By: George M. Wilson, SEC Institute

While the sound and fury and related wave of comment letters over the use of non-GAAP measures has in large part subsided since the issuance of the May 2016 Compliance and Disclosure Interpretations, the SEC continues to be watchful of how companies use non-GAAP measures.

The 2017 Tax Act and new revenue recognition standard are areas where the staff has indicated they will continue to focus on the use of non-GAAP measures. To be proactive in guiding companies about the use of non-GAAP measures in these areas, at PLI’s “The SEC Speaks in 2018” conference on February 23-24, 2018, speakers from CorpFin leadership discussed their current thinking about the use of non-GAAP for these issues.

Tax Act Considerations

The staff expects that companies will want to use non-GAAP measures to provide more comparable information between periods because of the significant impact enactment of the Tax Act had in 2017, and the impact it can have going forward. The staff’s main concern in this area is “cherry picking.”   If a company presents a non-GAAP measure for the impact of the new Tax Act it should be sure to include all aspects of the Act in that measure. For example, if a company wants to remove the impact of the revaluation of deferred tax assets and liabilities from tax expense for 2017, it should also adjust for all other impacts, such as the tax on repatriation of foreign earnings.

Revenue Recognition Considerations

The staff expects that companies, particularly those that use the modified retrospective method of adoption, will want to use non-GAAP measures to present more comparable information.

One question the staff anticipates is whether or not the analysis in MD&A can use a “full retrospective” approach even if the company formally adopts with the modified retrospective method. The staff indicated that this would be acceptable. However, they cautioned to be careful to include all impacts from the new standard in this approach, such as the impact of contract acquisition and fulfillment costs.

In addition, the staff reminded conference participants that full financial statements on a non-GAAP basis are not appropriate.

The staff also indicated that it could be appropriate, again when using the modified retrospective method of adoption, to present the 2018 compared to 2017 part of MD&A using old GAAP. This would be acceptable, in part because ASU 2014-09 requires companies using this method to present revenue in the year of adoption with information about how much and why the new standard impacts each line of the financial statements. After the year of adoption, however, this approach would not be appropriate in the view of the staff. In addition, companies using this approach in MD&A would have to address the impact of adopting the new standard in the year of adoption.

As always, your thoughts and comments are welcome!