Introduction
Assumptions and forecasts in financial reporting are common in companies, which are not audited according to the generally accepted accounting principles (GAAP). This standard is specific in ascertaining the rules of revenue recognition. Meanwhile, non-GAAP reporting can be used to exclude seemingly minor lines, which may impact financial results, such as marketing expenses and stock compensation costs (Dutta et al. 237). Groupon and Priceline exemplify the use of assumptions and forecasts in non-GAAP accounting.
Discussion
Priceline utilized the opportunity to report gross income to improve its financial performance. The assumption was that the ability to generate sales was more important than the subsequent expenses, such as payments to service providers who allowed the company to make sales in the first place (Dutta et al. 234). Now, current accounting guidelines require businesses to report net revenues, which include corresponding expenses, and prevent companies from using such assumptions.
Groupon’s strategy to record sales before customer refunds showcase the use of forecasts in reporting. The prediction was that the expansion into new markets would be as effective as the company’s previous experience. However, the number of purchase returns made it clear that Groupon’s forecasts were excessively optimistic, creating a gap between recorded sales and actual revenue (Dutta et al. 236). Under the GAAP standard, a company is not able to manipulate its financial results as easily.
Conclusion
Altogether, the choice of the accounting standard is essential in determining the ability of firms to utilize assumptions and forecasts in financial reporting. GAAP metrics are transparent because they allow investors to compare companies’ sales, revenues, and different types of expenses, whereas non-GAAP reporting may obfuscate financial performance. If a firm follows GAAP standards, it is less likely to use assumptions and forecasts, thus making its reporting more reliant.
Work Cited
Dutta, Saurav K., Dennis H. Caplan, and David J. Marcinko. “Growing Pains at Groupon.” Issues in Accounting Education, vol. 29, no. 1, 2014, pp. 229-245.