1.2 Prevalence of Non-GAAP Information
1.2.1 Who Uses Non-GAAP Measures?
Non-GAAP financial measures are used commonly not only by registrants but also
by companies seeking to gain access to the U.S. capital markets through an IPO
or de-SPAC transaction. Several recent studies provide insight into the
prevalence of non-GAAP measures and how they differ from comparable GAAP
measures.
A study published by Audit Analytics noted that 97 percent of
S&P 500 companies used non-GAAP measures in earnings releases during
2017.6 Further, the number of non-GAAP measures used per filing has almost
tripled from 2.35 in 1996 to 7.45 in 2016.
In addition, a study7 published by FactSet indicated that for the fourth quarter of 2020, 77
percent of the companies in the Dow Jones Industrial Average reported non-GAAP
earnings per share and 74 percent of these companies reported non-GAAP earnings
per share that exceeded GAAP earnings per share.
A report8 analyzing the adjustments to GAAP net income to arrive at adjusted net
income noted that the most common adjustments were restructuring charges,
acquisition-related items, impairment, depreciation, amortization, and, to a
lesser extent, debt costs and legal costs (see Section 4.3 for a discussion of these and
other common adjustments). In addition, adjustments related to taxes have
increased as a result of the enactment of U.S. tax reform (see Section 4.10.1 for a
discussion of non-GAAP measures that adjust for the impact of tax reform).
Although these studies are based on different subsets of registrants, the message is clear — non-GAAP
measures are prevalent, and they generally present a more positive financial picture than their GAAP
counterparts.
1.2.2 Why Do Registrants Use Non-GAAP Measures?
Many registrants assert that non-GAAP measures are meaningful and provide
valuable insight into the information management considers important in running
the business. Registrants may believe that GAAP numbers do not provide a full
picture of their business or their results of operations and liquidity unless
they are supplemented with non-GAAP measures that they believe are useful. While
the SEC staff allows registrants to use non-GAAP measures “to tell their story,”
registrants must comply with the appropriate SEC rules and guidance and provide
appropriate disclosures.
Reasons why registrants may use non-GAAP measures include the following:
- Management compensation and incentive plans may be based on non-GAAP measures.
- Debt covenants or other requirements may be based on non-GAAP measures.
- Investors, analysts, and others may find non-GAAP information useful for a variety of reasons; for example, the information may provide meaningful insight into items affecting a company’s performance and comparability of results to others in the industry.
- Forecast and budgets used by management may be based on non-GAAP measures.
- Certain non-GAAP measures, such as EBITDA, may be used for assessing business valuations in analyses of either earnings multiples or comparable transactions.
In some situations, the SEC staff may seek to corroborate a registrant's assertion regarding the usefulness of a measure by asking about the information provided to the company's board or about which measures the company uses in financial planning. See also Section 3.4 regarding disclosure of the use and purpose of non-GAAP measures.
Footnotes
6
Audit Analytics, "Long-Term Trends in Non-GAAP
Disclosures: A Three-Year Overview" (October 10, 2018).
7
FactSet Insight, “Large Spread Between Non-GAAP
EPS and GAAP EPS for Dow 30 Continued in Q4 2020” (March 12, 2021).
8
Radical Compliance, "Non-GAAP Reporting, Popular as
Ever" (October 2, 2018).