SEC updates interpretive guidance on non-GAAP financial measures

In brief , PwC US May 19, 2016

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The SEC's new guidance on non-GAAP measures includes examples of what may make measures misleading or unduly prominent.

Authored by

Patrick Higgins

Partner, PwC US

+1 (973) 236 5245


Kevin Garry

Senior Manager, Florham Park, PwC US


What happened?

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:

  • presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business;
  • presenting non-GAAP measures inconsistently between periods without disclosing the change and the reasons for change;
  • presenting non-GAAP measures that exclude non-recurring charges but do not exclude non-recurring gains; and
  • using individually-tailored accounting principles to calculate non-GAAP earnings—for example, presenting non-GAAP revenue that accelerates revenue recognition as though the revenue were earned sooner than for GAAP purposes.

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:

  • omitting comparable GAAP measures from headlines or captions;
  • presenting 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 non-GAAP over the comparable GAAP measures;
  • presenting a full income statement of non-GAAP measures;
  • describing non-GAAP measures (e.g., record performance, exceptional) without equally prominent description of the comparable GAAP measure;
  • providing tabular disclosure of non-GAAP information without including the GAAP information in the same table or an equally prominent tabular disclosure;
  • excluding the quantitative reconciliation to the most directly comparable GAAP measure for forward-looking non-GAAP measures due to the “unreasonable efforts” exception of Regulation S-K, without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
  • including unbalanced discussion and analysis of non-GAAP versus GAAP presentations.

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.


Why is this important?

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. 

What's next?

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.

Contact us

David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US

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