Accounting Reporting Complexity and Non-GAAP Earnings Disclosure

Posted: 12 May 2018

See all articles by Nerissa C. Brown

Nerissa C. Brown

University of Illinois at Urbana-Champaign

Shira Cohen

San Diego State University

Adrienna A. Huffman

The Brattle Group

Date Written: April 13, 2018


The continuing proliferation of non-GAAP (or adjusted) earnings measures in corporate disclosures has led accounting standard-setters and financial reporting regulators to debate whether this disclosure trend is in response to the increasing complexity of GAAP. We inform this debate by investigating the role of accounting-based complexity in shaping managers’ non-GAAP disclosure choices and the quality of non-GAAP earnings information. Using an XBRL-based measure of accounting reporting complexity that links directly to the FASB codification, we find that managers’ propensity to report a non-GAAP earnings metric increases with the degree of accounting complexity as reported in financial statement filings. Notably, the effect of accounting-based complexity on non-GAAP disclosure is robust to, and distinct from, the effects arising from operational complexity and the readability of the financial report. Our results also indicate that managers’ non-GAAP disclosure propensity is particularly sensitive to the reporting complexity of the firm’s income and cash flow statements as well as the complexity of specific accounting concepts appearing in the filings. Furthermore, we find that the earnings items managers exclude when deriving the non-GAAP earnings figure are of higher quality when accounting complexity is high. This result suggests that in the face of increasing accounting complexity, managers use non-GAAP adjustments as a tool to better communicate the firm’s financial performance. Taken together, our study is the first to provide empirical evidence that non-GAAP reporting is in-part a strategic response to the complexity of accounting principles.

Keywords: Non-GAAP, Accounting Complexity, XBRL

Suggested Citation

Brown, Nerissa C. and Cohen, Shira and Huffman, Adrienna A., Accounting Reporting Complexity and Non-GAAP Earnings Disclosure (April 13, 2018). Available at SSRN:

Nerissa C. Brown

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Shira Cohen

San Diego State University ( email )

San Diego, CA 92182-0763
United States

Adrienna A. Huffman (Contact Author)

The Brattle Group ( email )

San Francisco, CA 9133
United States

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