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US Securities and Exchange Commission

Moody’s Warns Companies Not to Fudge Financial Results With Creative Metrics

Thomson Reuters Tax & Accounting  

· 6 minute read

Thomson Reuters Tax & Accounting  

· 6 minute read

By Soyoung Ho

Analysts with credit rating agency Moody’s Investor Service warned companies not to get too creative and fudge quarterly earnings figures in the age of COVID-19.

In the past month, for example, there has been some attention paid to “EBITDAC”—short for earnings before interest, taxes, depreciation, amortization, and coronavirus—a derivative of the popular EBITDA non-GAAP metric. (See Relax, Investors; There is No ‘EBITDAC’ Pandemic in the June 3, 2020, edition of Accounting & Compliance Alert.)

“This is a hypothetical operating metric that excludes the way coronavirus has altered performance and looks at results as though the pandemic had never happened,” Moody’s analysts said in a June 8, 2020, report. “We view any move to obscure performance in this way as a credit negative.”

This comes as many businesses have or are expected to show poor results because of drastic social distancing measures imposed by states to slow the transmission of the novel coronavirus.

“As companies wrestle with performance woes linked to the coronavirus pandemic, new terminologies are appearing in financial reporting,” Moody’s said. “This tendency threatens to obscure leverage, earnings and other metrics for any companies looking to add back profits or otherwise report performance as if the global pandemic had never happened.”

Company managers say they are better able to discuss the company’s results using non-GAAP measures, which are figures adjusted from official U.S. GAAP, and many analysts also find them to be useful because they can usually get more insight about the company’s operations. However, the use of adjusted earnings has been increasing in the past several years because non-GAAP financial metrics tend to show higher figures than comparable GAAP numbers that are audited.

Moody’s analysts said they put together the report to help investors be mindful about non-GAAP metrics which are normally issued before quarterly reports that use U.S. GAAP are filed with the SEC.


EBITDAC is problematic because there are many ways that a company’s earnings are affected—from lost revenue to higher expenses in protecting employees. Companies can also see changes in earnings because of impairments, interest changes, and market fluctuations.

“Anything that has affected performance that is not reflected would create a make-believe result,” the report said. “Doing so would require using estimations to give credit for lost revenue or costs, whereas acceptable non-GAAP metrics such as EBIT, EBITDA or adjusted earnings use data that is reported in the audited financial statements.”

Moody’s said investors should be aware of non-GAAP metrics that use estimates rather than verifiable hard amounts.

“Debt cannot be paid with imaginary earnings or cost savings, which is why reliance on EBITDAC has no place in credit analysis,” the report noted and asked public companies to comply with SEC rules and guidance related to non-GAAP measures.

Regulation G says that companies cannot present their non-GAAP numbers more prominently than their audited GAAP numbers. The rule requires companies to reconcile the differences between the non-GAAP financial measure with the most directly comparable financial measurement from GAAP. It also requires a statement about why management believes that presenting non-GAAP financial measures provides useful information to investors regarding the company’s financial condition and results of operations, among other requirements.

“We do not believe a metric such as EBITDAC would comply with these guidelines and therefore do not expect to see it in US public financial reporting,” Moody’s said.

Still, as companies experience more expenses because of the virus, Moody’s analysts said they have seen more companies adding to adjusted figures a one-time expense. And this practice is fine, the report said, to remove non-recurring and unusual expense, as opposed to removing the full impacts of COVID-19 through EBITDAC.

Moody’s analysts will evaluate the coronavirus-related adjustments in the same way that they evaluate all non-expenses to determine the appropriate calculation of credit metrics.

IOSCO Warning

Separately, the International Organization of Securities Commissions (IOSCO) in a May 29 statement also said it has always been concerned about inappropriate use of non-GAAP measures especially when the metrics are presented inconsistently from period to period, defined inadequately, or are used to obscure rather than supplement official GAAP numbers.

“It could be misleading to describe an adjustment as COVID-19 related, if management does not explain how an adjusted amount was specifically associated with COVID-19,” said IOSCO, of which the SEC is a member.

Disclosure of Going Concern Risks

The credit ratings firm also said more companies are likely to face risk to their survival—going concern risk as management and the company’s outside auditors evaluate the impact of lowered results.

Under the FASB’s standard, management must disclose if it is “probable” that the company will not be able to pay debts as they come due during the next 12 months. Auditors must then assess whether there is “substantial doubt” about the company’s going concern. If there is, the auditor needs to report it in the auditor’s opinion.

Because there is so much uncertainty in the current environment, companies might be tempted not to provide guidance because their current projections of future results are so unreliable. But Moody’s reminded companies that the going concern analysis is required, and they must use their best educated guesses.

Further, the analysts said the FASB’s rule only allows management to consider executed plans at the time of the going concern evaluation. This means that future plans, such as debt refinancing or capital raise, cannot be used until it is complete.

“It is for these reasons that going concern disclosures may add little to credit analysis, even if such perspective can shed light as to the company’s future expectations.”

Government Assistance

In order to counter the devastating effects lockdown policies have had on businesses, Congress passed stimulus measures that provide financial assistance to affected businesses. And Moody’s analysts said they expect to see diversity in practice of about how such assistance are presented in financial statements. They noted that they are still evaluating whether removing government aid from earnings will help in their analysis because of significant changes in operating results.

In the meantime, the SEC in March provided a 45-day extension to companies that have filings due through July 1, and Moody’s said it expects more companies to take advantage of the temporary relief.

This article originally appeared in the Friday, June 12, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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