GAAP and Non-GAAP Numbers
Why earnings releases often show two versions of profit, the rules companies must follow when they use "adjusted" numbers, and how to judge whether an adjustment is reasonable.
The short version
GAAP numbers follow the official accounting rules. Non-GAAP numbers, like adjusted earnings or adjusted EBITDA, start from GAAP and remove items management considers unusual or not part of the ongoing business. SEC rules require a company that uses a non-GAAP number to show the comparable GAAP number and a reconciliation between them, and in SEC filings the GAAP number must be at least as prominent. Some adjustments are reasonable; others remove real, recurring costs. Read the reconciliation and ask, for each item, whether it will happen again and whether it costs shareholders something.
By the end of this lesson, you'll be able to
- Explain the difference between GAAP and non-GAAP measures, including EBITDA
- Describe the SEC's rules on presenting non-GAAP numbers
- Judge whether an adjustment is reasonable
Why this matters
Many earnings releases lead with numbers like "adjusted earnings per share" or "adjusted EBITDA." They're often higher than the official figures, sometimes by a lot. Neither version is automatically right. The official number follows strict rules; the adjusted one reflects management's view of the business. Knowing how they differ, and what the rules require, lets you decide how much weight each deserves.
GAAP and non-GAAP
GAAP. Generally accepted accounting principles: the official accounting rules US companies follow in their financial statements, set by the Financial Accounting Standards Board. Glossary, generally accepted accounting principles, are the official accounting rules for US companies, set by the Financial Accounting Standards Board. Its codification is the source of authoritative GAAP for companies and other non-government organizations.1 Every number in the financial statements follows them.
A Non-GAAP measure. A financial figure that doesn't follow the official accounting rules, usually a GAAP number with items added or removed, such as adjusted earnings or adjusted EBITDA. Glossary measure starts from a GAAP number and adds or removes items. Common examples:
- Adjusted earnings or adjusted EPS, which often leave out stock-based compensation, restructuring costs, or one-time gains and losses.
- EBITDA. Earnings before interest, taxes, depreciation, and amortization. A non-GAAP measure, often calculated as operating income plus depreciation and amortization. Glossary: earnings before interest, taxes, depreciation, and amortization. For STU Corp, that's $80 million of operating income plus $25 million of depreciation: $105 million. "Adjusted EBITDA" usually removes more.
- Free cash flow and organic growth, from earlier lessons.
The rest of this lesson is for members
Still to come in this lesson: The rules, Judging an adjustment, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Quality of EarningsFinancial Statement Analysis in Depth (depth track)
- Stock-Based CompensationFinancial Statement Analysis in Depth (depth track)
- Accounting Red FlagsFinancial Statement Analysis in Depth (depth track)
Notes and sources
- Financial Accounting Standards Board. Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Checked 2026-10-11. Back to text
- Legal Information Institute, Cornell Law School. 17 CFR 244.100 (Regulation G): General rules regarding disclosure of non-GAAP financial measures. Checked 2026-10-01.
- Legal Information Institute, Cornell Law School. 17 CFR 229.10 (Item 10 of Regulation S-K), paragraph (e): Use of non-GAAP financial measures in Commission filings. Checked 2026-10-01.
- U.S. Securities and Exchange Commission, Division of Corporation Finance. Non-GAAP Financial Measures: Compliance and Disclosure Interpretations (Question 102.07). Checked 2026-10-11.