June 2007 Capital Adequacy Extension © Copyright 2007, CCRO. All rights reserved. Page 28 of 92 budgeting purposes. This process can result in pro-forma statements that project expected values for future states and it is these pro-forma statements that the Risk function can utilize as the base case to determine the maximum potential shortfall that can occur relative to those budgeted targets. From a Market risk perspective, the targeted earnings will be predicated on expected market rates for commodity prices, foreign exchange rates, interest rates, etc. From a Credit risk perspective, the targeted earnings will be predicated on expected contractual performance based on assessed credit quality of the counterparties with whom the company is dealing. From an Operative risk perspective, the targeted earnings will be predicated on normal operating circumstances. From a Business risk perspective, target earnings values will be based primarily on expected sales numbers, projected growth, debt / equity balance, as well as other business expectations. Once the base case / expected, or targeted earnings numbers are determined, one can go about the task of determine the “at-risk” values to those targets. If the “at-risk” values result in potential negative earnings, that is the case when equity can be degraded and the ability to fund capital requirements is reduced, and these scenarios will be what drive the Risk Capital Requirement. 3.2.5. GAAP Earnings vs. Non-GAAP Earnings In section 3.1 it was recommended to assess the equity of a company from both an accounting perspective and a market perspective. In determining earnings it is recommended to take a similar approach in that the dual analysis will provide insightful knowledge as to the financial health of a company from different perspectives. This is particularly relevant from a disclosure perspective as differing constituencies will be viewing the company from different angles. For example, figure 3.7 displays the disclosure from a company’s financial statement that displays both GAAP and non-GAAP earnings.