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New SEC Guidance on Non-GAAP Financial Measures Will Require Changes to Many Non-GAAP Presentations

On May 17, the SEC’s Division of Corporation Finance issued new and revised Compliance & Disclosure Interpretations (CDIs) on the use of non-GAAP financial measures. These CDIs will likely affect many non-GAAP financial measure presentations made by companies today, particularly in earnings press releases that are subject to Regulation G. In addition, the CDIs will likely affect non-GAAP financial measure presentations in SEC filings that are subject to the more stringent disclosure requirements of Item 10(e) of Regulation S-K.

The new CDIs provide, among other things, the following:

  • The use of non-GAAP financial measures that present revenue in any way that is not consistent with GAAP could be misleading.

  • The presentation of “funds from operations” on a basis other than as defined by the National Association of Real Estate Investment Trusts (NAREIT) is acceptable as long as it is not misleading.

  • A charge being eliminated cannot be described as non-recurring, infrequent, or unusual if it is reasonably likely to recur within two years, or there was a similar charge or gain within the prior two years.

  • A non-GAAP per share financial measure cannot be presented if the substance of the measure is that it is a liquidity measure, even if management presents the measure solely as a performance measure.

  • Free cash flow cannot be characterized as representing the residual cash flow available for discretionary expenditures and cannot be shown on a per share basis.

  • A non-GAAP measure presented in an SEC filing or an earnings release furnished under Item 2.02 of Form 8-K in one of the following ways would be considered inconsistent with the requirement in Item 10(e)(1)(i)(A) that the non-GAAP financial measure be shown with equal or less prominence than the GAAP measure:

    • Presenting a full income statement of non-GAAP financial measures or presenting a full non-GAAP income statement when reconciling the non-GAAP financial measure to the most directly comparable GAAP measure

    • Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP financial measures

    • Using a style of presentation of a non-GAAP financial measure that is not used for the comparable GAAP measure (e.g., in bold or larger font)

    • Presenting a non-GAAP financial measure before the comparable GAAP measure, including in an earnings release headline or caption

    • Describing a non-GAAP financial measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure

    • Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table

    • Excluding a quantitative reconciliation of a forward-looking non-GAAP financial measure in reliance on the “unreasonable efforts” exception without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence

    • Providing a discussion about a non-GAAP financial measure without a similar discussion of the comparable GAAP measure in a location with equal or greater prominence

  • An adjustment to arrive at a non-GAAP financial performance measure should include the related current and deferred income tax expense, but the reconciliation should not show the adjustment “net of tax.” Instead, the income tax effect should be shown as a separate adjustment and be clearly explained. It may be acceptable to adjust GAAP taxes to show taxes paid in cash if a non-GAAP financial measure is a liquidity measure that includes income taxes.

  • Earnings before interest and tax (EBIT) or earnings before interest, tax, depreciation, and amortization (EBITDA) that is presented as a performance measure should be reconciled to net income and not operating income.

  • EBIT and EBITDA must not be presented on a per share basis.

Copyright © 2023 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VI, Number 139

About this Author

Linda Griggs, Securities attorney, Morgan Lewis
Senior Counsel

Linda L. Griggs’s practice focuses on securities regulation and corporate law matters. She draws on her experience as a former chief counsel to the chief accountant of the US Securities and Exchange Commission (SEC) to advise clients on issues related to financial reporting, accounting, and other disclosure requirements under securities laws and public and private securities offerings. Linda also advises clients on the fiduciary duties of directors and officers, as well as corporate governance matters.​​

Sean Donahue, Capital markets lawyer, Morgan Lewis

Sean M. Donahue counsels public companies across the United States on activist defense matters. As a member of the firm’s market-leading shareholder activism defense practice, he advises public companies in high-profile proxy contests, activist shareholder campaigns, contests for corporate control and negotiated and contested mergers and acquisitions (M&A). Sean also advises public companies and their boards of directors on the latest techniques for lessening a company’s vulnerability to activist shareholders, board advisory matters, and the implementation of...