2.5 Financial Measures Required by GAAP — Segment Information
The Rules prohibit the disclosure of non-GAAP measures on the face of or in the
footnotes to the financial statements.2 However, financial measures that a registrant is required to disclose under
GAAP (such as the ASC 280 segment information regarding revenue, profit or loss, and
total assets) are not considered non-GAAP measures in the application of the Rules
even if they would otherwise meet the definition of non-GAAP measures. The most
common examples of such measures are related to segment profitability measures such
as adjusted EBITDA for each reportable segment.3
See Deloitte’s Roadmap Segment Reporting for information about the basis of
presentation of segment measures under ASC 280.
C&DIs — Non-GAAP
Financial Measures
Question: Is segment
information that is presented in conformity with Accounting
Standards Codification 280, pursuant to which a company may
determine segment profitability on a basis that differs from
the amounts in the consolidated financial statements
determined in accordance with GAAP, considered to be a
non-GAAP financial measure under Regulation G and Item 10(e)
of Regulation S-K?
Answer: No. Non-GAAP
financial measures do not include financial measures that
are required to be disclosed by GAAP. Exchange Act Release
No. 47226 lists “measures of profit or loss and total assets
for each segment required to be disclosed in accordance with
GAAP” as examples of such measures. The measure of segment
profit or loss and segment total assets under Accounting
Standards Codification 280 is the measure reported to the
chief operating decision maker for purposes of making
decisions about allocating resources to the segment and
assessing its performance.
The list of examples in Exchange Act Release
No. 47226 is not exclusive. As an additional example,
because Accounting Standards Codification 280 requires or
expressly permits the footnotes to the company’s
consolidated financial statements to include specific
additional financial information for each segment, that
information also would be excluded from the definition of
non-GAAP financial measures. [Jan. 11, 2010]
Question: Does Item
10(e)(1)(ii) of Regulation S-K prohibit the discussion in
MD&A of segment information determined in conformity
with Accounting Standards Codification 280?
Answer: No. Where a
company includes in its MD&A a discussion of segment
profitability determined consistent with Accounting
Standards Codification 280, which also requires that a
footnote to the company’s consolidated financial statements
provide a reconciliation, the company also should include in
the segment discussion in the MD&A a complete discussion
of the reconciling items that apply to the particular
segment being discussed. In this regard, see Financial
Reporting Codification Section 501.06.a, footnote 28. [Jan.
11, 2010]
At the 2016 AICPA Conference, the SEC staff discussed an example of an elective
form of segment disclosures that would be subject to the non-GAAP rules. The staff
noted that a registrant should not voluntarily expand its segment footnote in the
financial statements to provide a non-GAAP measure of profit or loss in instances in
which the CODM uses both a GAAP measure and a non-GAAP measure. ASC 280-10-50-28
indicates that if more than one measure of segment profit or loss is used by the
CODM (e.g., operating income calculated in accordance with GAAP and adjusted
EBITDA), the measures that should be reported in the segment footnote are those that
are more consistent with GAAP.4 Therefore, any such additional measure (e.g., adjusted EBITDA) would not be
required by GAAP and thus would be within the scope of the Rules.
Example 2-1
A registrant with multiple segments reports two measures of segment profitability to its CODM: GAAP operating income and a non-GAAP measure, adjusted EBITDA. Although the CODM uses both to measure performance and allocate resources, the registrant should disclose the GAAP measure — operating income — in the footnotes to the financial statements. Adjusted EBITDA would be considered a non-GAAP measure. The registrant may discuss adjusted EBITDA at the segment level in MD&A (see Section 2.5.1), but such disclosure would be subject to the Rules, including all required disclosures.
Further, if a registrant with only one reportable segment voluntarily elects to
disclose, in the footnotes to its financial statements, a measure of profit or loss
that is evaluated by the CODM, such a measure would also be subject to the Rules
because the measure is not required by GAAP. As discussed above, the Rules prohibit
the disclosure of non-GAAP measures in the footnotes unless the measure is
“required” to be disclosed under GAAP. Therefore, an entity with one reportable
segment should not disclose in the notes to its financial statements a non-GAAP
measure of segment profit and loss, even if the measure is reviewed by the CODM or
its disclosure is believed to be beneficial to readers.
Example 2-1A
A registrant has a single reportable segment but reports its performance measure — adjusted EBITDA — to its CODM. The registrant would be prohibited from voluntarily presenting adjusted EBITDA as part of its segment footnote since such disclosure is not required by GAAP and is therefore subject to the prohibition against including non-GAAP amounts in the financial statements. However, the registrant could present adjusted EBITDA in MD&A, subject to any requirements under the Rules, including the required disclosures (e.g., the reconciliation).
2.5.1 Segment Profit or Loss Measures Outside the Footnotes
A measure of segment profit or loss, or of segment liquidity that is not consistent with the requirements of ASC 280, is a non-GAAP measure and subject to the requirements of the Rules.
C&DIs — Non-GAAP
Financial Measures
Question: Is a
measure of segment profit/loss or liquidity that is not
in conformity with Accounting Standards Codification 280
a non-GAAP financial measure under Regulation G and Item
10(e) of Regulation S-K?
Answer: Yes.
Segment measures that are adjusted to include amounts
excluded from, or to exclude amounts included in, the
measure reported to the chief operating decision maker
for purposes of making decisions about allocating
resources to the segment and assessing its performance
do not comply with Accounting Standards Codification
280. Such measures are, therefore, non-GAAP financial
measures and subject to all of the provisions of
Regulation G and Item 10(e) of Regulation S-K. [Jan. 11,
2010]
Example 2-2
Assume that Company X’s segment earnings measure for resource allocation and performance assessment purposes is “adjusted EBITDA.” Such amount is disclosed in the notes to the financial statements under ASC 280 and is therefore not subject to the Rules. If, however, X further adjusts each segment’s adjusted EBITDA in its MD&A by excluding additional items such as restructuring costs, the resulting amounts do not comply with ASC 280, and the “as further revised” adjusted EBITDA is subject to the Rules.
As noted above, financial information (e.g., segment profit or loss for each
reportable segment) that must be disclosed under GAAP is not a non-GAAP measure.
This is true even if, for example, the measure would otherwise be considered a
non-GAAP measure, such as adjusted EBITDA. On the other hand, the presentation
of the total non-GAAP segment profit or loss measure, revenues, or assets on a
consolidated basis outside the footnotes (e.g., MD&A) is considered a
non-GAAP measure. For example, if the registrant’s measure of segment
profitability is adjusted EBITDA, and adjusted EBITDA for all of the segments
combined is disclosed outside the financial statements, total adjusted EBITDA is
a non-GAAP measure and therefore Item 10(e) would apply to the disclosures in
MD&A (see Example
2-3 for further illustration).5
C&DIs — Non-GAAP
Financial Measures
Question: In the
footnote that reconciles the segment measures to the
consolidated financial statements, a company may total
the profit or loss for the individual segments as part
of the Accounting Standards Codification 280 required
reconciliation. Would the presentation of the total
segment profit or loss measure in any context other than
the Accounting Standards Codification 280 required
reconciliation in the footnote be the presentation of a
non-GAAP financial measure?
Answer: Yes. The
presentation of the total segment profit or loss measure
in any context other than the Accounting Standards
Codification 280 required reconciliation in the footnote
would be the presentation of a non-GAAP financial
measure because it has no authoritative meaning outside
of the Accounting Standards Codification 280 required
reconciliation in the footnotes to the company’s
consolidated financial statements. [Jan. 11, 2010]
Example 2-3
Assume that Company X has three reportable segments and includes the appropriate
segment disclosures in its notes to the financial
statements in accordance with ASC 280. Company X’s
measure of segment profitability is adjusted EBITDA. The
following is an excerpt from X’s segment footnote, which
shows its segment measure of profitability (i.e.,
adjusted EBITDA) reconciled to income before income
taxes:
Adjusted EBITDA at the segment level (i.e., separately for segments A, B, and C) is not considered a non-GAAP measure under the Rules when discussed in MD&A, whereas the total segment-adjusted EBITDA at the consolidated level is considered a non-GAAP measure and is subject to the Rules if presented in MD&A or elsewhere outside the financial statements. In this example, if total segment-adjusted EBITDA is presented in MD&A, it would be subject to the Rules and would need to be identified as a non-GAAP measure, and all of the appropriate disclosures would need to be provided.
2.5.2 Disclosure of Product and Service Revenues
ASC 280 also requires registrants to disclose in the notes to the financial statements revenues for “each product and service or each group of similar products and services unless it is impracticable to do so.” In MD&A, registrants often include such similar disclosures about revenues on a disaggregated basis by products and services. These are not considered non-GAAP measures.
C&DI Question 104.05 describes a situation in which a registrant presents a table that breaks down revenues by certain products but does not sum these amounts to the revenue amount presented in its financial statements. If the product revenue amounts are calculated in accordance with GAAP and are not adjusted, the information presented in the table is not considered a non-GAAP financial measure.
C&DIs — Non-GAAP
Financial Measures
Question:
Company X presents a table illustrating a breakdown of
revenues by certain products, but does not sum this to
the revenue amount presented on Company X’s financial
statements. Is the information in the table considered a
non-GAAP financial measure under Regulation G and Item
10(e) of Regulation S-K?
Answer: No,
assuming the product revenue amounts are calculated in
accordance with GAAP. The presentation would be
considered a non-GAAP financial measure, however, if the
revenue amounts are adjusted in any manner. [Jan. 11,
2010]
Example 2-4
Assume that in accordance with ASC 280-10-50-40, Company X includes in its notes to the financial statements product revenues from external customers for three different types of products as part of its segment disclosures. In addition, X discusses in MD&A its revenue by products in accordance with the presentation in its segment notes but also presents product revenue by type of customer served, as reflected in the following table:
Company X uses GAAP to calculate revenues for products A, B, and C. When discussed in MD&A, these revenue amounts are not considered non-GAAP measures even if X does not sum the total of these products to the revenue amount presented in its financial statements. However, revenues from products A, B, and C that are adjusted from the amounts presented above are considered a non-GAAP measure if they are presented in MD&A or elsewhere outside the financial statements.
Footnotes
2
See Section 4.1 for a list of prohibitions, including the
prohibition against presenting “non-GAAP financial measures on the face of
the registrant’s financial statements prepared in accordance with GAAP or in
the accompanying notes.”
3
See also footnote 19 of the Release, which states that ASC
280 “requires that companies report a measure of profit or loss and total
assets for each reportable segment. This tabular information is presented in
a note to the audited financial statements and is required to be reconciled
to the GAAP measures, with all significant reconciling items separately
identified and described. A registrant is required to provide a Management’s
Discussion & Analysis of segment information if such a discussion is
necessary to an understanding of the business. Such discussion would
generally include the measures reported under [ASC 280].”
4
As discussed in Section 4.4.2 of Deloitte’s Roadmap
Segment
Reporting, in certain instances, a CODM may use
multiple measures of profit or loss or assets. In such cases, the measures
presented should be those that most closely reflect the measurement
principle applied to the consolidated financial statements.
5
See also Section 6.4 of Deloitte's Roadmap
Segment
Reporting for considerations related to SEC
guidance on non-GAAP measures.