Perspectives

A roadmap to non-GAAP financial measures

The guidance in this Roadmap is intended to help registrants assess the appropriateness of their non-GAAP measures. The body of the publication combines the SEC’s guidance on non-GAAP measures with Deloitte’s interpretations and examples in a comprehensive, reader-friendly format. The appendixes include questions for registrants to consider when disclosing such measures, highlights from recent remarks by SEC officials, and examples of comments on non-GAAP measures from completed SEC staff reviews.

The recent explosion of press coverage and SEC scrutiny of non-GAAP measures has resulted from concerns about the increased use and prominence of such measures, their potential to be misleading, and the progressively larger difference between the amounts reported for them and GAAP measures. These concerns led the SEC staff to issue new and updated Compliance & Disclosure Interpretations in May 2016 that clarify the SEC’s guidance on non-GAAP measures. The C&DIs do not prohibit companies from using non-GAAP measures that comply with the SEC’s existing rules; in fact, the SEC staff has acknowledged that in certain circumstances, non-GAAP measures may be useful. However, the updated guidance was intended to change certain practices about which the SEC has expressed concern. In remarks after the issuance of the C&DIs, the SEC strongly encouraged registrants to “self-correct” before the staff considers any further rulemaking or enforcement action related to non-GAAP measures.

For the 12 months ended June 30, 2016, non-GAAP measures ranked third in the top-ten list of topics frequently commented on by the SEC’s Division of Corporation Finance as part of its filing review process, moving up from fourth place for the comparable prior year. For the three months ended June 30, 2016, non-GAAP measures rose to second place, after all sections of MD&A combined. Over the next year, we expect the number of SEC comments to continue to remain high and even increase until the guidance in the updated C&DIs has been fully incorporated into practice. The SEC staff’s most recent comment letters have particularly focused on the use and prominence of non-GAAP measures in press releases. Comments on press releases and filed documents have also centered on disclosures, including reconciliation requirements and the purpose and use of such measures. In addition, we expect to see more comments about the use of misleading measures, including measures that use individually tailored accounting principles, and the tax impact of non-GAAP adjustments.

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The Roadmap Series contains periodic collections of our accounting guidance on selected topics of broad interest to the financial reporting community.

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