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Adjusted revenue

What Is Adjusted Revenue?

Adjusted revenue refers to a company's total sales figures that have been modified from their reported, unadjusted amount to exclude or include specific items. This financial reporting metric falls under the broader category of Non-GAAP financial measures. Companies often present adjusted revenue to provide investors and analysts with a different perspective on their core operational performance, potentially removing the impact of non-recurring events or non-operating activities. While financial statements prepared under Generally Accepted Accounting Principles (GAAP) offer a standardized view, adjusted revenue seeks to highlight underlying trends in a company's primary business. It can appear alongside, but distinct from, official revenue figures on a company's income statement.

History and Origin

The concept of presenting financial metrics beyond the strict confines of GAAP gained traction as businesses sought to better communicate their operational results, free from the distortions of certain accounting treatments or one-time events. This practice became more prevalent in the late 20th and early 21st centuries, particularly with the rise of technology companies whose business models often involved significant non-cash expenses or volatile revenue streams. However, the increased use of non-GAAP measures, including various forms of adjusted revenue, also led to concerns about potential manipulation and lack of comparability across companies.

In response to these concerns and major accounting scandals of the early 2000s, such as the WorldCom fraud, regulators intervened. The Sarbanes-Oxley Act of 2002 mandated greater corporate accountability and transparency in financial reporting. Following this, the Securities and Exchange Commission (SEC) adopted Regulation G and amended Item 10(e) of Regulation S-K in 2003, establishing rules for the disclosure of non-GAAP financial measures15. This regulatory framework requires companies to reconcile non-GAAP measures to their most directly comparable GAAP equivalent and explain why these non-GAAP metrics are useful. Before these formal rules, the SEC had already issued interpretive guidance, such as Staff Accounting Bulletin No. 104 in 2003, which codified staff positions on revenue recognition14.

Key Takeaways

  • Adjusted revenue modifies standard revenue figures to present a different view of a company's operational performance.
  • It is a non-GAAP financial measure, used to highlight core business trends by excluding or including specific items.
  • Companies often use adjusted revenue in investor presentations and earnings calls to explain financial results.
  • While providing additional insight, adjusted revenue lacks the standardization of GAAP, requiring careful scrutiny.
  • Regulatory bodies like the SEC provide guidance for the proper disclosure and reconciliation of adjusted financial metrics.

Interpreting the Adjusted Revenue

Interpreting adjusted revenue requires understanding the specific adjustments a company has made and the rationale behind them. Companies may adjust revenue for various reasons, such as:

  • Non-recurring items: Excluding revenue from one-time asset sales or discontinued operations to focus on ongoing business.
  • Non-cash items: Though less common for revenue itself, adjustments might relate to the timing of cash receipts versus accruals in complex arrangements.
  • Specific business model characteristics: For example, a company acting as an agent might present net revenue (fees received) rather than gross revenue (total transaction value) to better reflect its economic reality, even if GAAP requires gross presentation13.

The goal of presenting adjusted revenue is often to provide a clearer picture of the company's underlying profitability and how its core business generates earnings. Investors and analysts can use this metric, in conjunction with GAAP figures, to gain a more comprehensive understanding of a company's financial health and trajectory. However, it is crucial to analyze the nature of the adjustments and consider if they genuinely reflect sustainable performance.

Hypothetical Example

Consider "TechCo Inc.," a software company that sells subscription services. In 2024, TechCo reports total GAAP revenue of $100 million. However, within this $100 million, $5 million came from the sale of an old, non-core software division that the company divested. Management believes this one-time sale distorts the view of their recurring subscription business growth.

To provide a clearer picture of its ongoing operations, TechCo might present an "Adjusted Revenue" figure.

Calculation:

  • GAAP Revenue: $100 million
  • Less: Revenue from sale of non-core division: $5 million
  • Adjusted Revenue: $95 million

In this example, the adjusted revenue of $95 million aims to reflect the revenue generated solely from TechCo's continuing subscription services, allowing investors to better assess the growth of its primary business model. This adjustment helps in evaluating the company's core performance, separate from an unusual event not expected to recur under normal revenue recognition practices.

Practical Applications

Adjusted revenue is primarily utilized in corporate communications, such as investor presentations, earnings call transcripts, and supplementary financial reports. Companies use this metric to articulate their financial performance in a way that aligns with their strategic narrative or to highlight specific operational efficiencies. For instance, a software company might present adjusted revenue to exclude professional services revenue that is less profitable or scalable than its core software subscription revenue. This allows management to emphasize the growth of its high-margin recurring revenue.

Regulators like the Securities and Exchange Commission (SEC) oversee the use of non-GAAP measures to ensure they are not misleading. The SEC's rules require that if a company discloses a non-GAAP financial measure, it must also provide the most directly comparable GAAP measure with equal or greater prominence, along with a reconciliation between the two12. This helps maintain transparency and allows stakeholders to understand the differences between the adjusted figures and those prepared under official accounting standards. Analysts and investors frequently analyze adjusted revenue figures, but always in conjunction with GAAP numbers, to form a comprehensive view of a company's financial health.

Limitations and Criticisms

While adjusted revenue can offer valuable insights, it comes with significant limitations and criticisms. The primary concern is the lack of standardization; unlike GAAP, there are no universal rules governing how companies calculate or present adjusted revenue. This can lead to inconsistencies between companies, making direct comparisons difficult. Companies have discretion in deciding what to exclude or include, which can sometimes result in "cherry-picking" adjustments that present a more favorable financial picture without reflecting the full economic reality.

A notable historical example illustrating the dangers of financial misrepresentation, even if not directly related to adjusted revenue, is the WorldCom accounting scandal. In 2002, WorldCom was found to have fraudulently inflated its assets by billions of dollars, primarily by capitalizing ordinary operating expenses rather than expensing them. While this manipulation primarily affected expenses and assets, it underscores how creative accounting can distort a company's reported financial health, impacting its revenue and cash flow perception. The SEC charged WorldCom's former controller for his role in the multi-billion dollar accounting fraud7, 8, 9, 10, 11. Such incidents highlight the critical role of independent auditing and adherence to principles set by bodies like the Financial Accounting Standards Board (FASB) to ensure accurate financial reporting.

Reliance solely on adjusted revenue without careful consideration of the underlying GAAP figures can be misleading, especially if the adjustments remove items that are, in fact, recurring operational costs or integral to the business. Investors should always scrutinize the adjustments made, understand the reasons provided by management, and consider the potential for bias.

Adjusted Revenue vs. GAAP Revenue

The key distinction between adjusted revenue and GAAP Revenue lies in their adherence to standardized accounting principles. GAAP revenue, or gross revenue, is the top-line figure reported on a company's official financial statements, derived directly from the application of Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers"3, 4, 5, 6. This standard provides a comprehensive framework for how and when companies recognize revenue from contracts with customers, ensuring uniformity and comparability across different entities2. For example, ASC 606 outlines a five-step model for revenue recognition, including identifying contracts, performance obligations, transaction price, allocating that price, and recognizing revenue when obligations are satisfied1.

In contrast, adjusted revenue is a non-GAAP metric. It begins with the GAAP revenue figure but then modifies it by adding back or subtracting specific items that management deems non-representative of core operations. These adjustments are company-specific and are not governed by the same strict accounting standards as GAAP. While GAAP revenue provides a consistent and verifiable benchmark, adjusted revenue aims to offer a different, often more "normalized" view of a company's sales performance, free from distortions caused by unusual or non-recurring events. The potential for confusion arises when users do not fully understand the nature of the adjustments or the reasons for their inclusion or exclusion, making it imperative to always consider both figures.

FAQs

Why do companies report adjusted revenue?

Companies report adjusted revenue to provide what they believe is a clearer picture of their ongoing operational performance, often by excluding non-recurring or non-core items. This can help investors understand the underlying trends in the business, separate from temporary fluctuations or unusual transactions.

Is adjusted revenue audited?

While the underlying GAAP revenue figures are subject to auditing by independent accounting firms, adjusted revenue figures, as non-GAAP measures, are typically not audited to the same extent as the primary financial statements. Companies are required by the Securities and Exchange Commission (SEC) to reconcile adjusted figures to their most comparable GAAP measures, but the adjustments themselves are management's discretion.

How does adjusted revenue differ from net sales?

Net sales, often found on the income statement, represent gross sales less returns, allowances, and discounts. It is a GAAP measure. Adjusted revenue, however, is a non-GAAP measure that takes net sales (or total revenue) and further modifies it by excluding or including specific items that management identifies as non-operating or non-recurring, to highlight core business performance.

Can adjusted revenue be higher than reported revenue?

Yes, adjusted revenue can be higher than reported GAAP revenue if a company adds back certain items that were initially subtracted or deferred under GAAP, but which management considers part of their core operational performance. For example, if a company defers revenue under GAAP for certain contracts, it might include a portion of that deferred amount in its adjusted revenue to show what it believes is the true economic activity for a period.

What regulations govern the disclosure of adjusted revenue?

In the United States, the disclosure of adjusted revenue and other non-GAAP financial measures is primarily governed by the Securities and Exchange Commission (SEC)'s Regulation G and Item 10(e) of Regulation S-K. These rules require companies to reconcile non-GAAP measures to their most directly comparable GAAP financial measure and provide a clear explanation of why the non-GAAP measure is useful. The Financial Accounting Standards Board (FASB) sets the standards for GAAP.