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!


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