SEC Updates Guidance for Non-GAAP Disclosures | Kramer Levin Naftalis & Frankel LLP

On December 13, 2022, the SEC’s Division of Corporation Finance updated several Compliance and Disclosure Interpretations addressing the presentation of non-GAAP financial measures, available here. The updates are as follows:

  • Question 100.01. As revised, this Question clarifies when adjustments to non-GAAP measures that are not explicitly prohibited can be misleading. Consistent with the previous guidance, this determination is based on a company’s individual facts and circumstances. As an example, presenting a non-GAAP measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. In particular, the SEC staff explains that it would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring.
  • Question 100.04. Prior to its revision, this Question provided that it may be misleading and violate Regulation G to substitute individually tailored revenue recognition and measurements for GAAP methods. The revised question continues and broadens this guidance by including the following examples of non-GAAP adjustments that could have the effect of changing the recognition and measurement principles required by GAAP, which would be considered individually tailored and potentially misleading:
    • Changing the pattern of revenue recognition to treat revenue as earned when customers were billed
    • Presenting a non-GAAP revenue measurement that deducts transaction costs as though the company acted as an agent in a transaction, when gross presentation is required by GAAP, or the inverse: presenting a revenue measure on a gross basis when net presentation is required by GAAP, and
    • Changing the basis of accounting for revenue and expenses in non-GAAP performance measures from an accrual basis in accordance with GAAP to cash basis
  • Question 100.05. New Question 100.05 confirms that a non-GAAP measure may be misleading if it (or any adjustment made to the corresponding GAAP measure) is not appropriately labeled and described. Examples that the SEC staff considers misleading include:
    • Failure to identify and describe a measure as non-GAAP, and
    • Presenting a non-GAAP measure with a description that does not reflect the nature of the measure, such as
      • a contribution margin that is calculated as GAAP revenue less certain expenses and labeled “net revenue”
      • a non-GAAP measure labeled the same as a GAAP line item, or
      • a non-GAAP measure labeled “pro forma” that is not calculated in a manner consistent with the requirements in Article 11 of Regulation S-X
    • Question 100.06. New Question 100.06 confirms that a non-GAAP measure could be considered misleading even if it is accompanied by extensive, detailed disclosure of each adjustment made to comparable GAAP measures.
    • Question 102.10(a). As revised and renumbered subsection (a), this Question provides additional detail on the “equal or greater prominence” requirement in Item 10(e)(1)(i)(A) of Regulation S-K: if a non-GAAP measure is included in an SEC filing, the GAAP equivalent must also be provided with equal or greater prominence. This requirement applies to the presentation and any discussion and analysis of a non-GAAP measure. Examples of non-GAAP measures that the SEC staff would view as more prominent than their GAAP counterparts include:
      • Presenting an income statement of non-GAAP measures
      • Presenting a non-GAAP measure before the most comparable GAAP measures, including in an earnings release headline or caption that includes a non-GAAP measure with equal or greater prominence
      • Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without including a ratio using a comparable GAAP measure
      • 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
  • Describing a non-GAAP measure as a “record performance,” or “exceptional” without at least an equally prominent description of the comparable GAAP measure, and 
  • Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure with equal or greater prominence
  • Question 102.10(b). New Question 102.10(b) provides examples of disclosures of non-GAAP reconciliations under Item 10(e)(1)(i)(B) of Regulation S-K that the SEC staff would consider as giving the non-GAAP measure undue prominence:
    • Starting the reconciliation with the non-GAAP measure
    • Presenting a non-GAAP income statement when reconciling non-GAAP and GAAP measures, and
    • Disclosing a forward-looking non-GAAP measure that is not reconciled to its GAAP counterpart, without disclosing with equal or greater prominence that the registrant is relying on the reconciliation exception under Item 10(e)(1)(i)(B) of Reg S-K, identifying the information that is unavailable and its probable significance
  • Question 102.10(c). New Question 102.10(c) clarifies that the SEC staff considers a non-GAAP income statement to be one that is comprised of non-GAAP measures and also includes all or most of the line items and subtotals on a GAAP income statement. The staff views a non-GAAP income statement as giving undue prominence to non-GAAP measures.

Companies should review their presentation of non-GAAP measures, including in their year-end filings and earnings releases, taking into account the updated SEC staff guidance.

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