Non-GAAP: who chooses the adjustments and how to reconcile them with the financial statements

Adjusted (non-GAAP) measures are figures that do not exist in accounting standards: a company takes a line item from its audited financial statements and adds to it, or subtracts from it, whatever it considers untypical of its ordinary business. Such measures are neither fake nor mandatory. They are defined by management, and the auditor signs off not on them but on the underlying IFRS or US GAAP statements. Hence the main practical rule: adjusted profit should only ever be read alongside the reconciliation table, that is, the line-by-line bridge from the standard measure to the adjusted one. Without that table, "adjusted EBITDA" is not data but a claim.

Where non-GAAP measures come from and why they cannot be abolished

Accounting standards fix a limited set of lines: revenue, operating profit, profit before tax, net profit and cash flows. EBITDA does not exist in IFRS at all. It is a construct that originated with analysts, which is precisely why every issuer defines it in its own way. The same goes for OIBDA, free cash flow, net debt, like-for-like sales and the other metrics on which corporate communication relies.

The demand for such measures is legitimate. Standard net profit mixes operating results with non-cash revaluations, impairments, foreign exchange differences and the effects of one-off transactions, and so it no longer describes the business's ability to generate cash. Management that wants to show the underlying economics has no choice but to exclude something. The problem is not the adjustment as such but the fact that whoever chooses the adjustments has a stake in the outcome.

What is usually excluded, and which exclusions are contentious

The typical set: impairment of assets and goodwill, foreign exchange differences, revaluation of investment property and biological assets, M&A transaction costs, restructuring expenses, legal settlements, and the effects of selling or deconsolidating a business.

The contentious part of the list is shorter, but it is this part that determines the quality of disclosure:

• Share-based compensation. A non-cash expense, but a very real one: it dilutes the stake of existing shareholders. Excluding it from profit means that part of the cost of labour vanishes from the income statement.
• Non-recurring expenses that recur period after period. A restructuring that runs for many years in a row is operating routine, not an exception.
• Adjustments for lease accounting rules. A measure "before applying the lease standard" can be justified on grounds of comparability, but it puts back into profit obligations that exist in law.
• Sign asymmetry. If, over the entire history of disclosures, the adjustments have only ever moved the result upwards, that tells you about the methodology, not about the business.

How to read the reconciliation table

The procedure is simple and almost mechanical.

Step 1. Find the base line. A reconciliation always starts from a measure in the standard financial statements, so work from the issuers' published financial statements, not from a presentation slide.

Step 2. Read each adjustment as a separate event and ask whether it will recur. A non-recurring write-off is one thing; an annual "non-recurring" one is quite another.

Step 3. Compare the trend in adjusted profit with the cash flow statement. If the adjusted result is improving while operating cash flow is not, the gap is explained either by working capital or by the adjustment methodology.

Step 4. Check comparability with prior periods. A change in the definition of a measure without restating earlier figures is a significant warning sign.

Regulation: where it exists and where it does not

In the United States, non-GAAP disclosure is regulated directly: Regulation G requires a reconciliation to the comparable standard measure, while Item 10(e) of Regulation S-K prohibits presenting the adjusted figure more prominently than the comparable standard one and restricts the exclusion of cash expenses from liquidity measures. In Europe, the ESMA guidelines on alternative performance measures apply. The new IFRS standard on presentation of financial statements, which takes effect from 2027, introduces for the first time a category of management-defined performance measures and requires them to be disclosed in the notes together with a reconciliation.

For Russian issuers there is no requirement for press releases of comparable strictness: the composition and presentation of adjusted measures remain a matter of each company's own disclosure practice. This is not a judgement but a limitation worth keeping in mind when reading.

Where non-GAAP measures acquire legal force

Adjusted measures stop being marketing in two places. The first is dividend policy: the payout base is often tied to adjusted net profit or free cash flow, in which case the definition of the measure directly determines the size of the payout. See the dividends section and the upcoming dates in the payment calendar:

The second is covenants in loan agreements and bond documentation. The net debt to EBITDA ratio in a contract is calculated according to the definition in that contract, and it usually matches neither the reported figure nor the one in the presentation. The discrepancy here is a working detail of any debt-burden analysis, including for corporate bond issues.

How this feeds into valuation multiples

Every multiple is a fraction, and non-GAAP lives in its denominator. A P/E calculated on standard profit and a P/E calculated on adjusted profit are different numbers, and neither is "correct" unless the base is stated. When you take a ready-made value, say 3,92 from the SBER page, the first thing to check is the calculation methodology: which profit sits in the denominator and for which period. Comparing values calculated on different bases leads to a false conclusion faster than any arithmetic error.

It is useful to keep the definitions of individual terms at hand in the glossary, and the publication dates of financial statements in the corporate events calendar, so that you read the reconciliation straight away rather than someone's retelling of it. A selection of securities is available in the equities section.

A short checklist. There is a reconciliation table: the measure can be discussed. There is no reconciliation: the measure does not exist. The definition has changed without the history being restated: consider comparability lost. The adjustments only ever go upwards: the question is not about the business but about the disclosure.