Tag Archives: Regulation G

Jeepers, You Say There is More Non-GAAP News?

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.

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:

www.sec.gov/news/headlines/trumphotels.htm

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:

www.ecfr.gov/cgi-bin/text-idx?SID=8e0ed509ccc65e983f9eca72ceb26753&node=17:4.0.1.1.5&rgn=div5

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!