Prior to Sarbanes-Oxley, it was fashionable for public companies to issue press releases with “pro-forma earnings,” which generally excluded certain GAAP charges from the income calculation.  To some, this measure was known as EBBS, or “Earnings Before Bad Stuff.”  As a response, Sarbanes-Oxley required, and the SEC issued, Regulation G.  Regulation G addresses “non-GAAP financial measures” and requires the most directly comparable GAAP measure be presented and a reconciliation of the most comparable GAAP and non-GAAP measures.

We reviewed some recent SEC comment letters on Regulation G.  For the most part, the comments were not surprising on a technical level.  One interesting point we noted is that the SEC, when conducting periodic reviews of issuers, is not shy about reviewing Form 8-Ks, including earnings announcements, and commenting on Regulation G deficiencies.

Some of the general categories of comments we noted were:

  • The non-GAAP operating statement conveys undue prominence.
  • All non-GAAP financial information (including forward looking information) was not reconciled to GAAP.
  • Requests to present non-GAAP financial information consistent with Securities Act filings, with an explanation of why the information is useful.
  • Where multiple non-GAAP financial measures are reported, a comment to reconcile each non-GAAP measure to the most directly comparable GAAP measure.
  • A comment to present more information as to why certain matters are not representative of future performance and are non-recurring in nature.

We also noted several comments on issuers’ Schedule 14D-9s, which an issuer files in response to a third party tender offer.  Those comments uniformly addressed projections which were presented on a non-GAAP basis (usually EBITDA) and required reconciliation to GAAP.

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