1.1 Overview and History of the SEC’s Guidance on Non-GAAP Measures and Metrics
The SEC’s written guidance on non-GAAP financial measures has been
in existence for many years. During this time, the SEC staff has periodically issued
new and updated guidance on the use and disclosure of such measures or informally
communicated its views in speeches and comments at various forums. The graphic below
illustrates key events in the evolution of the SEC’s guidance on these measures and
is followed by a discussion of each event.
In December 2001, the SEC issued Release
33-8039, which provides cautionary advice to registrants about
including “pro forma” non-GAAP financial information in their press releases. The
SEC reminded registrants that the antifraud provisions of the federal securities
laws apply when pro forma information is contained in earnings releases.
The SEC’s cautionary advice was followed by its adoption in 2003, in
accordance with a mandate under the Sarbanes-Oxley Act of 2002, of the following
rules (the “Rules”) on the conditions for use of non-GAAP financial measures, as
described in SEC
Final Rule 33-8176 (the "Release"):
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Regulation G, which contains general rules requiring registrants to provide certain information whenever they disclose or release non-GAAP financial measures. Regulation G did not affect the applicability of the general antifraud standards to non-GAAP disclosure, and it established a separate basis in securities law for SEC enforcement actions.1
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Amendments to Regulation S-K, Item 10, and Exchange Act2 Form 20-F, which provide guidance on non-GAAP measures included in SEC filings.
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Amendments that require registrants to furnish to the SEC, on Exchange Act Form 8-K, earnings releases or similar announcements, with furnished press releases also having to comply with Item 10(e)(1)(i).
The Rules and the Release are referred to frequently throughout this
Roadmap. For guidance on how the Rules apply in specific circumstances, see Appendix D.
Also in 2003, the SEC staff published 33 FAQs3 interpreting certain aspects of the Rules in an attempt to help registrants
and others comply with and understand them.
Several years later, the SEC staff announced at the 2009 AICPA
Conference on Current SEC and PCAOB Developments (the “AICPA Conference”) that it
was revisiting its rules and FAQs to ensure that registrants were not omitting key
information from their filings. While registrants frequently included non-GAAP
measures in their press releases, the SEC staff was concerned that many had been
reluctant to use them in filed documents because of restrictions specified in the
FAQs. Although the SEC staff did not amend the Rules, in 2010, it replaced the
interpretive guidance in the FAQs with the C&DIs4 that exist (as updated) today.5
The C&DIs were intended to give registrants more flexibility to
disclose such measures in filings with the SEC. For example, one notable
clarification was that the prohibition in Item 10(e) against adjustments to a
non-GAAP performance measure for nonrecurring, infrequent, and unusual items is
based on the description and labeling of the charge or gain rather than on the
underlying nature of the amount.
After the issuance of the C&DIs, the SEC staff continued to
question registrants about non-GAAP measures; however, the staff focused on clear
labeling and descriptions of the measures and adjustments, nonboilerplate
discussions of their usefulness to investors and how management uses them, and
similar disclosures.
Beginning in late 2015, SEC officials started discussing non-GAAP
measures at various public venues, prompted in part by concerns about companies’
extensive use of these measures. Press coverage increased as well, sometimes
focusing on a specific registrant’s use of non-GAAP measures and other times
concentrating more broadly on the propriety and usefulness of non-GAAP measures for
a wide variety of industries.
The SEC renewed its focus on non-GAAP measures as a result of
several factors, including (1) the increased use and prominence of such measures,
(2) the nature of the adjustments, and (3) the increasingly large difference between
the amounts reported for GAAP and non-GAAP measures. Concerns about such factors had
increased given that non-GAAP measures should supplement the GAAP information in the
financial statements rather than supplant such information.
In response to these increasing concerns about the use of non-GAAP
measures, in May 2016, the SEC issued new and updated C&DIs to provide
additional guidance on what it expects from registrants when using these measures.
The SEC staff noted its expectation that the updated C&DIs would promote changes
in the use of non-GAAP measures, particularly related to potentially misleading
measures and undue prominence placed on such measures, as well as compliance with
other presentation and disclosure requirements.
In October 2017 and April 2018, the SEC staff updated and added
certain C&DIs on non-GAAP financial measures associated with business
combinations that addressed whether financial measures in forecasts provided to
financial advisers, boards of directors, or bidders and used in connection with a
business combination transaction constitute non-GAAP measures. See Section 2.6.3 for information
about non-GAAP measures related to business combination transactions.
Many registrants also disclose the metrics and KPIs used to manage
their business. To provide guidance on such disclosures, the SEC in January 2020
issued an interpretive release (see discussion in Section 2.4.1) that
highlights disclosure considerations related to metrics and KPIs and addresses the
application of the existing MD&A rules to them. For more information about
metrics and KPIs, see Section
2.4.
On December 13, 2022, in response to a high volume of SEC comments
and questions from issuers, the SEC issued new and updated
C&DIs to provide additional interpretive guidance related to
how the SEC staff evaluates non-GAAP measures. These C&DIs provide greater
insight into, and examples of, (1) normal, recurring cash operating expenses and how
the exclusion of such expenses could be misleading; (2) individually tailored
accounting; (3) inappropriate labeling and unclear descriptions; (4) whether
non-GAAP measures can be misleading even when accompanied by detailed disclosures;
and (5) when a non-GAAP measure is more prominent than a GAAP measure.
Footnotes
1
Regulation G indicates that “[a] registrant . .
. shall not make public a non-GAAP financial measure that, taken
together with the information accompanying that measure and any
other accompanying discussion of that measure, contains an
untrue statement of a material fact or omits to state a material
fact necessary in order to make the presentation of the non-GAAP
financial measure, in light of the circumstances under which it
is presented, not misleading.”
2
Securities Exchange Act of 1934.
3
Frequently Asked Questions Regarding the Use of Non-GAAP
Measures (superseded).
4
C&DIs are not rules, regulations, or statements of the
SEC; instead, they provide general guidance on the views of the SEC staff on
a variety of issues.