David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal.
Since 2003, when the SEC first adopted rules regarding the use of non-GAAP financial measures, there has been a constant tension between the utility of these measures and their potential to mislead investors. In recent years, the use of non-GAAP measures in public company filings has significantly increased, as has the discrepancy between these measures and their GAAP equivalents. The SEC has taken note of these trends and, since 2016, has correspondingly escalated its scrutiny of non-GAAP disclosures. In 2018, the SEC indicated that it may further intensify its enforcement in this area for the protection of investors.
Increased Use and Variance of Non-GAAP Measures
Nearly all large public companies now report non-GAAP metrics in their financial statements. In 1996, around 60 percent of S&P 500 companies reported at least one non-GAAP earnings-per-share figure. Today, according to Audit Analytics, over 97 percent of S&P 500 companies use at least one non-GAAP metric in their financial statements. Item 10(e)(1)(i)(A) of Regulation S-K states that an issuer including non-GAAP financial measures in SEC filings must present, with equal or greater prominence, the most directly comparable financial measures calculated and presented in accordance with GAAP.