The SEC continues to focus on non-GAAP financial measure disclosures with the topic being the second most frequent area of SEC review comments. Accordingly, to provide transparency into the SEC staff’s process for evaluating certain non-GAAP measures and the criteria for considering such measures misleading, in December 2022 the staff of the Division of Corporate Finance issued new Compliance and Disclosure Interpretations (C&DI) addressing questions relating to Non-GAAP Financial Measures in those areas commonly identified as problematic. The new interpretations cover:
- Certain adjustments that could result in non-GAAP measures that are misleading notwithstanding that they are not explicitly prohibited (Question 100.01).
- The violation of Rule 100(b) of Regulation G if the non-GAAP measure is inconsistent with generally accepted accounting practice (GAAP) (Question 100.04).
- Inappropriate labeling and unclear descriptions of adjustments made to a GAAP measure (Question 100.05).
- Violation of Rule 100(b) of Regulation G even when a non-GAAP measure is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure (Question 100.06).
- Examples of disclosures that would cause a non-GAAP measure to be more prominent rather than a directly comparable GAAP measure filed under Item 2.02 of Form 8-K (Question 102.10(a)).
- Examples of disclosures that would cause the non-GAAP measure reconciliation required by Item 10(e)(1)(i)(B) of Regulation S-K to give undue prominence to a non-GAAP measure (Question 102.10(b)).
- A description of what is considered to be a non-GAAP income statement item when presenting a non-GAAP income statement, alone or as part of the required non-GAAP reconciliation (Question 102.10(c)).
It should be remembered that the C&DI’s reflect the views of the SEC staff and are not rules, regulations, or statements of the Commission, and are intended to provide general guidance (and should not be relied upon as definitive). However, if your client is reporting non-GAAP measures, or would like to change any non-GAAP measures disclosed, the clarifications in these new C&D’s should be kept in mind.