On 17 May 2016, the staff of the SEC's Division of Corporation Finance issued new compliance and disclosure interpretations relating to Regulation G (which governs the use of non-GAAP financial measures in public disclosures generally) and Item 10(e) of Regulation S-K (which governs use of non-GAAP financial measures in filings with the SEC and, in part, earnings releases). These interpretations reflect recent concerns expressed by the SEC staff regarding the misuse of non-GAAP (or non-IFRS, as applicable) measures. Companies should expect additional scrutiny and SEC comments relating to their use of non-GAAP measures, in addition to possible future rulemaking.
For non-GAAP measures in all public disclosures, the new guidance under Regulation G includes the following interpretations:
- some adjustments, while not expressly prohibited, may be misleading and violate Rule 100(b) of Regulation G;
- non-GAAP measures may violate Rule 100(b) if presented inconsistently between periods;
- non-GAAP measures may violate Rule 100(b) if they exclude charges but not gains; and
- non-GAAP measures that substitute tailored revenue recognition and measurement methods may violate Rule 100(b).
For non-GAAP measures in SEC filings and earnings releases, the new guidance covers the "equal prominence" requirement. The equal prominence requirement is found in Item 10(e)(1)(i) of Regulation S-K and provides that companies that either file or furnish earnings releases with the SEC must present a quantitative reconciliation to the most directly comparable GAAP measure, as well as disclose the reasons management thinks the non-GAAP measure provides useful information for investors and any other purposes for which management uses the non-GAAP measure. The new interpretations also provide specific guidance on when the disclosure of a non-GAAP measure is deemed more prominent than its GAAP counterpart and thus in violation of the rule. These changes are the most likely overall to require companies to re-evaluate their disclosure practices.
For non-GAAP measures in SEC filings, the new guidance applies to Item 10(e) of Regulation S-K. The new interpretations clarify that non-GAAP liquidity measures (even those management present solely as performance measures) cannot be presented on a per share basis. In addition, income tax effects on non-GAAP measures should be provided depending on the nature of the measures.
Further information on the new interpretations can be found in our client publication here:
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