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The Use of Non GAAP Financial Measures – Part II

Feb 14, 2017

This is Part 2 of a series. Read Part 1 here.

Update of SEC Interpretive Guidance in May 2016

In May 2016 the SEC updated its Compliance & Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures. The updates provide clarifying examples for misleading non-GAAP measures and for presentation of non-GAAP measures with greater prominence than the comparable GAAP measures.

Some examples for misleading non-GAAP measures:

  • A performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business.
  • A non-GAAP measure that adjusts a particular charge or gain in the current period while similar charges and gains were not adjusted in prior periods without disclosing the change and the reason for it. Sometimes it may be necessary to recast prior measures to conform to the current presentation and place the disclosure in appropriate context.
  •  A non-GAAP measure that adjusts only for non-recurring charges but not for non-recurring gains.
  • Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP. Use of individually tailored recognition and measurement methods for other financial statement line items may also be considered misleading.

Examples of disclosure of non-GAAP measures as more prominent:

  • Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures;
  • Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures.
  • Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure.
  • A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption).
  • Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure.
  • Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table.
  • Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence.
  • Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.

The interpretation also prohibits presenting non-GAAP liquidity measures on a per share basis in documents filed or furnished with the Commission. When analyzing whether the non-GAAP measure can be used as a liquidity measure, the staff will focus on the substance of the non-GAAP measure and not on management’s characterization.

Finally, the interpretation discusses the calculation of the income tax effects on non-GAAP measures. If a measure is a performance measure, the registrant should include current and deferred income tax expense in respect of the non-GAAP measure of profitability. In addition, adjustments to arrive at a non-GAAP measure should not be presented “net of tax.” Rather, income taxes should be shown as a separate adjustment and clearly explained.

SEC Staff Comments on use of Non-GAAP measures

During 2016 the SEC has sent many registrants comments concerning their use of non-GAAP measures, making this topic the second in the top 10 topics in SEC reviews with comment letters issued in review year 2016. Many of the staff comments in this area have focused on the use of non-GAAP measures in press releases and other information in addition to registrant’s filings. The SEC staff comments continued to focus on undue prominence of a non-GAAP measure, inappropriate reconciliation to the most directly comparable GAAP measure, inadequate disclosures about the purpose and usefulness of non-GAAP measures for investors, and comments concerning the nature of the adjustments and their appropriateness based on the new CD&Is such as litigation and restructuring cost adjustments, acceleration of revenue and proportionate consolidation. In most cases, the staff did not ultimately object to the adjustment; however, the registrant may have had to revise its disclosure about the nature or purpose of the adjustment.


At the December 2016 AICPA conference on current SEC and PCAOB developments, the topic of non-GAAP financial measures was discussed by many speakers, including Mr. Bricker, SEC chief accountant, who indicated that “…substantial progress has been made in addressing the problematic practices. However, there is more progress for companies to make, for example, in the evaluation of the appropriateness of the measure and its prominence, as well as the effectiveness of disclosure controls and procedures….” As such, registrants should continue to take great care in developing their methodologies to arrive at their non-GAAP measures so these do not result in inappropriate measures as well as so that their presentation and disclosure of the non-GAAP measures comply with SEC rules and interpretations.

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