Non-GAAP Financial Measures Subject to Additional Guidance

By Michael E. Storck

August 11, 2016 | Corporate Blog

On May 17, 2016 the SEC issued additional interpretive guidance on the use of non-GAAP financial measures. The additional guidance clarifies non-GAAP issues the SEC staff comments on frequently. In particular, the SEC expressed concern about misleading non-GAAP presentations and non-GAAP measures presented more prominently than the comparable GAAP measures.

The additional guidance identifies some potentially misleading non-GAAP practices, including:

• Using performance measures that exclude necessary, normal, recurring, cash operating expenses;
• Calculating non-GAAP earnings based on “tailored” accounting principles such as non-GAAP revenue that accelerates revenue recognition as though the revenue were earned sooner than for GAAP purposes.
• Calculating non-GAAP measures differently between periods without disclosing the change and the reasons for change;
• Excluding non-recurring charges without excluding non-recurring gains in non-GAAP measures; and
• Describing an eliminated charge or gain as non-recurring, infrequent or unusual if such charge is reasonably likely to recur when 2 years or there was a similar charge or gain within the prior 2 years.

The additional guidance also specifies some circumstances in which a non-GAAP measure would be deemed more prominent than the most directly comparable GAAP measure. These include:

• Omitting comparable GAAP measures from headlines or captions;
• Presenting a non-GAAP measure before presenting the most directly comparable GAAP measure, including such use in headlines or captions;
• Presenting a full income statement of non-GAAP measures;
• Presenting a non-GAAP measure in a presentation style (e.g., bold, underlined or larger font) emphasizing the non-GAAP over the comparable GAAP measures;
• Providing tabular disclosure of non-GAAP information without including the GAAP information in the same table or an equally prominent tabular disclosure;
• Describing non-GAAP measures (e.g., record performance, exceptional) without an equally prominent description of the comparable GAAP measure;
• Excluding the quantitative reconciliation to the most directly comparable GAAP measure for all forward-looking, non-GAAP measures in reliance on the “unreasonable efforts” exception of Regulation S-K, without disclosing that such reliance and omission may be material, and identifying the unavailable information and its probable significance in a location of equal or greater prominence; and 
• Presenting unbalanced discussion and analysis of non-GAAP versus GAAP presentations.

The foregoing summary does not highlight all of the SEC’s additional guidance. Please see the SEC’s full additional guidance and interpretations on non-GAAP measures here. 

For further information contact Michael E. Storck, Partner, at 716-853-5100, ext. 369.

Disclaimer: The information in this post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from our firm or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

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