Perspectives

A roadmap to non-GAAP financial measures

This Roadmap combines the SEC’s guidance on non-GAAP measures with Deloitte’s interpretation and examples in a comprehensive, reader-friendly format. The appendixes include questions for registrants to consider when disclosing such measures, an example of a non-GAAP disclosure policy, and comments on non-GAAP measures from completed SEC staff reviews. The 2017 edition includes new and updated discussions of common themes identified by the SEC staff in comment letters and public statements as well as other recent developments related to non-GAAP measures.

In May 2016, the SEC staff issued new and updated Compliance and Disclosure Interpretations (C&DIs) that clarify the SEC’s guidance on non-GAAP measures in response to concerns about (1) the increased use and prominence of such measures, (2) their potential to be misleading, and (3) the progressively larger difference between the amounts reported for non-GAAP and 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.

Many registrants have heeded the SEC staff’s advice to incorporate into practice the guidance in the updated C&DIs by modifying their disclosures, particularly the SEC staff’s guidance on the prominence of non-GAAP measures in press releases and filings. Nevertheless, the SEC staff continues to issue comments on the prominence of non-GAAP measures. It also continues to issue comments in connection with the reconciliation requirements, the purpose and use of non-GAAP measures, and the use of potentially misleading measures, including those with individually tailored accounting principles. In fact, for the 12 months ended July 31, 2017, non-GAAP measures ranked first in the top-10 list of topics frequently commented on by the SEC’s Division of Corporation Finance as part of its filing review process. Although there was significant scrutiny of non-GAAP disclosures this past year, the volume of comments related to such disclosures is beginning to lessen.

As part of its focus on non-GAAP measures, the SEC has also publicly spoken about the importance of registrants’ implementation of appropriate controls regarding the disclosure of such measures. For example, in his keynote address at the 2016 AICPA Conference on Current SEC and PCAOB Developments, SEC Chief Accountant Wesley Bricker advised audit committee members to “seek to understand management’s judgments in the design, preparation, and presentation of non-GAAP measures.”

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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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