Appendix B — Sample Non-GAAP Measure Policies and Procedures | DART

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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 more information about disclosure controls and procedures and related considerations.

Title and information about the policy and procedures	[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:
References to relevant guidance	[Company to describe applicable guidance. For example:] U.S. Securities and Exchange Commission (SEC) Regulation G. SEC Regulation S-K, Item 10(e). Compliance & Disclosure Interpretations (C&DIs) on the use of non-GAAP financial measures (updated April 4, 2018). SEC Final Rule Release No. 33-8176, Conditions for Use of Non-GAAP Financial Measures.
Background and scope	[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.
Overall policy regarding non-GAAP measures	[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.
Non-GAAP measures used	[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.]
Reporting and disclosures regarding non-GAAP measures	[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.]
Procedures for calculating and reviewing non-GAAP measures	[Company to describe the process for calculating and reviewing non-GAAP measures. For example, see Section 5.1.3.]
Disclosure controls and procedures regarding non-GAAP measures	[Company to describe the disclosure controls and procedures regarding non-GAAP measures. For example, see Chapter 5.]
Procedures for changing this policy	[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.
Definitions	[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.”

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:

Operating decisions.
Strategic planning.
Annual budgeting.
Evaluating company and management performance.
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):

Interest income (all).
Interest expense (all).
Tax expense (all).
Depreciation (all).
Amortization (all).
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:

Goodwill impairment.
Nonrecurring restructuring charges.
Discontinued operations.
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).

Confidential and Proprietary — for Use Solely by Authorized Personnel

This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.