GAAP vs. Adjusted Earnings: Know the Difference

Generally accepted accounting principles, or GAAP, are a strict set of accounting rules, standards, and procedures set by the Financial Accounting Standards Board. GAAP financial statements follow these rules, helping investors compare companies on a level playing field using standardized measures.

All domestic companies that trade on U.S. exchanges must follow GAAP when filing financial statements with the U.S. Securities and Exchange Commission (SEC). However, foreign companies that trade on U.S. exchanges are allowed to use International Financial Reporting Standards instead.

Investors have long debated the value of GAAP versus non-GAAP earnings.

Non-GAAP, or adjusted, earnings allow companies to normalize their financial performance relative to similarly sized industry peers or companies at a similar stage of the business cycle (start-up, growth phase, maturity phase) by excluding certain items, such as stock-based compensation, which can vary significantly from one company to another.

One-time items could reflect a large single expense like restructuring, layoffs, an acquisition, a tax charge, or construction on a new facility. A company has some wiggle room in defining these, which can cause debate over just what's "one-time" versus ongoing.

Adjusted results make it easier for investors to compare companies without digging too deep into the weeds, while one-time items might make it tough to measure one stock versus another over time. It also might explain why anyone who reads financial articles is more likely to come across non-GAAP results, though any company that uses those is required to publish GAAP results as well.

In 2025, 72% of S&P 500 companies reported adjusted earnings alongside GAAP results, according to a report by Calcbench in collaboration with Suffolk University's Sawyer Business School.

That year, total non-GAAP net income outpaced traditional GAAP income by $271 billion across the S&P 500. In most cases, adjusted earnings showed companies in a better light than GAAP.

Among firms reporting on an adjusted basis, 87% reported adjustments that resulted in earnings figures that were higher than GAAP net income, the study found. Some—including well-known companies like AbbVie (ABBV), Broadcom (AVGO), Capital One (COF), General Motors (GM), and Pfizer (PFE)—reported adjusted income that was several times their GAAP income.

AbbVie, a pharma firm, had the most dramatic adjustments, reporting non-GAAP income that was $13.6 billion higher than GAAP income, the researchers found. Pfizer and Broadcom also adjusted their respective GAAP net income upward by $10 billion or more in 2025.

Drilling into one company and the impact of adjusted versus GAAP earnings, AbbVie's fourth-quarter 2025 results listed diluted earnings per share (EPS) of $1.02 on a GAAP basis and adjusted diluted earnings per share of $2.71.

The GAAP results included what AbbVie referred to as an "unfavorable impact of $0.71 per share related to fourth-quarter acquired IPR&D and Milestones Expense."

IPR&D stands for in-process research and development. In the life sciences field, milestone expenses often represent payments to partners, such as when a collaborating firm completes a specific clinical goal in a drug trial.

For insight into such one-time items, investors can scroll through an earnings report to the section called "Reconciliation of GAAP Reported to Non-GAAP Adjusted Information." This section is usually found relatively deep in the report, well below positive language near the top. It also includes definitions that can help investors can decipher terms such as IPR&D.

Anyone who wanted additional information about that item could find it on a company's investor relations page under SEC filings, which are detailed reports each publicly traded firm files quarterly with the government. These 10-Q filings provide far more detailed information on elements like research and development expenses affecting financial performance.

Anyone considering a large investment in an individual stock should consider reading the latest company SEC filing to make sure they understand all factors that might contribute to future growth or weakness. These can be dry reads, but having all publicly available knowledge is better than being unpleasantly surprised.

Also, if a company reports adjusted earnings, investors might want to consider reading the earnings call transcript for more details, as analysts on those calls often ask about progress in areas like mergers and acquisitions, layoffs, and other factors that go into the GAAP results. Analyst reports can also be a good tool for understanding how Wall Street views these items and their possible impact. If most analysts agree with a company that an item excluded from non-GAAP results was transient and unlikely to hurt future results, it could be a vote of confidence.

For investors who don't want to get bogged down in GAAP versus non-GAAP and worry that adjusted earnings might be painting too bright a picture, there's one element of an earnings report that companies have little opportunity to polish: revenue.

While companies can adjust earnings in all sorts of ways, even beyond reporting adjusted results, revenue speaks for itself. Investors struggling to piece the GAAP versus non-GAAP puzzle together can consider revenue a neutral referee.

Long spans of declining revenue can arguably tell investors far more than quarter after quarter of adjusted earnings reports explaining various problems. Companies can use adjusted earnings or other techniques to put a shine on a rough patch, but a prolonged sales decline is harder to hide.