The financial GAAP

Financial reporting is a part of this complete breakfast.

Financial reporting from games-publishers often makes for interesting reading. Almost always, you’ll see things quoted like “non-GAAP earnings”, and “non-GAAP net sales” and so on, accompanied by some substantially large dollar figures.

So, what actually is GAAP reporting? Well, there are two major systems of financial reporting. One is the International Financial Reporting Standards (IFRS), and the other is Generally Accepted Accounting Principles (GAAP) which is used in the USA. GAAP is a collection of rules and principles about how a company reports its income, sales, losses, assets and overall financial operations.

The principles of GAAP are: regularity, consistency, sincerity, permanence of methods, non-compensation, prudence, continuity, periodicity, Full Disclosure/Materiality, and Utmost Good Faith.

So, what’s non-GAAP reporting? Well, non-GAAP reporting pretty much means that one or more of those principles isn’t being observed.

A US company must use GAAP reporting to shareholders, the SEC, banks, and the like.

That allows a company’s financial operations to be sensibly assessed and compared with other companies used GAAP reporting.

Fiscal reports to shareholders and the public, however, (especially in the case of games publishers, it seems) seem to be wrapped in a layer of non-GAAP reporting with the GAAP material buried a few layers down.

As an random recent example (and I’m not singling them out), THQ’s GAAP net-sales for 2012 was US$830.8 million, and it’s GAAP net loss was US$239.9 million. You won’t read much about that in the news. The news mostly uses the non-GAAP figures which list net sales at US$835.9 million and a net loss of just US$95.2 million.

That’s US$144.7 million dollar improvement in financial performance by changing the way it is calculated and reported.

Now, it’s true that games-publishers have a rather odd financial model to begin with. Their products generally sell for just weeks or months before sales dwindle, and money gets sunk into them for years before they’re released. Additionally, they tend to be seasonal, with most of a publisher’s sales happening in the fourth quarter of the calendar year.

But that’s hardly unique, and a number of other, similar industries continue to use GAAP reporting.

So, where did that $144.7 million dollars come from? Possibly, it came from a previous year, but more likely it is actually from a year that hasn’t happened yet. I’ve looked through both the GAAP and non-GAAP reporting side-by-side and I still can’t quite see where the magic trick was done.

The way I see it, regardless of what you see in the gaming press, if you actually want to find out how the big games publishers are really doing, you need to dig a whole lot deeper.