In the latest step in the SEC’s continuing efforts to, in the words of Corp Fin Chief Accountant Mark Kronforst, “crack down” on the inappropriate use of non-GAAP measures, on May 17, 2016 the SEC updated their Compliance and Disclosure Interpretations about the use of non-GAAP measures.

(At this point we almost want to apologize for how many recent posts we have done about non-GAAP measures, but this new guidance is important.)

You will find them at:

www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

If you use non-GAAP measures anywhere, earnings releases, MD&A, wherever, read them!

To help you get started, here are a couple of highlights.

This first question is a broad theme in current SEC public remarks, as we have discussed them in recent posts:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016]

This C&DI clarifies issues about per-share presentations:

Question 102.05

Question: While Item 10(e)(1)(ii) of Regulation S-K does not prohibit the use of per share non-GAAP financial measures, the adopting release for Item 10(e), Exchange Act Release No. 47226, states that “per share measures that are prohibited specifically under GAAP or Commission rules continue to be prohibited in materials filed with or furnished to the Commission.” In light of Commission guidance, specifically Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data, and Accounting Standards Codification 230, are non-GAAP earnings per share numbers prohibited in documents filed or furnished with the Commission?

Answer: No. Item 10(e) recognizes that certain non-GAAP per share performance measures may be meaningful from an operating standpoint. Non-GAAP per share performance measures should be reconciled to GAAP earnings per share. On the other hand, non-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission, consistent with Accounting Series Release No. 142. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure.  When analyzing these questions, the staff will focus on the substance of the non-GAAP measure and not management’s characterization of the measure. [May 17, 2016]

As always, your thoughts and comments are welcome.