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 2019 edition of this Roadmap 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. Appendix H of the Roadmap outlines the key changes made since publication of the 2017 edition.

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 the increased use and prominence of such measures, their potential to be misleading, and 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. Although the number of reviews with comments on non-GAAP measures significantly declined, non-GAAP measures remained the top area of SEC comment for the 12 months ended July 31, 2018. Since the SEC staff is expected to continue monitoring registrants’ use of non-GAAP measures, registrants should still be mindful of the key focus areas, which include (1) whether there is undue prominence of non-GAAP measures, (2) enhancement of the disclosure related to the purpose and use of such measures, (3) clear labeling of non-GAAP measures, (4) whether the nature of certain adjustments may be potentially misleading or could represent tailored accounting, and (5) the presentation of the tax impact of non-GAAP adjustments.

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 2018 Baruch College Financial Reporting Conference, SEC Chief Accountant Wesley Bricker stated that “[w]ith non-GAAP . . . , our rules require that companies must have disclosure controls and procedures, which typically would include appropriate governance practices regarding the measures and policies and controls that prevent error, manipulation, or mischief with the numbers, including a policy that addresses how any changes in the non-GAAP measure will be reported.”

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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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