TL;DR: In response to criticism about its accounting processes, popular payments platform Square confirmed it is discontinuing the practice of Adjusted Revenue Reporting (ARR) in future financial disclosures to regulators and shareholders.
Square Discontinues Favorable Adjusted Bitcoin-Involved Accounting
“We will discontinue use of the Adjusted Revenue measure,” Square revealed in a question and answer published document, “following the third quarter of 2019. Following receipt of a comment letter from, and subsequent communications with, the Division of Corporation Finance of the Securities and Exchange Commission (the ‘SEC’), we will discontinue the use of the Adjusted Revenue measure based on the SEC’s evolving position with respect to non-GAAP performance measures.”
GAAP refers to the SEC’s Generally Accepted Accounting Principles, a standardization in place since 2008. It’s an effort to regularize often creative metrics produced by companies looking to seek even the slightest advantage. That works for a while, but when serious investors want an apples-to-apples comparison, non-GAAP interjections can be a turnoff and borderline illegal.
Square, Inc. was founded nearly a decade ago in part by Twitter co-founder Jack Dorsey, and operates a basket of financial services geared around an iconic mobile payment hardware, point-of-sale (PoS) system. Class A shares trade on the New York Stock Exchange (NYSE), and its 2018 revenue topped more than $3 billion. It also prides itself on the Cash App, which began facilitating bitcoin trading at the beginning of 2018.
Since going public, Square used ARR, and its numbers have been rather stellar. A change from that method of accounting means ceasing in the practice of subtracting transaction-based and bitcoin-related costs from total revenue, … only to add back deferred revenue. The ARR idea, Square claimed, was to give a better sense of the business when, say, a retailer like Starbucks no longer uses their PoS.
“However,” a financial analyst at Motley fool explained, “Square continued to use the adjusted revenue figure after it lapped the end of the Starbucks partnership, and it gradually evolved from its ‘revenue without Starbucks’ into its current, more convoluted definition,” which might be viewed as cooking the books. What it will do, according to the SEC, is bring heat — non-GAAP revenue is often flagged, and that’s never a good sign for a public company.
Without assigning anything necessarily nefarious to Square, the Motley Fool characterized the usage of ARR “after its divorce from Starbucks was highly unusual. Its rival PayPal only reports one set of revenue, even as it faces the gradual loss of its longtime customer eBay to its European rival Adyen.” The company admitted scrapping ARR going forward means it “expects that deceleration to continue in the fourth quarter,” perhaps preparing investors for different, less rosy results in the future.
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