Banks looking to partner with or buy a fintech company need to do careful analysis, as the sector is notorious for using non-GAAP financial measures to present a glowing picture. Brian Caplen looks at what to avoid.

Banks may be guilty of playing fast and loose with risk weightings, but with other sectors such as tech and pharmaceuticals it can be stock option costs or the way basic performance numbers such as return on equity and earnings per share are calculated.

Apparently some 95% of FTSE companies use so-called non-GAAP financial measures (NGFM), and while they have their uses a number of recent reports have highlighted concerns. There is, for example, no agreed procedure on how to marry them up with GAAP equivalents.

The problem was particularly acute during the dot-com bubble when a number of bad experiences led the US Securities and Exchange Commission to introduce Regulation G in 2003.

Banks working with or planing to buy a fintech company need to make sure their due diligence has taken account of this. They should make sure that stock option expenses are fully factored in as a recurring expense as well as restructuring and legal costs.

Many non-listed companies also use GAAP accounting and here the temptation to mix this up with NGFM is even greater.

The CFA Institute for investment professionals is the latest body to study this area and raise concerns. Director of financial reporting policy Vincent Papa says: “The use of NGFMs is pervasive and the trend is getting worse rather than better. Though there are regulatory guidelines, there is concern about the flexibility of how NGFMs are calculated which can make it challenging to compare these measures across companies and in some cases they give too rosy a view of performance compared to GAAP/IFRS numbers.” 

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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