More than 20 years after the dot-com boom sparked a proliferation of non-GAAP financial measures, they continue to expand and remain an important part of the financial reporting process. The measures can play an important role in showing a view of the company’s financial or operational results to supplement what is captured in the financial statements. Non-GAAP measures adjust a company’s operating performance, financial position, or cash flows by excluding or including amounts from the most directly comparable GAAP measure. They can help management tell the company’s story to users of the financial statements that gives a view into the company “through the eyes of management.”
Here are some questions audit committees may want to ask management in fulfilling their oversight responsibilities:
More companies now use non-GAAP measures, and the majority of the time, their non-GAAP results are better than those reported under GAAP. The last time the SEC updated its interpretive guidance by releasing additional Compliance & Disclosure Interpretations (C&DIs) was in May 2018. Since those C&DIs were released, the SEC has reiterated their views on non-GAAP.
The disclosure requirements vary based on the applicable regulation. Regardless of the source, all of the governing regulations share an overarching principle that non-GAAP information cannot be misleading. Companies may also be subject to express prohibitions depending on which regulation governs a particular non-GAAP disclosure.
The use of GAAP provides uniformity in how companies report their financial performance. But most S&P 500 companies choose to report non-GAAP metrics in addition to GAAP measures. If done appropriately, non-GAAP measures can provide insights into a company’s business, past performance, and its potential prospects.