On May 17, 2016, the SEC staff updated its interpretive guidance on non-GAAP financial measures. The updated guidance provides clarifying examples in areas of frequent staff comment, including misleading non-GAAP presentations and non-GAAP measures with greater prominence than the comparable GAAP measures.
Compliance and Disclosure Interpretations updates
No SEC rules have changed as a result of the updated staff guidance. However, the updated guidance provides examples of potentially misleading non-GAAP measures that could violate Regulation G, including:
The updated guidance also provides example disclosures that would cause a non-GAAP measure to be more prominent than the most directly comparable GAAP measure, such as:
The SEC staff updates also clarified that non-GAAP liquidity measures cannot be presented on a per share basis in documents filed or furnished with the Commission. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure. When determining if the non-GAAP measure is a performance or liquidity measure, the staff will focus on the substance of the non-GAAP measure and not management’s characterization of the measure.
Finally, the updates described how income tax effects of non-GAAP measures should be presented and calculated. For liquidity measures that include income taxes, it might be acceptable to adjust GAAP taxes to show taxes paid in cash. For performance measures, the current and deferred income tax expense commensurate with the non-GAAP measure should be presented. Furthermore, adjustments to arrive at non-GAAP measures should not be presented “net of tax.” Rather, income taxes should be shown as a separate adjustment and clearly explained.
Refer to the SEC's interpretive guidance on non-GAAP measures for additional information.
Non-GAAP measures can provide insight into a company’s business, its past performance, and its potential prospects. Compliance with the interpretive guidance will facilitate non-GAAP measures that are more consistently applied, fair, and balanced and can enhance stakeholders’ confidence in non-GAAP measures.
Companies should evaluate their current non-GAAP measures and assess if the measures could be misleading or provide undue prominence. Any changes to existing non-GAAP presentations should be accompanied with appropriate disclosures.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the National Professional Services Group.
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