Appendix B — Sample Non-GAAP Measure Policies and Procedures
Disclaimer: The
samples below of non-GAAP policies and procedures were
developed on the basis of Deloitte’s observations and
knowledge of the applicable requirements of SEC rules and
guidance. However, the information a company presents can
and is likely to change, and Deloitte is under no obligation
to update the samples to reflect such information. All
companies should consult with their legal counsel regarding
the applicability and implementation of SEC rules and
guidance. Accounting policies, processes, and controls are
ultimately the responsibility of management.
B.1 Sample Elements of Policies and Procedures Related to Non-GAAP Measures
The sample elements below may be incorporated into a company’s
policies and procedures related to non-GAAP measures. The samples are followed
by descriptions of certain specific non-GAAP measures and related calculations
that a company may use in its development of non-GAAP information.
See Chapter
5 for information about DCPs and related considerations.
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Title and information about the policy
and procedures
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[Company to insert relevant
Information. For example:]
Title: [Company ABC’s Non-GAAP
Policies and Procedures]
Date Issued:
Policy Owner(s)/Contact(s):
Functions:
Applicable Subsidiaries and
Geographies:
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References to relevant guidance
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[Company to describe applicable
guidance. For example:]
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Background and scope
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[Company to explain overall scope of
the policy and procedures. For example:]
This policy covers the use, calculation,
and disclosure of Company ABC’s non-GAAP measures in
press releases and SEC filings.
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Overall policy regarding non-GAAP
measures
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[Company to develop and include an
overall policy regarding the use of non-GAAP
measures. For example:]
In reporting and disclosing any
non-GAAP measures, Company ABC’s goal is to provide
useful and clear supplemental information to investors.
In doing so, Company ABC will comply with applicable SEC
rules and guidance. This policy has been developed on
the basis of Company ABC’s understanding and
interpretation of the current SEC rules and regulations
and will be updated as appropriate when related SEC
rules and guidance change or when other changes to the
policy are determined to be appropriate by management,
subject to the approval of the disclosure committee and
audit committee.
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Non-GAAP measures used
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[Company to (1) insert the specific
non-GAAP measures that have been approved for use by
management, by the disclosure committee, and by the
audit committee, as applicable; (2) explain how such
measures will be calculated by using specific and
detailed descriptions of the components of each
adjustment (e.g., restructuring charges will be
deducted from net income, in part, in the
calculation of adjusted EBITDA); and (3) describe
where and how such information will be disclosed.
See Section 2.2 for
a discussion of the most commonly used non-GAAP
measures and other related information. See also the
sample descriptions and calculations in the section
below.]
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Reporting and disclosures regarding
non-GAAP measures
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[Company to indicate which disclosure
requirements and prohibitions will apply on the
basis of the location(s) of the non-GAAP measure
disclosures, for example, by using information from
Appendix
D.]
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Procedures for calculating and reviewing
non-GAAP measures
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[Company to describe the process for
calculating and reviewing non-GAAP measures. For
example, see Section
5.1.3.]
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Disclosure controls and procedures
regarding non-GAAP measures
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[Company to describe the DCPs
regarding non-GAAP measures. For example, see
Chapter 5.]
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Procedures for changing this policy
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[Company to describe the process for
adopting any changes to the policy. For
example:]
Any changes to non-GAAP measures used by
management, to the calculation of such measures, or to
this policy must be recommended by management and
approved by the disclosure committee and audit
committee.
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Definitions
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[Company to describe any pertinent or
helpful definitions. For example:]
In accordance with SEC Regulation S-K,
Item 10(e), a non-GAAP financial measure is defined as
“a numerical measure of a registrant’s historical or
future financial performance, financial position or cash
flows that:
(i) Excludes amounts, or is subject to
adjustments that have the effect of excluding
amounts, that are included in the most directly
comparable measure calculated and presented in
accordance with GAAP in the statement of
comprehensive income, balance sheet or statement
of cash flows (or equivalent statements) of the
issuer; or
(ii) Includes amounts, or is subject to
adjustments that have the effect of including
amounts, that are excluded from the most directly
comparable measure so calculated and
presented.”
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B.2 Descriptions of Certain Non-GAAP Measures and Related Calculations
B.2.1 Adjusted EBITDA
Management uses adjusted EBITDA as a supplemental measure for assessing
operating performance in conjunction with related GAAP amounts. It also uses
adjusted EBITDA in connection with matters such as the following:
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Operating decisions.
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Strategic planning.
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Annual budgeting.
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Evaluating company and management performance.
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Comparing operating results with historical periods and with industry peer companies.
In addition, adjusted EBITDA helps investors understand operational factors associated with a company’s financial performance because it excludes the following from consideration: interest, taxes, depreciation, amortization, and infrequent or unusual losses or gains (i.e., nonrecurring and incremental restructuring charges that are not expected to be routinely incurred year over year because of the company’s historical strategy and operating experience as well as goodwill impairment).
Management calculates adjusted EBITDA by subtracting the following from net
income (GAAP):
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Interest income (all).
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Interest expense (all).
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Tax expense (all).
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Depreciation (all).
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Amortization (all).
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Infrequent or unusual losses and gains (e.g., nonrecurring restructuring charges, goodwill impairment).
B.2.2 Adjusted Earnings per Share
Management uses adjusted earnings per share as a critical measure of operating performance in conjunction with related GAAP amounts. The only items considered in the adjusted earnings-per-share calculation are those that management believes (1) may affect trends in underlying performance from year to year and (2) are not considered normal recurring cash operating expenses.
Adjusted earnings per share is used for forecasting and operational and strategic decision making, evaluating current company and management performance, calculating executive and employee cash bonuses, and calculating financial covenants. Management believes that excluding certain items (as listed below) from the calculation increases comparability of the metric from period to period, which makes it useful for management, the audit committee, and investors.
To calculate adjusted earnings per share, management adjusts from diluted
earnings per share (GAAP) the per-share impact, net of the tax effect of
adjustments, of the following:
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Goodwill impairment.
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Nonrecurring restructuring charges.
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Other infrequent or unusual losses and gains.
B.2.3 Free Cash Flow
Management uses free cash flow as a critical measure in the evaluation of liquidity in conjunction with related GAAP amounts. It also uses the measure when considering available cash, including for decision-making purposes related to dividends and discretionary investments. Further, it helps management, the audit committee, and investors evaluate a company’s ability to generate liquidity from operating activities.
Free cash flow is calculated by subtracting capital expenditures from cash provided by operating activities (GAAP).