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SEC Issues New Guidance on the Use of Non-GAAP Financial Measures

On May 17, 2016, the SEC published 12 new Compliance and Disclosure Interpretations ("C&DIs") regarding the use by reporting companies of non-GAAP financial measures. These interpretations give additional guidance on practices the SEC staff has indicated may result in misleading financial presentations even if the company has otherwise complied with the disclosure requirements of Regulation G under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Item 10 of Regulation S-K. The C&DIs also provide additional guidance on the presentation requirements if a non-GAAP measure is used and certain technical guidance regarding some commonly used non-GAAP financial measures. 

The SEC defines a non-GAAP financial measure as a numerical measure of a registrant's historical or future financial performance, financial position, or cash flows that includes or excludes amounts or reflects adjustments that differ from those used in preparing and presenting the most directly comparable GAAP measure. For example, if a registrant reports an adjusted earnings number to exclude non-cash charges or extraordinary items, the adjusted earnings number is a non-GAAP financial measure. 

Prior to the adoption of Regulation G in 2003, the SEC had expressed its views regarding the use of non-GAAP financial measures in public filings through comment letters and other guidance. Regulation G, which was adopted as one of the many requirements of the Sarbanes-Oxley Act of 2002, sets forth certain rules that a registrant must observe when it uses one or more non-GAAP financial measures in its public filings or press releases. Specifically, the registrant must also present the most directly comparable financial measure calculated and presented in accordance with GAAP and a quantitative reconciliation by schedule or otherwise of the non-GAAP financial measure to the most directly comparable GAAP financial measure. Importantly, however, from its inception, Rule 100(b) of Regulation G has not permitted the use of a non-GAAP financial measure if it would be false and misleading. The purpose of the new guidance is to identify practices that the SEC's staff views as being potentially misleading. 

When might a non-GAAP measure otherwise in compliance with Regulation G be misleading? In these new C&DIs, the SEC staff has noted the following potentially misleading practices:

  • Presenting a performance measure that excludes normal, recurring, cash operating expenses;

  • Presenting non-GAAP measures inconsistently between periods or excluding only non-recurring expenses but not non-recurring gains during the same period;

  • Individually tailoring revenue recognition and measurement methods are not permissible under Rule 100(b) and individually tailored recognition and measurement methods for other financial statement line items, such as key expense items, may present a problem as well.  

Concurrent with the adoption of Regulation G, Item 10 of Regulation S-K was amended to include additional, more stringent requirements on the use of non-GAAP financial measures including the addition of a requirement that when a non-GAAP measure is presented, the most directly comparable GAAP measure must be presented with equal or greater prominence. C&DI 102.10 provided a list of eight circumstances in which the staff would consider the non-GAAP disclosure to be more prominent than the GAAP measure: 

  • Presenting a full income statement of non-GAAP measures;

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

  • Using bold print or larger font for the non-GAAP measure would make the non-GAAP measure more prominent;

  • Putting a non-GAAP measure ahead of the comparable GAAP measure including in an earnings release headline or caption;

  • Describing a non-GAAP measure as "record performance" or "exceptional" without an equally prominent characterization of the comparable GAAP measure;

  • Providing tabular disclosure of the non-GAAP measure without preceding it with an equally prominent tabular disclosure of the comparable GAAP measure;

  • Omitting a quantitative reconciliation with respect to a forward-looking non-GAAP measure without disclosing the fact and the information that is unavailable to complete the reconciliation; and

  • Providing a discussion and analysis of a non-GAAP measure without a similar discussion of the comparable GAAP measure in a location of equal or greater prominence.

It is important to note that these Regulation S-K provisions are applicable to all periodic reports filed by a registrant under the Exchange Act including Forms 8-K filed pursuant to Item 2.02 to report earnings and the related earnings releases even though these earnings releases are deemed furnished but not filed.

Five of the new C&DIs address specific non-GAAP measure disclosure situations. C&DI 103.02 provides that if a company discloses EBIT (earnings before interest and taxes) or EBITDA (earnings before interest, taxes, depreciation, and amortization), companies must use net income rather than operating income as the most directly comparable GAAP measure. In addition, EBIT or EBITDA may not be presented on a per share basis, although Funds from Operations ("FFO"), a performance measure used by real estate investment trusts may be presented on a per share basis. The staff also advised that while certain non-GAAP per share performance data may be presented provided the company complies with the reconciliation and disclosure requirements, non-GAAP liquidity measures may not be presented on a per share basis in documents filed or furnished with the SEC.

This document is a summary of some of the more important points raised by the new C&DIs. The full text of the new C&DIs (which show a date of May 17, 2016, in brackets at the end) can be found on the SEC website or at

© 2020 Jones Walker LLPNational Law Review, Volume VI, Number 141



About this Author

Joan S. Guilfoyle, Banking and Finance Lawyer, Jones Walker Special Counsel
Special Counsel

Joan S. Guilfoyle is special counsel in the firm's Banking & Financial Services Practice Group in the Washington, D.C. office. Ms. Guilfoyle's practice concentrates on corporate and securities matters for financial institutions. She has extensive experience representing clients in connection with mergers and acquisitions, securities offerings, stock conversions, and securities compliance matters. Ms. Guilfoyle also represents companies involved in proxy contests, and has assisted clients with fidelity bond claims and internal investigations. Prior to practicing law,...

Curtis R. Hearn Securities Attorney Jones Walker Law Firm

Curt Hearn is the practice group leader of the Corporate & Securities Practice Group. He handles mergers, acquisitions, and divestitures, as well as capital raising transactions for a variety of publicly traded and privately held companies. Mr. Hearn represents private equity and venture capital firms, and focuses his practice on companies in the energy, energy service, healthcare, transportation, logistics, and manufacturing sectors. 

Mr. Hearn has more than twenty years of experience representing large bank holding companies in Louisiana....

Alexandra Clark Layfield Corporate Attorney Jones Walker Law Firm

Alexandra Layfield joined Jones Walker's Corporate & Securities Practice Group in 2008. Ms. Layfield's practice is exclusively transactional, concentrating principally on the areas of securities law, mergers and acquisitions, general corporate law and corporate governance matters. Alexandra Layfield is a partner in the Corporate Practice Group.

At Jones Walker, she leads the firm’s corporate, securities and executive compensation team. Alex serves as outside corporate and securities counsel for public companies, including acting as boardroom...