Final answer:
Non-GAAP measures are financial metrics not bound by GAAP, intended to better reflect economic reality and provide deeper insights. Although they can be beneficial, there is a risk of them being used to present performance in potentially misleading ways. They are analogous to broader economic measures that look beyond GDP to assess well-being.
Step-by-step explanation:
Non-GAAP measures refer to financial metrics that do not conform to Generally Accepted Accounting Principles (GAAP). These measures are often used by companies to provide a different view of their performance that may be more reflective of their operations and economic reality. Non-GAAP measures should better reflect economic reality by providing additional insights that GAAP measures may not fully capture.
However, there is also a concern that these measures may incentivize auditors to find alternative ways to present performance, which might not always be transparent or comparable across different companies. The intent behind the use of these measures should be considered alongside their benefits. For example, while alternative measures of costs such as fixed cost, marginal cost, average total cost, and average variable cost can provide valuable insights for a firm, the utilization of non-GAAP measures must be scrutinized to ensure they do not mislead investors or disguise underlying financial health of a company.
Additionally, alternative economic measures discussed by Kate Raworth, such as expanding metrics beyond GDP, provide a more comprehensive view of economic success and societal well-being, much like how non-GAAP measures aim to enhance understanding beyond traditional financial reporting.