Defining Issues | December 2022

Insight

Clarifying non-GAAP financial measures

SEC staff issues guidance to clarify how it evaluates non-GAAP financial measures.


At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments, staff from the SEC’s Division of Corporation Finance noted that presentation of non-GAAP financial measures continues to be one of the most frequent topics of comment letters issued to registrants. To provide additional guidance on this important topic, the staff released both new and updated Compliance and Disclosure Interpretations (C&DIs) about how to present these measures in compliance with the rules and regulations on non-GAAP measures.

Applicability

  • SEC registrants 

Relevant dates

  • Effective immediately

Background

Over the years, the SEC staff has issued several C&DIs to provide supplemental guidance concerning the way in which companies are allowed to use non-GAAP financial measures under Reg G and Item 10(e) of Reg S-K. The SEC first adopted its guidance in 2003 and updated it in 2010, 2016 and 2018. 

In December 2022, the SEC staff again updated several C&DIs and issued two new questions and responses to address non-GAAP presentation practices it believes do not comply with the Regulations. The new and updated C&DIs follow staff comments acknowledging the growing prevalence of non-GAAP measures. The intent of this guidance is to provide more transparency to preparers in how the staff evaluates non-GAAP financial measures. The C&DIs include examples and views that the staff has expressed as part of its filing reviews, including areas such as the prominence of presentation and characteristics that can make non-GAAP measures misleading, if presented.

If a company is found to have violated the rules and regulations on non-GAAP measures, including the C&DIs, the staff has stated it will expect the prohibited non-GAAP measure to be removed and any misleading adjustments in a non-GAAP measure to be corrected the next time presented. Any adjustments determined to be misleading should also be removed from comparative prior year non-GAAP measures.

Summary of updated and new guidance

  • Normal, recurring, cash operating expenses (Updated Question 100.01)
  • Tailored accounting principles (Updated Question 100.04)
  • Misleading measures (New Question 100.06)
  • Prominence (Updated Question 102.10)

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