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Adjusted sales

What Is Adjusted Sales?

Adjusted sales refers to a company's reported revenue after making specific modifications or exclusions to its Gross Sales figure. These adjustments are typically made to provide a clearer picture of a company's core Financial Performance, often by removing items considered non-recurring, non-operating, or otherwise distorting to regular business operations. While generally accepted accounting principles (GAAP) provide a standardized framework for preparing Financial Statements, companies sometimes present adjusted sales as a "non-GAAP financial measure" to highlight performance in a way they believe is more relevant to investors. Adjusted sales falls under the broader category of Financial Accounting.

History and Origin

The concept of adjusting sales or revenue figures has evolved as businesses have become more complex and financial reporting aims to offer increasingly nuanced insights. Historically, sales were primarily recorded as the exchange of goods or services for cash or a promise of payment. However, with the advent of more sophisticated financial structures and diverse business models, the need arose to distinguish between various types of revenue and to present figures that better reflect ongoing operations.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued comprehensive guidance on Revenue Recognition with ASC 606 (Revenue from Contracts with Customers) and IFRS 15, effective for public companies for fiscal years beginning after December 15, 2017. This standard provides a five-step model for recognizing revenue when control of goods or services transfers to the customer, influencing what constitutes "gross" revenue.6

Simultaneously, the use of non-GAAP financial measures, including adjusted sales, has become increasingly prevalent. This trend prompted the U.S. Securities and Exchange Commission (SEC) to issue Regulation G in 2003, along with Item 10(e) of Regulation S-K, to govern how public companies disclose these measures. The aim was to ensure that such disclosures are not misleading and are accompanied by a reconciliation to the most directly comparable GAAP measure.5 This regulatory oversight underscores the importance of transparently presenting any adjusted sales figures.

Key Takeaways

  • Adjusted sales represents a company's revenue after specific modifications, often to remove non-recurring or non-operating items.
  • These adjustments aim to provide a clearer view of a company's underlying operational performance.
  • Common adjustments to sales include sales returns, allowances, and sometimes one-time revenue events.
  • Adjusted sales is a non-GAAP financial measure, requiring reconciliation to GAAP figures per SEC regulations.
  • It is used by management, analysts, and investors for more insightful Market Analysis and comparative Valuation.

Formula and Calculation

The calculation of adjusted sales starts with the gross sales figure and then subtracts specific items or adds certain non-GAAP revenue streams. While there isn't one universal formula, a common starting point for basic adjustments involves subtracting "sales returns and allowances" from gross sales to arrive at net sales, which is itself a form of adjusted sales.

A general representation can be:

Adjusted Sales=Gross Sales−Returns−Allowances±Other Specific Adjustments\text{Adjusted Sales} = \text{Gross Sales} - \text{Returns} - \text{Allowances} \pm \text{Other Specific Adjustments}

Where:

  • Gross Sales: The total amount of sales before any deductions for returns, allowances, or discounts.
  • Returns: Revenue lost due to customers returning goods.
  • Allowances: Reductions in price granted to customers for damaged or defective goods, where the customer keeps the goods.4
  • Other Specific Adjustments: This can vary widely by company and industry, and might include adjustments for divestitures, acquisition-related revenue, or certain non-recurring contractual revenue streams, depending on what management aims to highlight as "adjusted."

The components of these adjustments, such as Sales Returns and Allowances, are considered contra-revenue accounts in Generally Accepted Accounting Principles and are deducted from gross sales on the Income Statement.

Interpreting the Adjusted Sales

Interpreting adjusted sales requires careful consideration of what specific items have been included or excluded. The primary goal of presenting adjusted sales is to offer insights into a company's underlying, ongoing operational revenue, free from the noise of extraordinary or non-recurring events. For example, if a company reports a significant increase in adjusted sales, it suggests organic growth or improved efficiency in core operations, even if total reported revenue was affected by a one-time divestiture.

Conversely, if a company's adjusted sales are consistently lower than its gross sales, it might indicate significant issues with product quality leading to high returns, or aggressive sales practices requiring frequent allowances. It is crucial for investors and analysts to understand the rationale behind the adjustments. Companies are required to disclose the nature of these adjustments and reconcile them to their GAAP counterparts, enabling stakeholders to make informed decisions. A detailed understanding of the company's Performance Obligations and their satisfaction helps in scrutinizing revenue figures.

Hypothetical Example

Consider "TechInnovate Inc.," a software company that sells subscription-based services. In Q1, TechInnovate reports gross sales of $$50 million. However, during the quarter, they had:

  1. Customer cancellations and refunds totaling $$2 million.
  2. Price adjustments for early renewals or specific customer concessions amounting to $$1 million.
  3. A one-time licensing fee of $$5 million from a legacy product that is no longer core to their future strategy.

To calculate adjusted sales, TechInnovate Inc. decides to exclude the one-time licensing fee to show their core subscription growth more clearly, while also accounting for returns and allowances.

Calculation:

Gross Sales: 50,000,000Less:RefundsandCancellations:50,000,000 Less: Refunds and Cancellations: 2,000,000
Less: Price Adjustments (Allowances): 1,000,000Less:One−timeLicensingFee(Non−core):1,000,000 Less: One-time Licensing Fee (Non-core): 5,000,000

Adjusted Sales=$50,000,000−$2,000,000−$1,000,000−$5,000,000=$42,000,000\text{Adjusted Sales} = \$50,000,000 - \$2,000,000 - \$1,000,000 - \$5,000,000 = \$42,000,000

In this scenario, TechInnovate's adjusted sales would be $$42 million. This figure gives Investor Relations and other stakeholders a more focused view of the company's recurring revenue from its primary business model, without the influence of the non-recurring legacy licensing fee. Understanding how these adjustments are made helps in assessing the true underlying performance.

Practical Applications

Adjusted sales are frequently used across various financial domains to gain deeper insights beyond standard Financial Statements.

  • Investment Analysis: Analysts often use adjusted sales to evaluate a company's underlying growth trends, particularly when comparing performance across different periods or against competitors. By stripping out one-off events like asset sales or large, non-recurring contract revenues, adjusted sales can provide a cleaner metric for assessing core operational expansion. This aids in better Valuation models.
  • Management Reporting: Internally, companies use adjusted sales to track the effectiveness of ongoing sales strategies and product performance. It helps management focus on metrics that reflect the true health and direction of their core business, separate from unusual items. For instance, adjusted sales might exclude revenue from a recently divested business unit to analyze the performance of continuing operations.
  • Credit Analysis: Lenders and credit rating agencies may look at adjusted sales figures to assess a company's sustainable revenue generation capacity, which is critical for evaluating its ability to service debt. Fluctuations due to non-recurring items can obscure a company's consistent revenue stream.
  • Mergers and Acquisitions (M&A): In M&A due diligence, adjusted sales are crucial for potential buyers to understand the target company's true earnings power and recurring revenue base, independent of any historical extraordinary sales events. This helps in pricing the acquisition accurately.
  • Public Company Reporting: While companies must comply with Regulation and present GAAP figures, many public companies voluntarily report non-GAAP measures like adjusted sales in their earnings releases and investor presentations to supplement GAAP data. For example, Thomson Reuters reported "adjusted revenue" and "organic revenue" in its fourth-quarter and full-year 2023 results, aiming to provide a clearer picture of their operational performance by excluding impacts from net divestitures.3

Limitations and Criticisms

Despite its utility, adjusted sales is a non-GAAP financial measure and is subject to certain limitations and criticisms.

  • Lack of Standardization: Unlike GAAP, there is no universal standard for how companies calculate adjusted sales. This means that adjustments can vary significantly from one company to another, or even within the same company over different reporting periods. This lack of consistency can make it challenging for investors to compare the Financial Performance of different companies or to track a company's performance over time without carefully scrutinizing the specific adjustments made.
  • Potential for Manipulation: Because companies have discretion over what items to exclude or include in adjusted sales, there is a risk that these figures could be used to present a more favorable, albeit less complete, picture of financial health. Excluding "normal and recurring" operating expenses or revenue items could be misleading if these items are truly integral to the business. The SEC frequently scrutinizes the use of non-GAAP measures, issuing guidance to prevent potentially misleading disclosures.2
  • Obscuring Real Costs/Risks: Focus on adjusted sales might distract from real costs or risks that are part of the GAAP financial statements. For instance, if a company consistently adjusts for significant Capital Expenditures or restructuring costs, it might downplay the ongoing financial burden of these activities.
  • Reduced Comparability: While intended to improve comparability by removing "noise," the differing methodologies for calculating adjusted sales can paradoxically reduce true comparability across the market, especially when comparing companies that do not disclose similar adjustments or those in different industries.

For these reasons, financial professionals emphasize the importance of reconciling adjusted sales back to the GAAP equivalent and understanding the nature and rationale behind each adjustment. This critical approach ensures a balanced and accurate assessment of a company's financial standing.1 Regular Auditing helps ensure these disclosures are accurate.

Adjusted Sales vs. Net Sales

Adjusted sales and Net Sales are both derivations from a company's gross revenue, but they differ in their scope and purpose.

  • Net Sales is a standard GAAP measure calculated by subtracting sales returns, allowances, and sales discounts directly from gross sales. It represents the actual revenue a company realizes from its core sales activities after accounting for common deductions. This is a fundamental figure on the income statement.

  • Adjusted Sales, on the other hand, is typically a non-GAAP financial measure. While it often includes the deductions made for net sales (i.e., it starts after considering returns and allowances), it goes further by incorporating additional adjustments. These "other adjustments" are discretionary and can include exclusions for non-recurring revenue, revenue from divested operations, or other items that management believes distort the view of their core ongoing business. The intent of adjusted sales is to offer a more tailored view of a company's revenue, highlighting what management deems as its sustainable, operational sales.

The key distinction lies in GAAP vs. Non-GAAP status and the discretionary nature of additional adjustments. Net sales is a clear, standardized GAAP figure, whereas adjusted sales provides a management-defined perspective.

FAQs

Why do companies report adjusted sales if they already report GAAP revenue?

Companies report adjusted sales to offer investors a clearer view of their core business operations and underlying Financial Performance, often by excluding items that are considered non-recurring, unusual, or unrelated to their primary business model. This helps in understanding trends and comparing operational results more effectively.

What are common adjustments made to sales figures?

Common adjustments include subtracting sales returns, allowances (price reductions for defective goods), and sales discounts. Beyond these standard deductions to reach net sales, companies might further adjust for revenue from discontinued operations, one-time contract gains, or the impact of acquisitions/divestitures, depending on what they define as "adjusted."

Are adjusted sales regulated?

Yes, in the United States, the use of non-GAAP financial measures, including adjusted sales, is regulated by the Securities and Exchange Commission (SEC) through rules like Regulation G and Item 10(e) of Regulation S-K. These regulations require companies to reconcile non-GAAP measures to the most directly comparable GAAP measure and to explain why the non-GAAP measure provides useful information.

How can I find a company's adjusted sales figures?

Companies typically disclose adjusted sales figures in their quarterly and annual earnings reports, press releases, and investor presentations. These figures are usually presented alongside or reconciled to the GAAP revenue or net sales figures. Accessing these documents through a company's Investor Relations section or SEC filings (like 10-K or 10-Q) is the best approach.