On January 11, the Securities and Exchange Commission’s Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) on rules, regulations and forms related to non-generally accepted accounting principles (GAAP) financial measures Item 2.02 of Form 8-K. In particular, the C&DIs addressed the use of non-GAAP measures in the context of business combinations, and offered further guidance with respect to Item 10(e) of Regulation S-K (which governs the use of non-GAAP financial measures in SEC filings); the reporting of segments; earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA); foreign private issuers and voluntary filers and disclosures under Item 2.02 of Form 8-K, regardless of whether the disclosure includes non-GAAP measures.
The C&DIs supersede the SEC’s Frequently Asked Questions regarding the use of non-GAAP financial measures published in June 2003 and incorporate some of the SEC’s prior guidance on these matters.
In addition to the restatement of the SEC’s previously published interpretations, the C&DIs included the following new guidance:
- The SEC clarified that if material non-public information is disclosed on a company’s earnings conference call which was not previously addressed in the earnings release for such call, then the company’s obligation to disclose such information pursuant to Item 2.02 of Form 8-K is limited only to such information which was not published in the earnings release and that the filing of the transcript of that portion would satisfy the requirement.
- The SEC confirmed that Item 10(e) of Regulation S-K applies to free-writing prospectuses included in or incorporated by reference into a registration statement or other filing under the Securities Exchange Act of 1934, but does not apply to other free-writing prospectuses.
- The SEC stated that, for purposes of reconciling non-GAAP measures, it is not appropriate to present a full non-GAAP income statement, as doing so may attach undue influence to the non-GAAP information.
- The SEC affirmed that, when reconciling a non-GAAP performance measure, a company may present an adjustment “net of tax” so long as issuer discloses both the tax effect of each reconciling item and how the tax effect was calculated.
- The SEC stated that a table illustrating a breakdown of revenues by product, which revenues do not sum to the amounts set forth in the company’s financial statements, is not considered a non-GAAP financial measure so long as the product revenue amounts are calculated in accordance with GAAP.
- The SEC clarified that “funds from operations” may be presented on a basis other than as defined and clarified by the National Association of Real Estate Investment Trusts as of January 1, 2000, provided that any adjustments made to “funds from operations” comply with the requirements of Item 10(e) of Regulation S-K for a performance measure or liquidity measure, as applicable.
Click here to view the new C&DIs with respect to the use of non-GAAP financial measures.