2.1 Definition of a Non-GAAP Measure

In addition, the Release states that the definition of a non-GAAP financial measure is intended to “capture all measures that have the effect of depicting either:

• [A] measure of performance that is different from that presented in the financial statements, such as income or loss before taxes or net income or loss, as calculated in accordance with GAAP; or
• [A] measure of liquidity that is different from cash flow or cash flow from operations computed in accordance with GAAP.”

If a registrant takes a commonly understood or defined GAAP amount and removes a component of that amount that is also presented in the financial statements, the resulting amount is generally considered a non-GAAP measure. As a simplified example, if a registrant discloses net income less restructuring charges and loss on debt extinguishment (having determined all amounts in accordance with GAAP), the resulting performance amount, which may be labeled “Adjusted Net Income,” is a non-GAAP measure subject to the Rules. Adjusted Net Income “excludes amounts . . . that are included in the . . . measure calculated and presented in accordance with GAAP in the statement of income” and would be considered a “measure of performance that is different from that presented in the financial statements.”

A registrant may present a table in MD&A that lists, in a balanced manner, the significant income and expense items that have affected comparability for the periods presented. The amounts in the table would not be considered non-GAAP measures unless they were subtotaled to a non-GAAP amount or used to derive an adjusted income non-GAAP measure. For example, the registrant in the example above may want to separately disclose the impact that certain significant expense items, such as a $6 million restructuring charge and a $4 million loss on debt extinguishment, had on the current fiscal year’s net income of $50 million compared with the prior year. If the registrant includes a table that lists the restructuring charge and loss on debt extinguishment amounts, and discusses narratively that net income excluding the impact of the restructuring charge and loss on debt extinguishment is $60 million, the resulting $60 million amount is a non-GAAP measure. If the registrant discloses that net income of $50 million includes a restructuring charge of $6 million and loss on debt extinguishment of $4 million and does not “do the math,” these amounts are not considered non-GAAP measures.

Note that the Release states that a non-GAAP measure that would otherwise be prohibited will be permitted in an FPI’s filing “if the measure is (1) required or expressly permitted by the standard-setter that establishes the generally accepted accounting principles used in the [FPI’s] primary financial statements and (2) included in the [FPI’s] annual report or financial statements used in its home country jurisdiction or market.”

This exception applies only to situations in which the foreign organization affirmatively acts to require or permit the measure; it is not intended to apply to circumstances in which the measure was merely not prohibited. Further, while such measures are not prohibited, footnote 41 of the Release confirms that Item 10(e)’s disclosure and other requirements apply to such measures.

See Section 1.4.3 of this Roadmap and Chapter 5 of Deloitte's Roadmap SEC Comment Letter Considerations, Including Industry Insights for more considerations related to FPIs. Further, FPIs should consider the SEC’s guidance on disclosing metrics and KPIs, which is discussed in Section 2.4.