In this series of posts we are focusing on non-GAAP measure problems and related SEC comments in earnings releases. As the first post in this series did, this post gives you an opportunity to see if you can spot the issue, and then provides the background and SEC guidance about the issue.
As a brief reminder, the SEC’s guidance about the use of non-GAAP measures is primarily in three places:
Regulation G for non-GAAP measures used anywhere,
S-K Item 10(e), for non-GAAP measures in filed documents, and
The related Compliance and Disclosure Interpretations.
Just like the first post in this series, you can read the excerpt of the release behind the comment and try to spot the issue. If you prefer, you can read straight through to the comment and explanation that follow.
This excerpt is from an 8-K filed by The Interpublic Group of Companies on April 22, 2020. Can you spot the non-GAAP issue?
The issue here goes back to the concept that companies should not try to create the impression that non-GAAP measures provide a better view of the company than GAAP. Here is the related SEC comment:
Form 8-K filed April 22, 2020
Reconciliation of Adjusted Results, page 7
- Please tell us your consideration of the guidance in Question 102.10 of the Non-GAAP Compliance and Disclosure Interpretations related to your presentation of full non-GAAP income statements when reconciling non-GAAP measures in your earnings releases.
The C&DI mentioned states:
Question: Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?
Answer: Yes. Although whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made, the staff would consider the following examples of disclosure of non-GAAP measures as more prominent:
- Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures;
- Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures;
- Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure;
- A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);
- Describing a non-GAAP 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 with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
- Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. [May 17, 2016]
The issue behind this comment is that the company presented a full non-GAAP income statement. The SEC does not permit this kind of presentation.
This is the Company’s response to the comment:
The Company acknowledges the Staff’s comment and advises that it had not previously viewed the non-GAAP reconciliation on page 7 to be a full non-GAAP income statement but will revise its disclosures going forward to ensure that future non-GAAP reconciliations in the Company’s earnings releases and other investor materials do not resemble full non-GAAP income statements. Below please find an example of how the Company intends to present future non-GAAP reconciliations, using the quarter ended March 31, 2020 results for illustrative purposes. We note that this presentation is also included in our Investor Presentation which was included as Exhibit 99.2 to Form 8-K filed on April 22, 2020.
As always, your thoughts and comments are welcome!