Accounting Reporting Complexity and Non-GAAP Earnings Disclosure

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 accounting. We inform this debate by investigating the role of accounting-based complexity in shaping the disclosure and quality of manager-adjusted earnings information. Using a firm-level XBRL measure of accounting reporting complexity that links directly to the FASB codification, we find that managers’ propensity to disclose non-GAAP earnings information increases with the firm’s accounting complexity as reported in the financial statement filing. Notably, the effect of accounting complexity on non-GAAP disclosure is robust to, and distinct from, the effects arising from operational complexity and the linguistic complexity of the financial report. Our results also indicate that non-GAAP disclosure is particularly sensitive to the reporting complexity of firms’ income and cash flow performance as well as the complexity of authoritative accounting principles. Furthermore, we find that the earnings items managers exclude when deriving the non-GAAP figure are of higher quality when accounting disclosures are complex, though the complexity inherent in certain accounts seem to lead some managers to (un)intentionally make low-quality earnings adjustments. Taken together, our evidence suggests that non-GAAP reporting practices are in part a strategic response to the complexity of accounting principles.