The use of non-GAAP financial measures is nearly ubiquitous for U.S. public companies. According to Audit Analytics, 97% of S&P 500 companies used non-GAAP financial measures in earnings releases during 20171.

Many companies believe that non-GAAP financial measures provide meaningful supplemental information to their financial statements that are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). For real estate investment trusts ("REITs"), non-GAAP financial measures have always been important due, in large part, to the impact of GAAP on accounting for real estate, such as the impact of depreciation and amortization on the income statement.

Non-GAAP financial measures can provide valuable financial metrics to investors and research analysts; however, the lack of uniformity in the use of non-GAAP financial measures can result in confusion among investors and potentially misleading disclosures by companies. As a result, non-GAAP financial measures have long been a focus of the U.S. Securities and Exchange Commission (the "SEC"), beginning with cautionary guidance issued in 2001 and the adoption of Regulation G and Item 10(e) of Regulation S-K in 2003. In May 2016, the SEC staff issued new and updated Compliance and Disclosure Interpretations ("C&Dis") to clarify and reinforce the SEC's position on the use of non-GAAP financial measures due to the increased use and prominence of such measures. Since then, the use of non-GAAP financial measures has been one of the most frequent subjects of SEC comment letters and has been the subject of SEC enforcement actions (see Exhibit A (Recent SEC Comments for REITs) and "Have there been any SEC enforcement actions related to non-GAAP financial measures?" below).

Therefore, it is important for REITs, including their boards of directors, management teams and advisors, to understand the SEC's rules, regulations and latest guidance with respect to non-GAAP financial measures.


What is a "non-GAAP financial measure"?

Under Regulation G and Item 10(e) of Regulation S-K, a non-GAAP financial measure is defined as a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that:

  • excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of comprehensive income, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or
  • includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable GAAP measure.

The SEC's 2003 adopting release for Regulation G and Item 10(e) of Regulation S-K further provides that the definition of a non-GAAP financial measure is intended to capture all measures that have the effect of depicting either:

  • a measure of performance that is different from that presented in the financial statements, such as income or loss before taxes or net income or loss as calculated in accordance with GAAP; or
  • a measure of liquidity that is different from cash flow or cash flow from operations computed in accordance with GAAP.

In other words, if a registrant takes a defined GAAP measure and excludes items that are components of that GAAP measure, or includes items that are not components of that GAAP measure, then the resulting measure is a non-GAAP financial measure.


1 See Audit Analytics' report "Long-Term Trends in Non-GAAP Disclosures: A Three-Year Overview" (October 2018).

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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