SEC Updates its Interpretations on the use of Non-GAAP Financial Measures


On May 2016, the SEC staff updated its Compliance & Disclosure Interpretations (“C&DIs”) regarding the rules and regulations on the use of non-GAAP financial measures. These updates provide clarifying examples of issues previously commented on by SEC staff, including misleading non-GAAP presentations and non-GAAP measures with greater prominence than the most directly comparable GAAP measures.

In recent speeches, the SEC consistently noted a significant and troubling increase in the use of and nature of adjustments within non-GAAP measures. This was highlighted in comments made by Mark Kronforst, Chief Accountant of the Division of Corporation Finance while participating in a recent panel discussion on financial reporting, he noted, “for lack of a better way to say it, we are going to crack down. The pendulum has swung.” As such, companies are encouraged to examine their use of non-GAAP disclosures in SEC filings and correct any areas in conflict with the C&DIs guidance.


Misleading Non-GAAP Measures

The updated C&DIs provide clear areas of focus for companies to evaluate when determining the appropriateness of their use of non-GAAP measures. These areas of focus include:

  • Misleading adjustments – Certain adjustments to non-GAAP measures can be misleading if a company elects to exclude normal, recurring, cash operating expenses necessary to operate its business.
  • Inconsistent presentation – Non-GAAP measures that are not consistently presented period over period can be misleading to investors. A company is allowed to present a non-GAAP measure in one period, but not another, provided clear disclosure on reasoning for inclusion/exclusion is made. If the change is significant, a recast of prior measures to conform to current presentation may be appropriate.
  • Selective inclusion/exclusion of charges/gains – Companies must exercise sound judgement when determining how non-GAAP measures are adjusted. For example, a company should adjust for non-recurring gains when adjustments are made for non-recurring charges. Otherwise, the non-GAAP measure could be misleading as all non-recurring items are not adjusted and disclosed.
  • Individually tailored accounting principles – Tailoring of accounting policies and treatment for the purposes of disclosing non-GAAP measures could be misleading as it does not reflect the required GAAP measurement method. For example, companies that calculate revenue under two revenue models, one for GAAP and one for non-GAAP, are introducing a complexity to investors that are going to be further scrutinized as the SEC staff’s position is that instances of principle differences should be rare.
  • Improper identification of non-recurring items – Non-recurring items are typically eliminated from non-GAAP measures to remove the infrequent activity that is not reflective of a company’s ongoing operations. Companies must evaluate these items to ensure they are infrequent or unusual and not reasonably likely to recur, suggesting that these items are part of normal operations and should not be eliminated.
  • Use of non-GAAP per share performance measures – Companies presenting non-GAAP per share performance measures must clearly present a reconciliation to GAAP earnings per share. Non-GAAP liquidity measured on a per share basis is not permitted.
  • Presentation of income tax effects of non-GAAP adjustments – Income tax effects on a non-GAAP measure should be disclosed. If measure is a liquidity measure, adjustment to GAAP taxes to show taxes paid in cash would be acceptable. If measure is a performance measure, current and deferred income tax expense should be included. Any adjustments to income taxes to arrive at the non-GAAP measure should be presented as a separate adjustment and clearly explained.
  • Disclosure of EBIT or EBITDA as a performance measure – A reconciliation to GAAP net income must be presented when EBIT or EBITDA is presented as a performance measure.

Presentation of Non-GAAP Measure and Most Directly Comparable GAAP Measure

The updated C&DIs also reiterated that when a company presents a non-GAAP measure, it must also present the most directly comparable GAAP measure with equal or greater prominence. Below are examples of disclosures where non-GAAP measures are considered to be more prominent:

  • Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures.
  • Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures.
  • Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure.
  • A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption).
  • 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.
  • Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table.
  • Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence.
  • 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.


As part of the SEC’s increased scrutiny surrounding the use of non-GAAP measures, the SEC is suggesting that companies and their audit committees should evaluate whether their disclosure controls and procedures are robust enough to ensure the information required to be disclosed in the reports filed or submitted to the SEC is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. In fact, the design and effectiveness of disclosure controls and procedures are required to be certified under Section 302 of the Sarbanes-Oxley Act of 2002. Therefore, management should ensure their disclosure controls and procedures are in place for the non-GAAP measures used regarding the compliance of the measures in according with SEC rules and regulations, that the measures are prepared consistently period over period, the measures are accurately calculated and transparent, and that the measures are adequately reviewed and monitored.


We encourage companies to evaluate their existing disclosure of current non-GAAP measures to determine if the measures reported to investors and analysts could be potentially misleading or are presented with greater prominence than the most directly comparable GAAP measure. Any changes to existing non-GAAP presentations should be accompanied with appropriate disclosures. Furthermore, companies should evaluate their disclosure controls to ensure adequate measures are in place to ensure accurate and transparent disclosure of non-GAAP measures. Let our vast financial reporting and internal control experience of assisting clients across a variety of industries help your company implement the non-GAAP interpretive guidance. Please contact us for more information.