SEC Issues New and Revised Non-GAAP Compliance and Disclosure Interpretations
On December 13, 2022, the SEC staff updated its Compliance and Disclosure Interpretations related to non-GAAP financial measures as follows to identify several practices viewed as violations of Regulation G or Rule 10b-5:
Revised Qu. 100.01 (stating that certain adjustments, although not explicitly prohibited, may result in a misleading non-GAAP measure in violation of Regulation G Rule 100(b)1): Supplemented to specify that presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is an example of a measure that could be misleading. An operating expense that occurs repeatedly or occasionally — including at irregular intervals — would be viewed as recurring.
Revised Qu. 100.04 (prohibiting substitute revenue recognition and measurement methods): Updated to specify that a non-GAAP measure can violate Rule 100(b) if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP. Such measures would be considered individually tailored and may cause the presentation of the non-GAAP measure to be misleading. Examples include: (i) changing the pattern of recognition, such as including adjustments to accelerate revenue recognized ratably over time in accordance with GAAP; (ii) presenting a non-GAAP measure of revenue that deducts transaction costs when gross presentation is required by GAAP, or the inverse; (iii) presenting a measure of revenue on a gross basis when net presentation is required by GAAP; and (iv) changing the basis of accounting for revenue or expenses in a non-GAAP performance measure from an accrual basis in accordance with GAAP to a cash basis.
New Qu. 100.05: A non-GAAP measure can be misleading if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly described. The following examples would violate Rule 100(b): (i) failure to identify and describe a measure as non-GAAP; (ii) presenting a non-GAAP measure with a label that does not reflect the nature of the non-GAAP measure, such as: (x) a contribution margin that is calculated as GAAP revenue less certain expenses, labeled “net revenue”; (y) a non-GAAP measure labeled the same as a GAAP line item or subtotal, even though it is calculated differently than the similarly labeled GAAP measure, such as “Gross Profit” or “Sales”; and (z) a non-GAAP measure labeled “pro forma” that is not calculated consistent with the pro forma requirements in Article 11 of Regulation S-X.
New Qu. 100.06: A non-GAAP measure may mislead investors even if it is accompanied by extensive, detailed disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure.
Revised Qu. 102.10(a): Includes the following refined and expanded list of examples of presentations of non-GAAP measures that are more prominent than the presentation of comparable GAAP measures2: (i) presenting an income statement of non-GAAP measures; (ii) presenting a non-GAAP measure before the most directly comparable GAAP measure or omitting the comparable GAAP measure altogether, including in an earnings release headline or caption that includes a non-GAAP measure; (iii) presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence; (iv) presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font, etc.) that emphasizes the non-GAAP measure over the comparable GAAP measure; (v) describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure; (vi) presenting charts, tables, or graphs of non-GAAP financial measures without presenting the same for the comparable GAAP measures with equal or greater prominence; and (vii) providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.
New Qu. 102.10(b): With respect to non-GAAP reconciliations, the following are examples of disclosure of non-GAAP measures more prominently than the comparable GAAP measures: (i) starting the reconciliation with a non-GAAP measure; (ii) presenting a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures; and (iii) when presenting a forward-looking non-GAAP measure, and excluding the quantitative reconciliation in reliance on the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K, failing to disclose reliance upon the exception and identify the information that is unavailable, and its probable significance in a location of equal or greater prominence.
New Qu. 102.10(c): A non-GAAP income statement is one that is comprised of non-GAAP measures and includes all or most of the line items and subtotals found in a GAAP income statement.
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Rule 100(b) of Regulation G states that “A registrant, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading.
Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the SEC and also earnings releases furnished under Item 2.02 of Form 8-K.