This edition of GAAP Flash starts with uncovering the truth about customized benchmarks, or non-GAAP financial measures, changes in accounting estimates, specifically straight-line depreciation under ASC 360, and little white lies found in financial disclosures. Are non-GAAP financial measures a way for companies to make their business look more appealing to investors? Can changes in straight-line depreciation estimates under ASC 360 help predict the future and have material impacts on financial results? Did SunEdison get caught in a white lie within its financial statement disclosures? The edition ends with Obamacare and the increased bad debt expense reported by healthcare providers.

Companies Invent Their Own Performance Benchmarks (March 29, 2016) – Wall Street Journal (@WSJ)

Chief Financial Officers are changing the way they measure their companies’ financial successes due to ever-changing technology and business models. As a result, some CFOs are choosing to disclose new performance benchmarks, non-GAAP financial measures, in order to better portray the continuing strength of the company. An example of a company that has disclosed customized benchmarks for years is Valeant Pharmaceuticals, a company that has been in the spotlight lately (and not in a good way!). The article claims that Valeant used the customized benchmarks to “paint a more appealing picture of its business”. As we discussed in last week’s GAAP Flash, Valeant is currently facing many issues and even had to push back its annual filing. Could the customized benchmarks have been a way to try to cover up these issues?!

So what are these “new” performance benchmarks? More than likely, you aren’t familiar with the benchmarks because the companies are inventing many of them, depending on their business models, as well as intent. Although non-GAAP financial measures may be helpful to some investors, regulators, and analysts, they may also cause confusion, may not be comparable with prior years, may cause red flags, and may not be relevant to a company’s performance. Additionally, the article claims that the SEC has recently raised concerns about the use of non-GAAP financial measures.

Word to the wise: If you come across a customized benchmark, make sure you understand it and take it with a grain of salt.

Moore's Law Meets GAAP Accounting at Intel (April 4, 2016) – Wall Street Journal (@WSJ)

Accounting estimates are based on management’s best estimate at the time the estimate is made and, if new information arises, the estimates must be updated. It is common for accounting estimates to be updated, but how big of an effect could a change in an accounting estimate really have on financial results and how could a change in accounting estimate help predict the future? Intel Corp. has proven just how big of an impact a change in accounting estimate can have!

As the result of slower product cycles, Intel has made the decision to depreciate its machinery and equipment over a five-year period as opposed to a four-year period. The change in accounting estimate has resulted in approximately $1.5 million less in depreciation expense being booked this year and therefore, has a positive impact on Intel’s bottom line! What does that mean for investors, regulators, and analysts who are keeping a close watch on Intel’s financial results? Although the profits may appear higher this year when compared to last year, keep in mind that due to the change in accounting estimate, the years aren’t comparable. Also, keep in mind that although the change in accounting estimate had a positive impact on current year financial results, the slower product cycles might mean that sales are slowing and therefore, financial results may not be that great in years to come.

Intel has proven that a change in accounting estimate can provide more information than just the change itself!

SEC Investigating SunEdison’s Disclosures to Investors About Its Liquidity (March 28, 2016) – Wall Street Journal (@WSJ)

After their stock price plummeted last year, SunEdison, Inc. claimed that it had $1.4 million cash on hand and enough liquidity to survive the decrease in stock price. Their statement should have made investors feel more comfortable and confident in the company, but did SunEdison actually have over $1.4 million cash on hand, and was the cash liquid? It appears that SunEdison may have falsely disclosed their liquidity to investors. The article claims that the majority of the $1.4 million was restricted cash and not accessible by SunEdison. In fact, the article states that SunEdison only had direct access to a few hundred million dollars!

So, is SunEdison in trouble? It definitely looks that way. Not only is the SEC currently performing an investigation to determine whether or not SunEdison overstated its liquidity, SunEdison’s annual financial statements have been delayed, a material weakness in internal controls over financial reporting has been identified, and it seems that SunEdison may also be in financial distress. In fact, the article claims that SunEdison had to stop paying some contractors and suppliers in late 2015 and that a deal to take over Vivint Solar, Inc. fell through after banks pulled funding.

In all of this chaos, I think SunEdison would agree with Alfred Lord Tennyson, who said, “A lie that is half-truth is the darkest of all lies.”

Bad Debt Is the Pain Hospitals Can't Heal as Patients Don't Pay (February 23, 2016) – Bloomberg Business (@business)

When the Patient Protection and Affordable Care Act was signed into law in 2010, it was assumed that the Act would affect healthcare providers’ patient revenues and receivables; however, it was unclear exactly how they would be affected. Now that six years have passed, healthcare providers are finding out just how the Act is affecting them and it isn’t pretty!

According to the article, the rate of the uninsured in the U.S. has dropped 42% since 2009. Great for healthcare providers, right? Think again! The insurance plans under the Act aren’t cheap and the less expensive plans have very high deductibles. With high deductible plans, the patient is responsible for the first few thousand dollars of medical expenses (if not more!). The majority of people can’t afford thousands of dollars of medical expenses, so they just don’t pay. What does that mean for healthcare providers? Higher bad debts and a decrease to the bottom line.

Read the article, written by John Lauerman, to find out exactly how bad it is!