SEC Updates Compliance and Disclosure Interpretations on Non-GAAP Financial Measures
On December 13th, the SEC staff updated its Compliance and Disclosure Interpretations (C&DIs)1 on non-GAAP financial measures to provide additional clarity and transparency on how the staff applies the guidance. Non-GAAP financial measures have consistently been one of the staff’s most frequent comment letter topics. The updates primarily address the nature and presentation of adjustments or measures that may be considered misleading and, therefore, violate Regulation G or Item 10(e) of Regulation S-K.
The staff revised three existing C&DIs and added two new C&DIs:
- C&DI 100.01 – revised: Some stakeholders have historically struggled with how to interpret what is considered a “normal, recurring” operating expense that constitutes an inappropriate adjustment in a non-GAAP performance measure. The staff’s updated guidance includes factors that it considers when evaluating an adjustment (e.g., the entity’s operations, strategy, industry, regulatory environment, etc.) and clarifies that “occasional” expenses that occur irregularly may constitute recurring expenses. For example, in the retail and restaurant industries, costs associated with opening and closing stores would generally be considered ‘recurring’ expenses even though they may not occur on a daily or periodic basis.
- C&DI 100.04 – revised: The staff objects to non-GAAP financial measures that contain “individually tailored accounting principles.” C&DI 100.04 previously referenced the prohibition on “individually tailored accounting principles” primarily in the context of adjustments that may accelerate revenue recognition. Some interpreted the prior guidance to only apply to revenue-related non-GAAP adjustments. The staff’s updated guidance clarifies that an adjustment that “individually tailors” a generally accepted accounting principle applies broadly to both revenue and expenses. The staff provided additional examples of what is considered misleading, which are outlined in the Appendix.
- C&DI 100.05 – new: The staff frequently comments on non-GAAP measures and adjustments that are not described as “non-GAAP” or are labeled with potentially misleading titles. The new guidance reminds registrants that inappropriate labels are considered violations of Regulation G and provides several examples of labels that do not reflect the underlying nature of the related non-GAAP measures.
- C&DI 100.06 – new: This new guidance memorializes the staff’s view that misleading disclosures cannot be cured by extensive, detailed disclosures. The staff expects registrants to revise their non-GAAP presentation (by removing the adjustment or measure) in the filing following a staff conclusion that the non-GAAP measure or adjustment is misleading.
- C&DI 102.10 – revised: This C&DI was updated, in part, to enhance its readability due to its length. It focuses on providing clarity about presentation that gives “undue prominence” to a non-GAAP measure. GAAP measures should always precede non-GAAP measures, whether they are in the form of dollar amounts, ratios, or percentages. Moreover, additional clarity was provided with respect to the prohibition on the presentation of a non-GAAP income statement (i.e., undue prominence is placed on the non-GAAP results if most line items and subtotals from the income statement appear in the disclosure of non-GAAP financial information).
Appendix2
| Question | Prior Guidance | Updated Guidance |
| 100.01 | Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading? Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016] | Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading? Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. Whether or not an adjustment results in a misleading non-GAAP measure depends on a company’s individual facts and circumstances. Presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading. When evaluating what is a normal, operating expense, the staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment. The staff would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring. [December 13, 2022] |
| 100.04 | Question: A registrant presents a non-GAAP performance measure that is adjusted to accelerate revenue recognized ratably over time in accordance with GAAP as though it earned revenue when customers are billed. Can this measure be presented in documents filed or furnished with the Commission or provided elsewhere, such as on company websites? Answer: No. Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G. Other measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also violate Rule 100(b) of Regulation G. [May 17, 2016] | Question: Can a non-GAAP measure violate Rule 100(b) of Regulation G if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP? Answer: Yes. By definition, a non-GAAP measure excludes or includes amounts from the most directly comparable GAAP measure. However, non-GAAP adjustments that have the effect of changing the recognition and measurement principles required to be applied in accordance with GAAP would be considered individually tailored and may cause the presentation of a non-GAAP measure to be misleading. Examples the staff may consider to be misleading include, but are not limited to:
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| 100.05 | N/A | Question: Can a non-GAAP measure be misleading if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly described? Answer: Yes. Non-GAAP measures are not always consistent across, or comparable with, non-GAAP measures disclosed by other companies. Without an appropriate label and clear description, a non-GAAP measure and/or any adjustment made to arrive at that measure could be misleading to investors. The following examples would violate Rule 100(b) of Regulation G:
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100.06 | Question: Can a non-GAAP measure be misleading, and violate Rule 100(b) of Regulation G, even if it is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure? Answer: Yes. It is the staff’s view that a non-GAAP measure could mislead investors to such a degree that even extensive, detailed disclosure about the nature and effect of each adjustment would not prevent the non-GAAP measure from being materially misleading. [December 13, 2022] | |
| 102.10 | Question: Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent? Answer: Yes. Although whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made, the staff would consider the following examples of disclosure of non-GAAP measures as more prominent:
| Question 102.10(a): Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent? Answer: Yes. This requirement applies to the presentation of, and any related discussion and analysis of, a non-GAAP measure. Whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made. The staff would consider the following to be examples of non-GAAP measures that are more prominent than the comparable GAAP measures:
Question 102.10(b): Are there examples of disclosures that would cause the non-GAAP reconciliation required by Item 10(e)(1)(i)(B) of Regulation S-K to give undue prominence to a non-GAAP measure? Answer: Yes. The staff would consider the following examples of disclosure of non-GAAP measures as more prominent than the comparable GAAP measures:
Question 102.10(c): The staff considers the presentation of a non-GAAP income statement, alone or as part of the required non-GAAP reconciliation, as giving undue prominence to non-GAAP measures. What is considered to be a non-GAAP income statement? Answer: The staff considers a non-GAAP income statement to be one that is comprised of non-GAAP measures and includes all or most of the line items and subtotals found in a GAAP income statement. [December 13, 2022] |
1 For ease of reference, the Appendix includes tables that compare the updated guidance to the prior guidance and present the new guidance in its entirety.
2 Source: https://www.sec.gov/corpfin/non-gaap-financial-measures#section100
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