In past quarterly updates of this memorandum, we have discussed the increased scrutiny with which the SEC has been reviewing companies' use of non-GAAP financial measures, which are financial measures that do not conform either to US generally accepted accounting principles ("GAAP") or international financial reporting standards ("IFRS"), as applicable
Since the SEC's updated its compliance and disclosure interpretations ("C&DIs") regarding the use of non-GAAP financial measures in May 2016 it has continued to focus on this topic and has to date publicly released approximately 300 comment letters dealing with misuses of non-GAAP measures. In addition to those areas discussed in past newsletters, recent comment letters have focused on:
- Inadequate presentation of tax effects on non-GAAP measures: the SEC frequently asks issuers to avoid presenting the required reconciliations from GAAP net of tax, asking instead for presentation of the income tax effect as a separate line item, with an explanation of the calculation if necessary.
- Individually tailored accounting principles: while non-GAAP measures by definition are not bound to accounting principles, the SEC has indicated that individually tailored application of accounting principles to non-GAAP measures may be misleading. Examples include only removing portions of depreciation expense, deferring revenue and costs, adjusting assets for proportionate economic ownership and adjusting weighted average common shares.
- Use of per share liquidity measures: the use of per share liquidity measures is generally prohibited, but recent SEC comments indicate they are examining per share non-GAAP measures to examine if they are in substance per share liquidity measures, and are used by investors as such, rather than permitted per share performance measures. Importantly for companies, EBITDA and EBIT are not permitted be presented on a per share basis.
Our client publication describing trends in the first 150 comment letters is available at:
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