The NASPP Blog

It’s not uncommon for public companies that grant stock compensation widely to report non-GAAP earnings that back out the expense for their stock compensation programs.  This is a supplement to their reported GAAP earnings (which they are required to report) of course. The practice arose after the adoption of ASC 718, before which companies rarely recognized any expense for their stock compensation programs. But, though the transition to ASC 718 has long been complete, the practice continues.

Google’s Announcement

Earlier this year, Google decided to stop backing stock compensation expense out of its earnings. Ruth Porat, Alphabet’s chief financial officer, explained the decision during an analyst conference call:

SBC [stock-based compensation] has always been an important part of how we reward our employees in a way that aligns their interests with those of all shareholders. Although it’s not a cash expense, we consider it to be a real cost of running our business because SBC is critical to our ability to attract and retain the best talent in the world. Starting with our first quarter results for 2017, we will no longer regularly exclude stock-based compensation expense from non-GAAP results. Noncash stock-based compensation will continue to be reported on our cash flow statement, but we will no longer be providing a reconciliation from GAAP to non-GAAP measures that reflects SBC and related tax benefits.

Will Other Companies Follow Suit?

A Bloomberg article urges more companies to take a similar approach (“Shame on Silicon Valley’s Stock Expense Stragglers”) and praises tech companies such as Facebook, Amazon, Google, and Electronic Arts, which are all either starting or planning to move away from excluding stock compensation expense from earnings.

Likewise, the Financial Times, calls this move a “watershed moment in Google’s financial maturity and the evolution of the Valley” (“Alphabet Opts to Spell Out Its Stock Options”). The article notes, however, that while Google’s consistent growth and profitability make this a “smooth transition,” it will be harder for other tech companies that need to back out this expense in their non-GAAP earnings to appear profitable.

And profitability is the name of the game. As noted in the Bloomberg article, many tech companies would be significantly less profitable (and some would report a loss) if they include stock compensation expense in earnings. These companies are probably pretty attached to their non-GAAP reports.

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– Barbara