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E-MailHoward B. Dicker is a partner in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication.
On May 17, 2016, the U.S. Securities and Exchange Commission staff issued important updates to its Compliance and Disclosure Interpretations regarding the use of non-GAAP financial measures. Last significantly modified in January 2010, these interpretations provide new guidance to help companies avoid presenting financial information in an improper or potentially misleading manner.
Below we look at just one significant interpretation, which applies to the frequent issue of how prominently non-GAAP financial measures in filings and earnings releases are presented in relation to GAAP measures.
Companies are currently required to present the most directly comparable GAAP financial measure with equal or greater prominence to any non-GAAP measure used in SEC filings or earnings releases furnished under Item 2.02 of Form 8-K. In C&DI 102.10, the SEC staff notes that determining relative prominence is typically fact-dependent, but goes on to provide examples of disclosures where they would consider the non-GAAP measure to be impermissibly prominent:
- Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures;
- A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);
- 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;
- 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;
- 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; and
- 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.
Other new interpretations cover potentially misleading or inconsistently applied adjustments (including the exclusion of normal, recurring, cash operating expenses), use of “funds from operations,” performance vs. liquidity per share measures, and calculation and presentation of income tax effects. For the complete set of C&DIs, see the SEC’s website here.
