Non-GAAP Measures – The SAGA continues – Full non-GAAP Financial Statements?

In our last two posts we reviewed the two sources of SEC guidance for the use of non-GAAP measures:

Reg G for non-filed documents such as earnings releases, and

Reg S-K Item 10(e) for non-GAAP measures included in filed documents such as in the MD&A of Form 10-K.

We also explored issues in the definition of a non-GAAP measure, which can be complex for some operational measures such as revenue per employee and same store sales.

In our next few posts we will discuss areas where companies sometimes push the use of non-GAAP measures a bit too far. When this happens, as you would expect, the SEC frequently writes comments about these issues.

The first is something that has happened frequently when companies want to show what their F/S would look like without certain non-cash charges. A very common example is share based payment expense. Since share based payments can affect a number of lines in the F/S companies will sometimes present an entire F/S, for example an Income Statement, on a non-GAAP basis.

In the view of the SEC their non-GAAP measure guidance allows the presentation of individual measures, but it does not permit this kind of full financial statement presentation. In essence, the risk that this could cause investor confusion is too great.

This position is formally stated in a Compliance and Disclosure Interpretation (C&DI). Here is the text:

Question 102.10

Question: Is it appropriate to present a full non-GAAP income statement for purposes of reconciling non-GAAP measures to the most directly comparable GAAP measures?

Answer: Generally, no. Presenting a full non-GAAP income statement may attach undue prominence to the non-GAAP information. [Jan. 11, 2010]

You can find all the C&DI’s for non-GAAP measures at:

Given this position, when the staff sees this kind of presentation, they do write comments! Here is an example:

  1. We see on page 5 of your earnings release that you present non-GAAP financial measures and related reconciliations required by Item 10(e) of Regulation S-K in the form of non-GAAP income statements. Please tell us how your presentation considers the guidance set forth in Compliance and Disclosure Interpretation 102.10. Under the cited guidance, it is generally not appropriate to present a non-GAAP income statement for purposes of reconciling non-GAAP financial measures to the most directly comparable GAAP financial measures.

And, here is another that has a bit more complexity, but the same theme, and makes the point that gross sales is in fact a non-GAAP measure that should be reconciled to net sales.

  1. We note that you present gross sales less promotional and other allowance figures at the top of your full GAAP income statements on page 48. In addition, you present and discuss gross sales, a non-GAAP measure, prior to the presentation and discussion of net sales, the most comparable GAAP measure, in your selected financial data on page 40 and in your discussion on page 49. Furthermore, it appears that you reconcile gross sales, the non-GAAP measure, to net sales, the most directly comparable GAAP measure, by presenting this reconciliation in a full non-GAAP income statement which is generally not considered appropriate as it may attach undue prominence to the non-GAAP measure, gross sales. Please revise future filings to present and discuss the GAAP measure net sales, more prominently than the non-GAAP measure, gross sales. In addition, any reconciliation of the two measures should not be included on your full income statement as this may result in presentation of a full non-GAAP income statement. Refer to the guidance outlined in Item 10(e) of Regulation S-K and Question 102.10 of Staff’s Compliance & Disclosure Interpretation on Non-GAAP Financial Measures at

As always, your thoughts and comments are appreciated!


Non-GAAP Measures – Part Two – Some Definitional Issues

In our last post we discussed the use of non-GAAP measures and the two sources of guidance the SEC has issued concerning their use, Reg G and S-K Item 10(e). In our next few posts we will delve into some of the common problems companies encounter in the use of non-GAAP measures.

The first application issue would seem to be pretty straightforward, just what is a non-GAAP measure? Both Reg G and S-K Item 10(e) use the same definition:

“(2) For purposes of this paragraph (e), a non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that:

(i) Excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or

(ii) Includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

(3) For purposes of this paragraph (e), GAAP refers to generally accepted accounting principles in the United States, except that:

(4) For purposes of this paragraph (e), non-GAAP financial measures exclude:

(i) Operating and other statistical measures; and

(ii) Ratios or statistical measures calculated using exclusively one or both of:

(A) Financial measures calculated in accordance with GAAP; and

(B) Operating measures or other measures that are not non-GAAP financial measures.

(5) For purposes of this paragraph (e), non-GAAP financial measures exclude financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant. However, the financial measure should be presented outside of the financial statements unless the financial measure is required or expressly permitted by the standard-setter that is responsible for establishing the GAAP used in such financial statements.”

There is a lot of technical detail included in this definition! Two common questions are:

  1. Is a measure such as “comparable store sales” a non-GAAP measure?

As is the case in many questions like this, the answer is “it depends”! Paragraph 4 above says that if a measure is computed with an operating measure that is not a non-GAAP measure (such as number of stores) and a GAAP financial measure, (such as sales), then it is not a non-GAAP measure.

However, if the sales number was somehow “adjusted”, for example to eliminate start-up period sales or to remove the impact of an unusual event, so that the sales number was a non-GAAP measure, then the comparable stores sales number would be a non-GAAP measure.

  1. My operating segment footnote includes measures that are non-GAAP measures (for example EBITDA) because we use them to evaluate operating segment performance. Do these disclosures fall into the non-GAAP disclosure requirements of S-K Item 10(e) or Reg G?

This one is pretty simple. As paragraph 5 above says disclosures of measures like EBITDA that are used to evaluate operating segments where the disclosure is required by GAAP are not non-GAAP measures, so reconciliations and other S-K Item 10(e) and Reg G disclosures are not required unless of course they are required by GAAP.

As always, your thoughts and comments are appreciated!


The CAQ – Why You Need to Know Who They Are!

Do you know where the SEC initially stated their position about transitioning to the 2013 Revised COSO framework? It was in September of 2013. Here is the path to that announcement.

One of the topics we discuss in our workshops is the importance of the “CAQ” in the financial reporting process. The CAQ is an important source of information about current positions and developments at the SEC. Surprisingly, we frequently discover that many people are not very familiar with this organization.

So, what is the CAQ? It is, in long form, The Center For Audit Quality.

Their web page is

At their home page you can learn about who they are:

“The Center is an autonomous, nonpartisan, nonprofit group based in Washington, D.C. It is governed by a Board that comprises leaders from the public company auditing firms, the American Institute of CPAs and three members from outside the public company auditing profession. The organization is affiliated with the American Institute of CPAs.”

And what they do:

“The Center for Audit Quality is dedicated to enhancing investor confidence and public trust in the global capital markets by:

  • Fostering high quality performance by public company auditors;
  • Convening and collaborating with other stakeholders to advance the discussion of critical issues requiring action and intervention;
  • Advocating policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions.”

One really important part of this organization is The CAQ SEC Regulations Committee. This group meets periodically with the SEC staff, generally once each quarter for the first three quarters of the year, and discusses current accounting and disclosure issues. The home page for the committee is:

The minutes of these meetings are published on the Committee’s webpage and frequently contain information that, while sometimes fairly narrow, is helpful in the financial reporting process.

For example, it was at a CAQ meeting that the SEC Staff early on stated their position about the transition to the 2013 COSO Framework. Here is a link to those minutes: (Check out page 6) publications/2013septembe25jointmeetinghls.pdf?sfvrsn=0

The most recent highlights of the SEC Regulations Committee meeting with the Staff are at:

This meeting addressed issues ranging from the reporting implications of the FASB’s new consolidation standard, ASU 2015-02, to the application of S-X Rule 3-14 to real estate acquisitions in prior years for a registration statement.

Yes, many of the issues are narrow and technical, but we suggest you check the CAQ minutes each quarter as you get ready to close!

As usual, your comments and thoughts are appreciated!

SEC Comment of the Week: To GAAP or non-GAAP, aye, that is the question….

Or – There is more than Reg G!

The use of Non-GAAP financial measures has a long and storied history. Non-GAAP disclosures always seem to engender controversy and questions. While there is no doubt that they are widely used and important to many investors, unfortunately they are sometimes misused, and can even result in enforcement action. Check out this enforcement release against Trump Hotels and casinos as a great example of what not to do:

During our workshops we frequently find that there is more than a bit of confusion over the SEC’s guidance for the use of non-GAAP measures. Most SEC Reporting professionals know about “Reg G” and it’s guidance, but that is not the only place the SEC has non-GAAP measure rules. (Note: It was in 2002 that the Title IV of the SOX Act gave the SEC the power and responsibility to regulate the use of “pro forma figures”, later renamed non-GAAP measures.)

Regulation G is the SEC rule that applies when a non-GAAP measure is included in a document that is not filed with the SEC such as an earnings release.

Regulation S-K Item 10(e), which is not as well understood, is additional guidance that must be followed if a non-GAAP measure is included in a filed document, such as in MD&A in Form 10-K and 10-Q or in CD&A in a proxy statement.

This difference is not always well understood and does result in SEC Comments. (There is an example comment to a company that did not follow S-K Item 10’s guidance below)

What is the Difference?

Reg G, the rule for non-filed documents such as an earnings release or an investor presentation, is in essence very simple. You can find Reg G at:

The nuts and bolts of Reg G are fairly straightforward:

“(a) Whenever a registrant, or person acting on its behalf, publicly discloses material information that includes a non-GAAP financial measure, the registrant must accompany that non-GAAP financial measure with:

(1) A presentation of the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP); and

(2) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (a)(1) of this section.”

There is also an anti-fraud provision to prevent measures that are misleading. A company cannot knowingly lie or omit a material fact in disclosure of a non-GAAP measure. The definition of a non-GAAP measure is also in the rule. (We will explore this definition in our next post!)

Regulation S-K item 10 (e), the source of guidance for non-GAAP measures used in filed documents, has more required disclosure about “why’s” behind the use of non-GAAP measures and some specific rules about things that can’t be done with non-GAAP measures. It does require essentially the same things as Reg G, but then adds additional requirements. Here is its core:

First, if a company uses a non-GAAP measure in a filed document, S-K Item 10(e) requires four things:

“(A) A presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP);

(B) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (e)(1)(i)(A) of this section;

(C) A statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations; and

(D) To the extent material, a statement disclosing the additional purposes, if any, for which the registrant’s management uses the non-GAAP financial measure that are not disclosed pursuant to paragraph (e)(1)(i)(C) of this section”

In addition to these four requirements, the first two of which are almost the same as Reg G, S-K Item 10 has five prohibitions. A company cannot:

(A) Exclude charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures, other than the measures earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA);

(B) Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;

(C) Present non-GAAP financial measures on the face of the registrant’s financial statements prepared in accordance with GAAP or in the accompanying notes;

(D) Present non-GAAP financial measures on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X (17 CFR 210.11-01 through 210.11-03); or

(E) Use titles or descriptions of non-GAAP financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures…

So far we have discussed and recapped a lot of information. All of that leads to this example SEC staff comment about the use of non-GAAP measures.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 27

  1. We note that you present certain non-GAAP financial measures, including constant currency revenues, gross profit excluding the impacts of the MDP transaction and the exchange, SG&A expense excluding certain costs as a percentage of revenue, and consolidated adjusted EBITDA. Please revise future filings to include all of the disclosures required by Item 10(e)(1)(i) of Regulation S-K for all non-GAAP measures included in your presentation.

This one is as simple as knowing the difference between Reg G and S-K Item 10!

As always, your thoughts and comments are appreciated!

conference pic

It’s Conference Time!

Our four Midyear SEC and FASB Forums are underway! This picture is from our Chicago Conference on May 28 and 29. In June the Forums will take place in New York and San Francisco. Check out the dates, agenda and speakers at:

All the programs are chaired by Carol Stacey and bring you up to date with all important developments and current issues at the SEC, FASB and PCAOB.

IFRS Wherefore art thou? – A May Update!

As you likely know, when James Schnurr took the reigns of OCA Chair White asked him to address IFRS. She asked Mr. Schnurr to review the staff’s IFRS work to date and develop a recommendation about “what action, if any, the Commission should take regarding the further incorporation of IFRS into the U.S. capital markets”.

Mr. Schnurr discussed the progress of this review in a May speech. In his remarks he said:

“Some of the key themes we heard from our discussions were as follows:

There is virtually no support to have the SEC mandate IFRS for all registrants.

There is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS.

There is continued support for the objective of a single set of high–quality, globally accepted accounting standards.”

He also said he would work to finish his recommendation in the “near term”.

You can read the speech at:

As always, your thoughts and comments are appreciated!



10-K Tip – Another S-K Item 201 Oddity

Over the years S-K Item 201 has been amended, updated and added to on several occasions. As a result it has become a bit of a disclosure hodge-podge. It contains more than a few twists and turns, and we explored one of them in our last post about the performance graph from S-K item 201(e) that does not have to be in the Form 10-K.

This post is about another twisty disclosure rule, and is also a reminder that the Compliance and Disclosure Interpretations from CorpFin can be really helpful. You can find them all at:

This S-K Item 201 twist surrounds the equity compensation table that is required by S-K 201(d). At first reading, you would not think there is even an issue. The instructions to Form 10-K seem clear:

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)  Furnish the information required by Item 201 of Regulation S-K (17 CFR 229.201) and …(rest of the instruction omitted as it is not relevant).

With this straightforward instruction it would seem everything required by S-K Item 201 should be included in Item 5 of the 10-K, including S-K 201(d):

(d) Securities authorized for issuance under equity compensation plans
(1) In the following tabular format, provide the information specified in paragraph (d)(2) of this Item as of the end of the most recently completed fiscal year with respect to compensation plans (including individual compensation arrangements) under which equity securities of the registrant are authorized for issuance, aggregated as follows:

(i) All compensation plans previously approved by security holders; and
(ii) All compensation plans not previously approved by security holders.

However, this seemingly straightforward issue gets disrupted when you get to Item 12 in the Form 10-K instructions which says:

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Furnish the information required by Item 201(d) of Regulation S-K (§ 229.201(d) of this chapter) and Item 403 of Regulation S-K (§ 229.403 of this chapter).

So, where is the appropriate place in the Form 10-K for this table? For a while many people read the instructions very literally and put the table in both Item 5 and Item 12! Eventually the common sense approach of the SEC, i.e. you don’t really need it twice, was clarified in this Compliance and Disclosure Interpretation:

Regulation S-K: Section 106. Item 201 — Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

Question 106.01

Question: Is the Item 201(d) disclosure required in Part II of Form 10-K, given that Item 5 of Form 10-K indicates that the registrant is required to furnish the information required under Item 201, or should the Item 201(d) disclosure be included (or incorporated by reference) in Part III of Form 10-K given that Item 12 indicates that the registrant is required to furnish the information required under Item 201(d)?

Answer: The Item 201(d) disclosure should be included in Part III, Item 12 of Form 10-K. An issuer may rely on General Instruction G.3 to Form 10-K to incorporate by reference the Item 201(d) disclosure from its proxy statement or information statement, even if the issuer did not submit a compensation plan for security holder action at its annual meeting of security holders. See American Bar Association (Jan. 30, 2004). [Mar. 13, 2007]

This one is pretty picky, but always good to get the details right! It also shows one facet of the SEC staff’s interpretive process, as the CDI resulted from an interpretive request from the ABA, which is linked to Reg S-K’s CDI 106.1.

As always your thoughts and comments are welcome!


Form 10-K Tip – A Subtle Filed Versus Furnished Issue

In our previous two posts dealing with the differences between the Form 10-K and the Annual Report to Shareholders (the ARS that accompanies the proxy), we delved into the differences between “filed” and “furnished” documents.

Here is another fairly subtle place that this “filed versus furnished” distinction comes into Form 10-K.

Regulation S-K Item 201(e) is the source of the requirement for the “performance graph” which does a five-year comparison of the return on a $100 investment in the company’s stock, a broad market index and an industry index. (The text of Item 201(e) is included below).

Here is an example of the graph from American Woodmark:

From this part of the Instructions to Item 5 of the Form 10-K it seems relatively straightforward that this graph should be in Item 5 of the 10-K:

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

  1. (a)  Furnish the information required by Item 201 of Regulation S-K (17 CFR 229.201)…

(Note: The rest of the Item 5 instructions are omitted as they do not affect this issue)

However, if you persevere (that is stay awake!) trying to read the whole of S-K Item 201, including the instructions (always an important part of the items!) you will find Instruction 7 to Item 201(e):

  1. The information required by paragraph (e) of this Item need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 (17 CFR 240.14a-3) or Exchange Act Rule 14c-3 (17 CFR 240.14c-3) that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). Such information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

The reason for this instruction goes back many years to when changes were made in the proxy rules and this graph was moved from the proxy statement to S-K Item 201.

And, as you read this instruction, you might be tempted to say “so what”! But the subtle and important issue is that the ARS is not a filed document!

So, if you put the graph in the Form 10-K, it is “filed” information, subject to 1934 Act liability provisions. However, if you put it only in the ARS, it is not subject to 1934 Act liability. While this might not be a major issue, it is still one to think about.

One path some companies use is to put the graph on the back page of a 10-K wrap, so it is not actually included in the 10-K itself.

Here is an example of a company, American Woodmark, that dealt with the issue by putting the graph in the 10-K wrap pages instead of the Form 10-K, in order to keep the graph from being filed. Check out page 12 of their ARS:

Yes, this one is pretty subtle, even picky, but one to think about.

As always, your comments and thoughts are welcome!

Here is the main part text of S-K Item 201(e). You can see the whole Item at:

S-K Item 201

(e) Performance graph. (1) Provide a line graph comparing the yearly percentage change in the registrant’s cumulative total shareholder return on a class of common stock registered under section 12 of the Exchange Act (as measured by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant’s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period) with:

(i) The cumulative total return of a broad equity market index assuming reinvestment of dividends, that includes companies whose equity securities are traded on the same exchange or are of comparable market capitalization; provided, however, that if the registrant is a company within the Standard & Poor’s 500 Stock Index, the registrant must use that index; and

(ii) The cumulative total return, assuming reinvestment of dividends, of:

(A) A published industry or line-of-business index;

(B) Peer issuer(s) selected in good faith. If the registrant does not select its peer issuer(s) on an industry or line-of-business basis, the registrant shall disclose the basis for its selection; or

(C) Issuer(s) with similar market capitalization(s), but only if the registrant does not use a published industry or line-of-business index and does not believe it can reasonably identify a peer group. If the registrant uses this alternative, the graph shall be accompanied by a statement of the reasons for this selection.

Leases Update – Final Standard Drafting Underway!

For years we have been watching the FASB/IASB project on lease accounting. And many of us wonder whether or not this project will ever finish. Well, checkout what the FASB is saying about their meeting this Wednesday, May 13. Yes, they are working on the project, working on it carefully and diligently and are actually in the process of drafting a final standard!

Wednesday May 13. 2015:

FASB Board Meeting, 9:00 a.m. EDT

  1. Leases. The Board will continue redeliberations of its May 2013 Exposure Draft, Leases, specifically discussing issues that have arisen during the drafting of the final standard.

They have said they hope to issue the final standard before the end of this year!

You can learn more at:

As always, your thoughts and comments are welcome and appreciated!

30th Midyear SEC Reporting & FASB Forum

For the 30th straight year our “Midyear SEC Reporting & FASB Forums” are being presented during May and June in Dallas, Chicago, New York, and San Francisco. These  programs are always the best way to keep up-to-date with what is going on at the SEC and the FASB. You can see the detailed agenda and list of speakers and learn more at:

Past participants are eligible for a discount. Please contact customer service at (888) 212-2010 or

As always, your thoughts a comments are appreciated!