The Division of Corporation Finance (the Division) is a branch of the U.S. Securities and Exchange Commission (SEC) that supports the SEC’s mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Among its duties, the Division “provides interpretive assistance to companies with respect to SEC rules and forms and makes recommendations to the Commission regarding new rules and revisions to existing rules.” This duty is performed, in part, through the issuance of Compliance and Disclosure Interpretations (or “C&DIs”) on a variety of subjects.
On May 17th, the Division issued additions and revisions to its list of C&DI’s on the subject of non-GAAP financial measures. The updated list now includes 38 C&DIs that “comprise the Division’s interpretations of the rules and regulations on the use of non-GAAP financial measures,” with specific references made to Regulations G, S-K, S-X, M-A and FD, which can all be found here.
What does this mean for public company CEOs and CFOs?
Judging from the C&DIs that were added or revised during the May 17th update, it is clear to us that, with respect to non-GAAP financial measures, the Division remains squarely focused on public company reporting practices that may potentially mislead investors.
Specifically, we found that the revised and additional C&DIs appear to focus on three main areas:
When presenting non-GAAP measures, companies should also “present the most directly comparable GAAP measure with equal or greater prominence.” For example, a non-GAAP financial measure should never:
- Precede its accompanying GAAP measure.
- Be presented in a style, such as bold or large font, that emphasizes the non-GAAP measure over its accompanying GAAP measure.
- Receive more analysis and discussion than its accompanying GAAP measure.
- Be described with terminology denoting its performance, such as “outstanding,” that is not also applied to its accompanying GAAP measure.
- Maintain consistency over periods in your non-GAAP calculation methodology, for the current period and the prior-year period.
- Include all recurring cash operating expenses necessary to operate the business.
- Exclude non-recurring gains when excluding non-recurring losses.
- Accompany every non-GAAP disclosure with a clear description of how the measure is calculated and a detailed reconciliation to the appropriate GAAP financial measure.
- If you must change your non-GAAP calculation methodology, ensure that the change is clearly disclosed and explained.
In order to avoid potential scrutiny from the SEC in the future, we believe that now is the time for executive management teams to take a proactive approach. Work together with your finance, accounting, and investor relations teams, as well as your auditors and audit committee, to ensure that the Company’s non-GAAP financial measures across all investor communications — including press releases, SEC filings, presentations, current reports, proxies, annual reports and CEO letters — are in compliance with the Division’s current compliance and disclosure interpretations.
To find out how we can be helpful to this process, or for more information on the subject, please get in touch.