When Does Forecasting GAAP Earnings Entail Unreasonable Effort?

SEC rules require managers to reconcile their non-GAAP forecasts with the most directly comparable GAAP measure unless doing so would entail ‘unreasonable effort'. A significant and growing number of managers invoke the unreasonable efforts exception to justify the omission of comparable GAAP forecasts. We analyze firms where managers invoke the unreasonable efforts exception and find them to be characterized by non-GAAP measures with significantly greater recurring expense exclusions that are less likely to be incorporated by analysts. Our results suggest that these managers opportunistically exploit the unreasonable efforts exception to avoid reconciling elevated non-GAAP forecasts to predictably lower GAAP earnings