Adjusted current revenue

What Is Adjusted Current Revenue?

Adjusted current revenue refers to a non-Generally Accepted Accounting Principles (non-GAAP) financial measure that modifies a company's reported revenue figures to exclude or include specific items. This financial accounting metric is often used by companies and analysts to present what they believe is a more representative view of a company's core operational performance, free from the distortions of certain non-recurring, non-cash, or otherwise unusual events. Companies often utilize adjusted current revenue as part of their broader corporate finance strategy to communicate financial health and trends to investors, alongside their official GAAP (Generally Accepted Accounting Principles) results.

History and Origin

The concept of "adjusted" financial metrics, including adjusted current revenue, has evolved with the increasing complexity of business operations and the desire of companies to provide supplemental information beyond traditional accounting standards. While GAAP and International Financial Reporting Standards (IFRS) provide a standardized framework for financial reporting, they can sometimes obscure a company's underlying operating performance due to specific accounting treatments for non-cash expenses, one-time gains or losses, or other non-recurring items.

The use of non-GAAP measures gained significant prominence in the early 2000s, leading the U.S. Securities and Exchange Commission (SEC) to issue guidance, notably Regulation G and Item 10(e) of Regulation S-K, to ensure these disclosures are not misleading and are reconciled to comparable GAAP measures. The SEC has repeatedly updated its guidance, emphasizing transparency and preventing the use of non-GAAP measures that exclude normal, recurring, cash operating expenses⁸, ⁹. Similarly, the Financial Accounting Standards Board (FASB) released Accounting Standards Codification (ASC) 606, "Revenue from Contracts with Customers," in May 2014, a landmark accounting standard that significantly refined how companies recognize revenue, aiming for greater consistency and comparability⁷. These formal standards provide the baseline from which "adjusted" revenue figures deviate, highlighting the need for clear reconciliation and justification.

Key Takeaways

• Adjusted current revenue is a non-GAAP financial measure.
• It modifies reported revenue to highlight core operational performance.
• Companies use it to provide additional context beyond GAAP financial statements.
• Adjustments often exclude non-recurring, non-cash, or unusual items.
• Proper disclosure and reconciliation to GAAP revenue are crucial for transparency.

Formula and Calculation

The formula for adjusted current revenue can vary significantly depending on the specific adjustments a company chooses to make. There is no universally mandated formula, as it is a non-GAAP measure. However, it generally follows this structure:

Where:

• Reported GAAP Revenue: The revenue figure recognized according to GAAP (or IFRS), typically found on the income statement. This revenue is based on the transfer of goods or services to customers in an amount reflecting the consideration the entity expects to receive, as per standards like ASC 606.
• Specific Adjustments: These are additions or subtractions the company makes. Common adjustments might include:
  • Exclusion of revenue from divested business units.
  • Inclusion of revenue from consolidated entities not fully owned.
  • Adjustments for the impact of foreign currency fluctuations (on a constant currency basis).
  • Exclusion of non-recurring revenue from one-time events.
  • Normalization for specific regulatory changes or new performance obligations.

For example, a company might present adjusted current revenue to exclude the sales generated by a discontinued operation, believing this provides a clearer picture of its ongoing business.

Interpreting the Adjusted Current Revenue

Interpreting adjusted current revenue requires careful consideration and a comparison with the company's reported GAAP revenue. This metric is primarily used to gain insights into the "true" operating performance and growth trajectory of a business by removing items that management considers extraneous to the core business.

When evaluating adjusted current revenue, it is essential to understand the nature and rationale behind each adjustment. Analysts and investors often use this figure to compare companies within the same industry, especially when different companies might have varying exposure to one-time events or unique accounting treatments. For example, if a company reports a significant one-time gain from the sale of an asset that is included in its GAAP revenue, an adjusted current revenue figure that excludes this gain could provide a more accurate view of the revenue generated from its ongoing operations. Conversely, aggressive adjustments that consistently exclude operating expenses that are normal and recurring could be misleading, and regulators like the SEC scrutinize such practices⁶.

Hypothetical Example

Consider "TechInnovate Inc.," a publicly traded software company. In its latest quarterly financial statements, TechInnovate reports GAAP revenue of $100 million. However, within that quarter, the company sold off a non-core legacy software division, which contributed $10 million in revenue before its divestiture. Additionally, due to a significant strengthening of the U.S. dollar, its international sales, when translated back into U.S. dollars, appeared $5 million lower than they would have under constant currency rates.

To provide investors with a clearer picture of its ongoing software subscription business, TechInnovate decides to report an adjusted current revenue figure.

Here's the step-by-step calculation:

1. Start with Reported GAAP Revenue: $100 million
2. Adjust for Divested Business: Subtract the revenue from the divested legacy division, as it's no longer part of the core operations.
   $100 \text{ million} - $10 \text{ million} = $90 \text{ million}$
3. Adjust for Constant Currency Impact: Add back the negative impact of foreign currency translation to show performance as if exchange rates remained constant.
   $$90 \text{ million} + $5 \text{ million} = $95 \text{ million}$

Therefore, TechInnovate Inc.'s adjusted current revenue would be $95 million. This figure aims to show investors the revenue generated purely from its continuing software subscription and related services, excluding the one-time sale and the impact of currency fluctuations. Investors can then use this adjusted figure, alongside the GAAP revenue, to assess the company's underlying growth trends and future prospects, particularly when analyzing its earnings per share.

Practical Applications

Adjusted current revenue finds several practical applications across investing, financial analysis, and corporate planning. Its primary use is in providing a more nuanced view of a company's revenue streams, which can be particularly useful in understanding underlying business performance when reported revenue is influenced by unusual or non-recurring events.

• Investment Analysis: Investors and analysts often use adjusted current revenue to compare companies within the same industry, especially those with diverse business models or exposure to different economic factors. By normalizing for specific items, it can help in assessing a company's true growth rate and its ability to generate sustainable sales from its core operations. This aids in more accurate valuation multiples and projections.
• Performance Evaluation: Management often uses adjusted current revenue internally to evaluate the effectiveness of strategic initiatives, free from the noise of one-off events. This can help in setting future sales targets and assessing the performance of different business segments.
• Loan Covenants: In some lending agreements, financial covenants might refer to "adjusted revenue" or similar non-GAAP metrics, requiring companies to maintain certain thresholds. This highlights its role in broader corporate finance.
• Mergers and Acquisitions (M&A): During M&A due diligence, adjusted revenue figures can help prospective buyers understand the ongoing revenue capacity of an acquired entity, excluding pre-acquisition adjustments or non-recurring integration costs.
• Regulatory Scrutiny: While companies are allowed to present non-GAAP measures, regulators, especially the SEC, closely monitor these disclosures to ensure they are not misleading. The SEC's Compliance and Disclosure Interpretations (C&DIs) on non-GAAP financial measures provide specific guidance on what constitutes a permissible adjustment and the required prominence of GAAP reconciliation⁵. Companies must ensure their financial reporting aligns with these guidelines.

Limitations and Criticisms

Despite its utility, adjusted current revenue, like all non-GAAP measures, carries significant limitations and faces criticism. The primary concern revolves around the potential for manipulation or misrepresentation, as companies have discretion in what they include or exclude from the adjustment.

One major criticism is the lack of standardization. Since there are no universally accepted definitions for "adjusted current revenue," each company can define and calculate it differently. This makes cross-company comparisons challenging, even within the same industry, undermining the goal of improved comparability. Critics argue that this flexibility can lead to "aggressive accounting" practices, where companies might strategically adjust figures to present a more favorable financial picture than what GAAP would show⁴. For instance, routinely excluding certain cash flow operating expenses by labeling them "non-recurring" when they are, in fact, integral to the business, can mislead investors about profitability and economic reality.

Another limitation stems from the potential for opacity. While companies are required to reconcile non-GAAP measures to their GAAP counterparts, the detailed rationale for each adjustment might not always be immediately clear or easily verifiable by the average investor. This can create information asymmetry, where insiders possess a deeper understanding of the adjustments than external stakeholders. Furthermore, the focus on adjusted figures can sometimes divert attention from underlying issues highlighted by the GAAP balance sheet or auditing reports. For instance, challenges in meeting compliance and audit standards for revenue recognition, particularly with complex contracts, can create discrepancies that adjustments might try to smooth over without fully addressing the root cause³.

Regulators continuously monitor the use of non-GAAP measures, with the SEC frequently issuing comment letters and updates to their guidance to curb potentially misleading practices². Investors are advised to view adjusted current revenue and similar metrics with a degree of skepticism, always cross-referencing them with the official GAAP financial statements and analyzing the accompanying reconciliation and disclosures.

Adjusted Current Revenue vs. Reported Revenue

Adjusted current revenue and reported revenue (which is synonymous with GAAP revenue) are both measures of a company's sales, but they differ fundamentally in their adherence to accounting standards and their purpose.

The main point of confusion often arises because adjusted current revenue aims to present what management considers a more relevant picture of a company's revenue generating capabilities, but it does so by deviating from the rigorous and comparable framework of GAAP. While reported revenue provides a standardized, verifiable baseline, adjusted current revenue offers an alternative perspective, which can be useful as long as the nature of the adjustments is fully transparent and justifiable.

FAQs

Why do companies use Adjusted Current Revenue?

Companies use adjusted current revenue to provide investors and analysts with a clearer view of their core operational performance, often by removing the impact of one-time events, non-cash charges, or other items that management believes do not reflect the ongoing business. It's a supplemental metric to GAAP figures.

Is Adjusted Current Revenue audited?

While the underlying components of adjusted current revenue (like GAAP revenue) are subject to external audit, the specific "adjusted" figure itself, being a non-GAAP measure, might not be directly audited in the same way. However, public companies must reconcile these non-GAAP measures to their GAAP equivalents, and auditors review these reconciliations to ensure compliance with SEC disclosure requirements.

How does Adjusted Current Revenue relate to profitability?

Adjusted current revenue focuses specifically on the top-line (revenue) figure. While a strong adjusted current revenue can indicate healthy underlying sales growth, it does not directly reflect net income or overall profitability, as it does not account for all expenses. It provides insight into revenue-generating capacity, which is a precursor to profitability.

Can Adjusted Current Revenue be misleading?

Yes, adjusted current revenue can be misleading if the adjustments are not transparent, are inconsistent over time, or exclude normal, recurring operating expenses. Regulators like the SEC scrutinize non-GAAP measures to prevent companies from presenting an overly optimistic financial picture. Always compare it to the reported GAAP revenue and understand the specific adjustments made.