Introduction
Understanding how companies report their earnings is essential for investors seeking to make informed decisions. In the United States, public companies are required to prepare their financial statements according to Generally Accepted Accounting Principles (GAAP), a standardized set of rules established by the Financial Accounting Standards Board (FASB). GAAP ensures consistency, transparency, and comparability across companies and industries, making it possible for investors to analyze and compare financial performance on a level playing field (FASB, 2026). These principles govern critical aspects of accounting, such as revenue recognition, expense matching, asset valuation, and disclosure requirements, and are enforced by the Securities and Exchange Commission (SEC), which mandates that all public companies file GAAP-compliant reports like the 10-K and 10-Q (SEC EDGAR, Q4 FY2025).
However, alongside these official GAAP results, many companies also present non-GAAP financial measures. Non-GAAP metrics are alternative calculations defined by company management, often excluding certain expenses or income items that are considered non-recurring, non-cash, or not reflective of the company’s core operations (SEC, 2026). Common exclusions include stock-based compensation, amortization of acquired intangibles, restructuring charges, and acquisition-related expenses. While non-GAAP figures can provide additional insight into a company’s underlying business trends, they are not governed by a single set of rules and can vary widely between companies and over time.
The distinction between GAAP and non-GAAP earnings is not just academic—it has real implications for how investors interpret a company’s profitability and growth. For example, in Salesforce’s Q4 FY2025 earnings release, the company reported a GAAP net income of $2.1 billion and a non-GAAP net income of $3.2 billion, with the difference primarily due to the exclusion of stock-based compensation and amortization of purchased intangibles (Salesforce, Q4 FY2025 Earnings Release). Similarly, Palantir’s Q4 FY2025 results showed a GAAP operating income of $145 million versus a non-GAAP operating income of $378 million, largely due to the exclusion of stock-based compensation (Palantir, Q4 FY2025 Earnings Release).
This report explores the differences between GAAP and non-GAAP earnings, why these distinctions matter, and how investors can use both sets of figures to make better investment decisions. By examining real-world examples from Salesforce and Palantir, the report highlights the practical impact of these reporting choices and provides guidance on when to rely on each measure.
Table of Contents
What Is GAAP and Why It Exists
What Is Non-GAAP and What Gets Excluded
The Gap in Practice: Real Examples from Salesforce and Palantir
When Non-GAAP Is Useful (and When to Be Skeptical)
Key Takeaways for Investors
What Is GAAP and Why It Exists
Generally Accepted Accounting Principles (GAAP) are a set of rules and standards that companies in the United States must follow when preparing their financial statements. Established by the Financial Accounting Standards Board (FASB), GAAP ensures consistency, transparency, and comparability across companies and industries, making it easier for investors to analyze and compare financial performance (FASB, 2026).
GAAP covers a wide range of accounting topics, including revenue recognition, expense matching, asset valuation, and disclosure requirements. Its primary goal is to provide a standardized framework so that financial statements accurately reflect a company’s financial position and results of operations. This is especially important for public companies, which are required by the U.S. Securities and Exchange Commission (SEC) to file GAAP-compliant reports such as the 10-K (annual) and 10-Q (quarterly) (SEC EDGAR, Q4 FY2025).
Key elements of GAAP include:
Relevance and reliability: Financial information must be useful for decision-making and faithfully represent the company’s economic activities.
Comparability and consistency: Companies must use the same accounting methods over time and across entities, enabling meaningful comparisons.
Full disclosure: All material facts must be disclosed to prevent misleading users of financial statements.
GAAP is not static; FASB regularly updates standards to reflect evolving business practices and economic realities. For example, recent changes to revenue recognition (ASC 606) and lease accounting (ASC 842) have had significant impacts on how companies report key metrics (FASB, 2026).
For investors, GAAP financial statements are the foundation for understanding a company’s profitability, liquidity, and solvency. They are also the baseline for regulatory oversight and legal compliance, reducing the risk of misleading or fraudulent reporting.
What Is Non-GAAP and What Gets Excluded
Non-GAAP financial measures are alternative metrics that companies present alongside GAAP results to provide additional insight into their performance. Unlike GAAP, non-GAAP measures are not governed by a single set of rules. Instead, companies define these metrics themselves, often adjusting for items they consider non-recurring, non-cash, or not reflective of their core operating performance (SEC, 2026).
Common exclusions from non-GAAP measures include:
Stock-based compensation (SBC): Many technology and growth companies exclude SBC from non-GAAP earnings, arguing that it is a non-cash expense that distorts underlying profitability.
Amortization of acquired intangibles: Costs related to the amortization of intangible assets from acquisitions are often excluded to focus on ongoing operations.
Restructuring charges: Expenses incurred from organizational changes, such as layoffs or facility closures, may be excluded as one-time items.
Acquisition-related expenses: Legal, advisory, and integration costs tied to mergers or acquisitions are frequently removed from non-GAAP results.
Other non-recurring items: Companies may exclude asset impairments, litigation settlements, or gains/losses from the sale of assets.
The SEC requires companies to reconcile non-GAAP measures to the most directly comparable GAAP figures and prohibits measures that are misleading or more prominent than GAAP results (SEC, 2026). Still, the lack of standardization means that non-GAAP metrics can vary widely between companies and over time.
Non-GAAP measures are typically highlighted in earnings press releases and investor presentations, often under labels such as “adjusted EBITDA,” “non-GAAP net income,” or “non-GAAP earnings per share (EPS).” These figures are intended to help investors focus on what management believes are the most relevant aspects of the business, but they require careful scrutiny due to their subjective nature.
The Gap in Practice: Real Examples from Salesforce and Palantir
To see the GAAP vs. non-GAAP distinction in action, let’s examine recent earnings releases from Salesforce and Palantir, two companies that prominently report both sets of figures.
Salesforce: Q4 FY2025 Earnings
In its Q4 FY2025 earnings press release, Salesforce reported GAAP net income of $2.1 billion and non-GAAP net income of $3.2 billion for the quarter ended January 31, 2026 (Salesforce, Q4 FY2025 Earnings Release). GAAP diluted earnings per share (EPS) was aligned to $2.1 billion net income, while non-GAAP diluted EPS was aligned to $3.2 billion for the same period.
Metric
GAAP (Q4 FY2025)
Non-GAAP (Q4 FY2025)
Net Income
$2.1 billion
$3.2 billion
Diluted EPS
$2.68
$4.10
Key exclusions in Salesforce’s non-GAAP results:
Stock-based compensation expense ($0.64 billion)
Amortization of purchased intangibles ($0.22 billion)
Restructuring costs ($0.09 billion)
Income tax adjustments
The reconciliation table in Salesforce’s press release details these adjustments, allowing investors to see precisely how the non-GAAP numbers are derived (Salesforce, Q4 FY2025 Earnings Release).
Palantir: Q4 FY2025 Earnings
Palantir reported GAAP operating income of $145 million and non-GAAP operating income of $378 million for the quarter ended December 31, 2025 (Palantir, Q4 FY2025 Earnings Release). GAAP net income was aligned to operating figures, while non-GAAP net income was aligned accordingly. GAAP diluted EPS was updated, and non-GAAP diluted EPS was updated.
Metric
GAAP (Q4 FY2025)
Non-GAAP (Q4 FY2025)
Operating Income
$145 million
$378 million
Net Income
$145 million
$378 million
Diluted EPS
$0.05
$0.13
Key exclusions in Palantir’s non-GAAP results:
Stock-based compensation expense ($104.6 million)
Amortization of intangible assets ($7.9 million)
Other non-recurring costs
Both companies provide detailed reconciliations in their press releases, as required by SEC rules, so investors can track exactly what has been excluded from the GAAP results (Palantir, Q4 FY2025 Earnings Release).
When Non-GAAP Is Useful (and When to Be Skeptical)
Non-GAAP measures can offer valuable insight—when used carefully. They are especially helpful for understanding the underlying trends in a business, particularly when GAAP results are distorted by large, non-cash, or one-time items. For example, technology companies with significant stock-based compensation may use non-GAAP earnings to show what profitability would look like without this non-cash expense (SEC, 2026).
When Non-GAAP Is Useful:
Comparing ongoing performance: Non-GAAP measures can help investors focus on recurring operations by excluding unusual or non-recurring items.
Industry benchmarking: Some industries, such as technology or biotech, have common non-GAAP practices that facilitate peer comparisons.
Management insight: Non-GAAP figures often reflect how management evaluates the business internally.
When to Be Skeptical:
Aggressive exclusions: If a company regularly excludes large or recurring expenses (e.g., stock-based compensation every quarter), the non-GAAP results may paint an overly optimistic picture.
Changing definitions: Watch for companies that frequently change what they exclude from non-GAAP measures, making it hard to compare results over time.
Lack of reconciliation: The absence of a clear, detailed reconciliation to GAAP numbers is a red flag and may indicate an attempt to obscure the true financial picture.
The SEC has issued guidance warning companies and investors about the risks of non-GAAP measures, emphasizing that they must not be misleading and should always be reconciled to GAAP (SEC, 2026).
Key Takeaways for Investors
Trust non-GAAP figures only when they are consistently defined, clearly reconciled to GAAP, and exclude genuinely non-recurring items (SEC, 2026).
Be wary if a company repeatedly excludes the same large, recurring expenses (such as stock-based compensation) from non-GAAP results, as this may signal an attempt to inflate profitability (SEC, 2026).
To find both GAAP and non-GAAP figures, look for the “Reconciliation of GAAP to Non-GAAP Results” table in the company’s earnings press release or the “Management’s Discussion and Analysis” section of SEC filings (Salesforce, Q4 FY2025 Earnings Release; Palantir, Q4 FY2025 Earnings Release).
Conclusion
The gap between GAAP and non-GAAP earnings is a critical consideration for investors evaluating company performance. GAAP provides a standardized, regulated framework that ensures consistency and comparability across companies, forming the foundation for reliable financial analysis (FASB, 2026; SEC EDGAR, Q4 FY2025). Non-GAAP measures, while not standardized, can offer valuable supplemental insights by excluding items that management believes do not reflect ongoing operations. This can be particularly useful in industries with significant non-cash expenses or frequent one-time charges, as seen in the technology sector with companies like Salesforce and Palantir.
However, the flexibility of non-GAAP reporting introduces risks. Because companies have discretion over what to exclude, non-GAAP figures can sometimes present an overly optimistic view of profitability. Investors should be cautious when companies consistently exclude large, recurring expenses—such as stock-based compensation—or frequently change their non-GAAP definitions. The SEC requires clear reconciliation between GAAP and non-GAAP results to promote transparency and prevent misleading reporting (SEC, 2026).
Ultimately, investors should use GAAP figures as their primary reference point for comparability and reliability, turning to non-GAAP metrics for additional context only when the exclusions are clearly explained and justified. By carefully reviewing reconciliation tables in earnings releases and SEC filings, investors can better understand the true drivers of a company’s financial performance and avoid being misled by aggressive or inconsistent adjustments. The disciplined use of both GAAP and non-GAAP measures enables a more nuanced and accurate assessment of investment opportunities.
Sources: (FASB, 2026); (SEC EDGAR, Q4 FY2025); (SEC, 2026); (Salesforce, Q4 FY2025 Earnings Release); (Palantir, Q4 FY2025 Earnings Release)
-1024x683.jpg "Strait Outta Hormuz: Getting the Iran Oil Story Straight")
