SEC Deputy Chief Accountant Discusses Use of Non-GAAP Measures
In a May 5 speech at the 2016 Baruch College Financial Reporting Conference, Wesley Bricker, deputy chief accountant at the Securities and Exchange Commission, discussed his observations regarding the use of non-generally accepted accounting principles (GAAP) financial measures, the transition to new standards for revenue recognition and leases, and the Financial Accounting Standards Board’s (FASB) financial instruments’ credit impairment proposal. Mr. Bricker’s sentiments regarding certain non-GAAP disclosure practices echo concerns expressed by others at the SEC, including Chair Mary Joe White, Chief Accountant Jim Schnurr and Director of the Division of Corporation Finance Keith Higgins.
Regulation G under the Securities Exchange Act of 1934 (Exchange Act) and Item 10(e)(i) of Regulation S-K generally require that non-GAAP financial measures included in public disclosures by a company with securities registered under the Exchange Act be accompanied by: (1) a presentation of the most directly comparable financial measure calculated in accordance with GAAP; and (2) a reconciliation to such GAAP financial measure. Item 10(e)(i)also requires a statement disclosing why the company’s management believes the presentation of the non-GAAP measure provides useful information regarding its financial condition and results of operations; and if material, a statement of any purposes for which the company’s management uses the non-GAAP financial measure. Regulation G also prohibits public disclosure of a non-GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading. The staff of the SEC often issues comments regarding non-GAAP financial measures disclosed in periodic reports and earnings releases, and has objected to certain measures.
In his remarks, Mr. Bricker discussed recent examples of practices related to the use of non-GAAP measures that may be problematic. Mr. Bricker focused on the use of individually tailored accounting principles to calculate non-GAAP earnings, with a particular emphasis on non-GAAP revenue adjustments. According to Mr. Bricker, “revenue adjustments do more than just adjust GAAP: they change the very starting point from which other performance analyses flow.” He went on to say that “if you present adjusted revenue, you will likely get a comment; moreover, you can expect the staff to look closely, and skeptically, at the explanation as to why the revenue adjustment is appropriate.”
In his speech, Mr. Bricker noted the possibility of future rulemaking with respect to non-GAAP financial disclosures. He also stressed the need for companies to consider how disclosure controls and procedures apply to the disclosure of non-GAAP measures, and for audit committees to focus on the presentation of non-GAAP measures and the process for determining that such disclosure is appropriate. Additionally, Mr. Bricker suggested that Exchange Act reporting companies review their practices in this area and make any necessary changes.
To view a complete transcript of Mr. Bricker’s remarks, including his commentary regarding the transition to new standards for revenue recognition and leases and the FASB’s financial instruments’ credit impairment proposal, click here.