1.1 Overview and History of the SEC's Guidance on Non-GAAP Measures and Metrics

In December 2001, the SEC issued Release 33-8039, which provided 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”):

• 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
• Amendments to Regulation S-K, Item 10, and Exchange Act2 Form 20-F, which provide guidance on non-GAAP measures included in SEC filings.
• 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. In addition, the C&DIs eliminated the requirement addressed in the FAQs related to disclosing the economic substance of management’s decision to use such a measure and any limitations, including how management compensates for those limitations, associated with that use compared with the use of the most directly comparable GAAP financial measure.

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 were intended to supplement the GAAP information in the financial statements rather than supplant it.

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.