skills/forensic-accounting/references/modules/M023-non-gaap-reconstruction.md

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<!-- Module: 023 | Title: Non-GAAP Reconstruction -->

## PART V - FORENSIC ACCOUNTING | MODULE 023

# Non-GAAP Reconstruction

> Mission. Rebuild management adjustments and classify recurring, discretionary, acquisition-related, and economically real costs.

## Decision output

Objective: Rebuild management adjustments and classify recurring, discretionary, acquisition-related, and economically real costs. The completed work product must be reproducible from evidence, show the downstream financial or decision effect when material, state the strongest contrary case, and define a dated update rule.

## Explicit operating procedure

1. Rebuild every major adjusted measure from GAAP for at least twelve quarters using the issuer reconciliation and your own consistent classification.

1. Classify exclusions as recurring operating cost, noncash but economic cost, acquisition/integration cost, restructuring, litigation, tax/financing item, or genuinely unusual event.

1. Run a recurrence test: repeated restructuring, acquisition costs, stock compensation, or other essential costs should not disappear from economic analysis simply because management excludes them.

1. Check naming, prominence, consistency, reconciliation, individually tailored accounting, and cash-cost treatment against current SEC non-GAAP guidance.

1. Rebuild adjusted FCF from actual cash movements and include recurring capex-like expenditures and economically recurring cash charges.

1. Show valuation under GAAP/fully economic normalization and management-adjusted presentation so the effect of adjustments is transparent.

## Required evidence and model bridge

- Primary-source set: multi-year statements, auditor reports, non-GAAP reconciliations, reserve disclosures, filing changes. Preserve exact document/version, date, period, and source location for every material factual input used in non-gaap reconstruction.

- For each key concept - adjustment ledger, recurring exclusions, SBC, restructuring, M&A costs, tax effects - state whether it is a reported fact, analyst calculation, management claim, external estimate, or judgment. Quantitative concepts must retain raw components and units; qualitative concepts must retain the specific evidence and counterevidence.

- Map only economically relevant findings into the model or decision record. Process-control modules such as non-gaap reconstruction may have no direct valuation line; in that case document the downstream error or governance risk the control prevents.

## Metrics and calculation controls

| Metric / concept | Construction | Required validation |
| --- | --- | --- |
| adjustment persistence | Number of consecutive periods a supposedly non-recurring adjustment appears, plus cumulative adjustment amount as a % of GAAP earnings. | adjustment persistence: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |
| GAAP-to-non-GAAP gap | Non-GAAP earnings or operating income minus GAAP equivalent, expressed in dollars and as a % of the GAAP measure; reconcile by adjustment category. | GAAP-to-non-GAAP gap: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |
| cash adjustment ratio | Cash costs excluded from non-GAAP results divided by total non-GAAP add-backs; higher values imply more economically recurring exclusions. | cash adjustment ratio: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |



## Non-GAAP reconstruction laboratory

- Rebuild adjusted operating income and EPS from GAAP for at least twelve quarters. Classify each exclusion as recurring operating cost, acquisition-related cost, restructuring, noncash but economic cost, or genuinely unusual item.

- Create a recurrence test: if the same category appears repeatedly or is necessary to operate the acquisition model, do not treat it as economically absent merely because management labels it nonrecurring.

- Compare management-adjusted FCF with cash actually available after recurring capex-like uses, restructuring cash, acquisition integration, and SBC-related dilution.

## Worked application

> Case: restructuring is excluded in seven of eight years.

- Reconstruct the relevant reported fact from primary evidence before interpreting the case. For non-gaap reconstruction, show the raw components rather than only the resulting ratio or narrative.

- Build the causal chain through adjustment ledger, recurring exclusions, SBC, restructuring, then identify which link is directly observed and which link remains an assumption.

- Calculate adjustment persistence, GAAP-to-non-GAAP gap, cash adjustment ratio from sourced components under the reported/base interpretation and at least one skeptical alternative interpretation.

- Translate the difference between cases into the variable that matters for non-gaap reconstruction: evidence quality, revenue, operating profit/NOPAT, free cash flow, invested capital, financing/dilution, risk, or valuation. Mark non-applicable links instead of inventing them.

- Expert consistency test: create an analyst-normalized policy that does not change to fit each quarter.

- Precommit the specific future filing, KPI, customer/supplier observation, regulator action, or market input that would materially invalidate the non-gaap reconstruction conclusion.

## Failure tests

- FAIL if adjustment ledger cannot be defined and reproduced from the source pack.

- FAIL if recurring excluded costs, cash costs, acquisition-related items, and favorable adjustments are not classified consistently across multiple periods.

- FAIL if the non-gaap reconstruction conclusion depends on an unstated assumption, unreconciled definition, or evidence that cannot be traced to its source/version.

- FAIL if evidence materially inconsistent with the non-gaap reconstruction conclusion is omitted, reclassified, or dismissed without a documented definition, materiality, causal, timing, and source-quality analysis.

## Completion test

A senior reviewer must be able to reproduce the non-gaap reconstruction conclusion, vary the most sensitive assumption independently, trace the change through the model, understand the strongest opposing case, and identify the next evidence that would force an update. If any link is missing, the module remains open.