumption of this theory is that the market process
the information in an efficient and unbiased manner. This helps in analyzing the effect of event
in the share price of the company.

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Data Interpretation
The share price data of the selected company Qantas and Start Entertainment group have
been collected from the Bloomberg. In the obtained data, the actual return and abnormal return
are provided to verify the effect of GAAP and NON GAAP earning announcement on the share
price of the company. The measurement of abnormal return is crucial for assessing the impact of
an event. The abnormal event can be defined as the difference between expected return in the
absence of the event and the actual realized return.
Qantas
Qantas Group
Date Change in GAAP Earning Change in NON GAAP Earning T Test
30-06-10 -4.50% -98.20% 0.72
31-12-10 372.80% 124.10% 0.40
30-06-11 -95.90% 42.20% 2.14
31-12-11 365.40% -86.50% -0.68
30-06-12 -784% -41.80% -1.70
31-12-12 -138.20% 629.20% -0.87
30-06-13 -196.80% -150.40% -1.21
31-12-13 97.50% 133.80% 0.45
30-06-14 1001.90% 43.20% 3.20
31-12-14 -107.60% -159.10% 0.69
30-06-15 53.30% 113.70% -1.09
31-12-15 79.70% 15.50% 2.64
30-06-16 -49.70% -17.10% -1.35
31-12-16 55% 3.50% -0.51

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7/6/2009 11/18/2010 4/1/2012 8/14/2013 12/27/2014 5/10/2016 9/22/2017
-1000.00%
-500.00%
0.00%
500.00%
1000.00%
1500.00%
Qantas Group
Change in GAAP Earning Change in NON GAAP Earning T Test
The table and the figure above indicates the relationship between the announcement and
the movement in the return of the share price from the expected return. It can be clearly seen
from T test that the market reacts more to the results of the GAAP earning than the NON GAAP
earnings. Therefore, in case of Qantas share price reacts to the GAAP earnings more than the
NON GAAP earnings.
Star Entertainment Group
Star entertainment Group

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Date Change in GAAP Earning Change in NON GAAP Earning T Test
31-12-11 -9.10% -11.40% 8.76
30-06-12 -140% -63.70% 1.07
31-12-12 -338.90% 201.30% 3.19
30-06-13 -75.00% -31.40% 0.37
31-12-13 146.10% -21.80% 4.17
30-06-14 29.70% 141.40% -2.92
31-12-14 56.90% -2.30% 3.34
30-06-15 -34.70% -17.00% 2.27
31-12-15 22.80% 23.50% -0.19
30-06-16 125.90% -29.40% 0.05
31-12-16 9% 11.30% 0.03
30-06-17 -13.50% 0.40% -0.15
31-12-17 -72.30% 15.80% -0.17
11/18/2010 4/1/2012 8/14/2013 12/27/2014 5/10/2016 9/22/2017 2/4/2019
-400.00%
-200.00%
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
SGR
Change in GAAP Earning Change in NON GAAP Earning T Test
The table above provides the data related to the star entertainment group. The figure
above shows the relationship between the earning announcement and the share price movement.

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The figure above clearly shows that in case of star entertainment group the share price is more
effected with the NON GAAP earning announcement.
Conclusion
The particular conclusion that can be derived from the information that has been derived
from the preceding paragraphs is that though non-GAAP reporting looks lucrative and is favored
by the executives , the prevalence of GAAP reporting is accepted and honored by the majority of
the corporate entities in Australia. However, the analysis above shows that investor in case of
Qantas Group is more reactive to the GAAP earning announcement where as in case of SGR the
investors reacts more to NON GAAP earning announcements.

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References
Baginski, S., Demers, E., Wang, C., Yu, J., Jiang, D., Kumar, A. and Law, K.K., 2016. Using
adverse-selection cost as a proxy for information asymmetry, we find evidence that non-GAAP
earnings numbers issued by management (pro forma earnings) and analysts (street earnings)
improve price discovery. First, information asymmetry before an earnings announcement is
positively associated with the probability of a non-GAAP earnings number at the forthcoming
earnings announcement. Second,... Review of Accounting Studies, 21(1), pp.198-250.
Bentley, J.W., Christensen, T.E., Gee, K.H. and Whipple, B.C., 2016. Disentangling managers’
and analysts’ non-GAAP reporting incentives.
Bhattacharya, N., Christensen, T., Liao, Q. and Ouyang, B., 2015. Can Short Sellers Constrain
Opportunistic Non-GAAP Earnings Reporting?.
Black, E.L., Christensen, T.E., Kiosse, P.V. and Steffen, T.D., 2017. Has the Regulation of Non-
GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?. Journal of
Accounting, Auditing & Finance, 32(2), pp.209-240.
Black, E.L., Christensen, T.E., Taylor Joo, T. and Schmardebeck, R., 2017. The Relation
Between Earnings Management and Non‐GAAP Reporting. Contemporary Accounting
Research, 34(2), pp.750-782.
Christensen, T., Pei, H., Pierce, S. and Tan, L., 2017. Non-GAAP reporting following debt
covenant violations.
Guest, N.M., Kothari, S.P. and Pozen, R., 2017. High Non-GAAP Earnings Predict Abnormally
High CEO Pay.

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Isidro, H. and Marques, A., 2015. The role of institutional and economic factors in the strategic
use of non-GAAP disclosures to beat earnings benchmarks. European Accounting Review, 24(1),
pp.95-128.
Parrino, R.J., 2016. New compliance guidance by SEC staff signals increased scrutiny of non-
GAAP financial measures. Journal of Investment Compliance, 17(4), pp.23-33.
Twardus, I. and Bhattacharjee, S., 2018. Effect of Non-Gaap Emphasis and Voluntary
Disclosures on Nonprofessional Investor Decision Making in the Equity Crowdfunding
Environment