GAAP isn’t a valuation tool. The purpose of GAAP is to encourage organizations to report
comparable results – comparable from one firm to another, and within a firm, from one
period to another and from one line item to another. If firm A pays employees with cash and
firm B pays with stock, GAAP encourages a standard where both are comparable. If firm A pays
with cash in Year 1 and with stock in Year 2, GAAP encourages a comparable standard. If firm A
pays employees with cash and pays consultants with stock, again GAAP encourages a standard. It’s
either a misunderstanding or misrepresentation to say GAAP punishes anyone.
for some, this thread has gone on long enough, but I agree with the above and it is the same point made by Tillingast in his new book:
Without an agreed-upon set of rules, like GAAP, the frontrunner will be the one with the most lenient standards. Comparability is reduced in a world where some companies are making certain adjustments, others are adjusting away something else, and a few stick with GAAP. GAAP standards aren’t always correct, but mostly they are closer to the real economics of a business that adjusted earnings. When they are not, I am not the one to identify better accounting principles.
If it matters, I hate SBC and think it is a plague and grossly unfair, but I always look at adjusted earnings too. For longer periods than I can remember, people are willing to overlook the negatives of these things (but please - don’t tell me that moving options and other share compensation from the footnotes onto the income statement was a bad thing as it resulted in most companies issuing restricted stock vs. options which is 100x better) and you’d be crazy not to look at all alternative points of view.