On May 17, 2016, the staff of the SEC Division of Corporation Finance (the “Staff”) issued 12 new Compliance & Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures, which has recently been an area of concern for the SEC. The C&DIs cover a variety of topics, including compliance with Rule 100(b) of Regulation G, compliance with Item 10(e) of Regulation S-K, and the use of EBIT and EBITDA. Highlights of the C&DIs include, among other things, the following guidance:
- Certain adjustments, although not explicitly prohibited, may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading.
- A non-GAAP measure be misleading if it is presented inconsistently between periods.
- Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G.
- The prohibition under Item 10(e) of Regulation S-K of adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual is based on the description of the charge or gain that is being adjusted.
- Item 10(e) of Regulation S-K recognizes that certain non-GAAP per share performance measures may be meaningful from an operating standpoint. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure.
- The deduction of capital expenditures from the GAAP financial measure of cash flows from operating activities would not violate the prohibitions in Item 10(e)(1)(ii) of Regulation S-K. However, companies should provide a clear description of how this measure is calculated, as well as the necessary reconciliation, should accompany the measure where it is used.
- 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:
- 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 that emphasizes the non-GAAP measure over the comparable GAAP measure;
- A non-GAAP measure that precedes the most directly comparable GAAP measure;
- 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) of Regulation S-K without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
- 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.
- A registrant should provide income tax effects on its non-GAAP measures depending on the nature of the measures.
- If a company presents EBIT or EBITDA as a performance measure, such measures should be reconciled to net income as presented in the statement of operations under GAAP.
A copy of the new C&DIs is available at: http://www.mofo.com/~/media/Files/PDFs/160518NonGAAPCDIs.pdf