Errors continue in non-GAAP financial measures
The Corp Fin staff surprised conference attendees last year by announcing several new and updated C&DIs on reporting non-GAAP financial measures. These C&DIs addressed non-GAAP presentation practices the staff believes do not comply with SEC regulations, such as presenting a non-GAAP measure more prominently than its directly comparable GAAP measure and excluding a normal, recurring operating expense from a non-GAAP measure when the expense is necessary to operate the registrant’s business.
This year the staff noted that these C&DIs did not reduce the number of comments in 2023. Corp Fin is still observing errors concerning the basic requirements, such as:
Not properly identifying expenses that are normal and recurring. An example is including adjustments for costs incurred to open a new store location when the registrant has incurred similar costs when opening other new stores. Normal and recurring is considered at the registrant level and not individual locations.
Presenting a tailored accounting principle with adjustments that change the GAAP-basis recognition, which the staff believes is misleading. An example is presenting a non-GAAP revenue measure that deducts transaction costs as if the registrant acted as an agent in a transaction when it is a principal under US GAAP.
Read more in our Issues-in-Depth, Non-GAAP financial measures.
Inventory disclosures lacking
Corp Fin staff observed that when companies have experienced material amounts of inventory losses – whether due to theft, obsolete or outdated inventory, or other circumstances – there has been little to no disclosures in MD&A or the notes to the financial statements about these issues.
Corp Fin staff reminded registrants that when inventory losses have a material impact on year-on-year results, and if there are known trends or uncertainties that will impact the company’s results of operations or liquidity, MD&A should include discussion of this fact.
Additionally, registrants should disclose in their risk factors any inventory risk that could or has impacted the company’s business.
Accountants can help with pay vs performance (PvP) rules
The PvP rules require registrants to disclose specified information about executive compensation. At the heart of the rules is disclosure of ‘actual compensation paid’ as that term in defined by the rules. The SEC staff has been getting questions, many from attorneys and compensation analysts, about how to determine actual compensation paid and the fair value of stock-based compensation.
The SEC released C&DIs in February, September and November 2023. These C&DIs also address other areas, such as clarifications to the appropriate fair value methodologies. The computations are largely GAAP-based, and therefore Corp Fin Chief Accountant Lindsay McCord urged registrants to involve their accountants in the process.
Read more about the C&DIs in our Defining Issues, New SEC staff C&DIs on pay vs performance disclosures.
