3.3 Presentation of Equal or Greater Prominence
Under Item 10(e), if a registrant presents a non-GAAP measure, it should present
the most directly comparable GAAP measure with “equal or greater prominence.”
C&DI Question
102.10 provides examples illustrating when the presentation of a
non-GAAP measure may be more prominent than the comparable GAAP measure. The SEC
continues to issue comments when a registrant presents its non-GAAP measures more
prominently than its GAAP measures, so registrants should continue to be mindful not
to present non-GAAP measures with undue prominence.
As discussed in Section 4.3 on potentially misleading non-GAAP measures, the SEC has brought enforcement actions against registrants related to their non-GAAP measures. For example, in 2018, the SEC brought an action against a registrant for failing to give equal or greater prominence to comparable GAAP measures in certain press releases. In this case, the SEC asserted that the registrant disclosed non-GAAP measures, such as adjusted net income and net income per share, more prominently than the comparable GAAP measures related to net loss amounts.
Changing Lanes
In December 2022, the SEC updated C&DI Question 102.10
(presented below), which provides guidance on when a non-GAAP measure is
more prominent than the corresponding GAAP measure, to add additional
interpretive guidance in three subsections:
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C&DI Question 102.10(a), which highlights the scope of what is considered undue prominence and includes refreshed examples of situations in which non-GAAP measures would be disclosed more prominently than the comparable GAAP measures. Those include presenting (1) ratios when a non-GAAP measure is used in the numerator, denominator, or both without disclosing the equivalent GAAP ratio or (2) charts, tables, or graphs of non-GAAP measures without disclosing the comparable GAAP measures.At the 2022 AICPA Conference, Division Chief Accountant Lindsey McCord noted that footnote 27 of the SEC’s original final rule on the conditions for the use of non-GAAP financial measures (issued in 2003) already extended the non-GAAP requirements to each non-GAAP measure used in the calculation of a ratio, but the guidance in the C&DI serves as an additional reminder for registrants that the GAAP counterpart should also be presented.
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C&DI Question 102.10(b), which provides examples of situations in which non-GAAP reconciliations may give undue prominence to a non-GAAP measure. The SEC staff has stressed that non-GAAP reconciliations should always begin with the most directly comparable GAAP measure and reconcile down to the non-GAAP measure.
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C&DI Question 102.10(c), which specifies that a non-GAAP income statement would include all or most of the line items and subtotals contained in a comparable GAAP income statement. Before being updated, C&DI Question 102.10 indicated that disclosing a “full income statement of non-GAAP measures” would be an example of a non-GAAP measure that is presented with undue prominence. Ms. McCord noted that issuers often had questions about the meaning of the term “full” in that context, so the guidance was updated to delete the term “full.”
C&DIs — Non-GAAP
Financial Measures
Question 102.10(a):
Item 10(e)(1)(i)(A) of Regulation S-K requires that when a
registrant presents a non-GAAP measure it must present the
most directly comparable GAAP measure with equal or greater
prominence. This requirement applies to non-GAAP measures
presented in documents filed with the Commission and also
earnings releases furnished under Item 2.02 of Form 8-K. Are
there examples of disclosures that would cause a non-GAAP
measure to be more prominent?
Answer: Yes. This
requirement applies to the presentation of, and any related
discussion and analysis of, a non-GAAP measure. Whether a
non-GAAP measure is more prominent than the comparable GAAP
measure generally depends on the facts and circumstances in
which the disclosure is made. The staff would consider the
following to be examples of non-GAAP measures that are more
prominent than the comparable GAAP measures:
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Presenting an income statement of non-GAAP measures. See Question 102.10(c).
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Presenting a non-GAAP measure before the most directly comparable GAAP measure or omitting the comparable GAAP measure altogether, including in an earnings release headline or caption that includes a non-GAAP measure.
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Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence.
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Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font, etc.) that emphasizes the non-GAAP measure over the comparable GAAP measure.
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Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure.
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Presenting charts, tables or graphs of . . . non-GAAP financial measures without presenting charts, tables or graphs of the comparable GAAP measures with equal or greater prominence, or omitting the comparable GAAP measures altogether.
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Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. [December 13, 2022]
Question 102.10(b): Are there examples of disclosures
that would cause the non-GAAP reconciliation required by
Item 10(e)(1)(i)(B) of Regulation S-K to give undue
prominence to a non-GAAP measure?
Answer: Yes. The staff would consider the following
examples of disclosure of non-GAAP measures as more
prominent than the comparable GAAP measures:
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Starting the reconciliation with a non-GAAP measure;
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Presenting a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures. See Question 102.10(c); and
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When presenting a forward-looking non-GAAP measure, a registrant may exclude the quantitative reconciliation if it is relying on the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K. A measure would be considered more prominent than the comparable GAAP measure if it is presented without disclosing reliance upon the exception, identifying the information that is unavailable, and its probable significance in a location of equal or greater prominence. [December 13, 2022]
Question 102.10(c): The staff considers the
presentation of a non-GAAP income statement, alone or as
part of the required non-GAAP reconciliation, as giving
undue prominence to non-GAAP measures. What is considered to
be a non-GAAP income statement?
Answer: The staff considers a non-GAAP income
statement to be one that is comprised of non-GAAP measures
and includes all or most of the line items and subtotals
found in a GAAP income statement. [December 13, 2022]
In assessing prominence, a registrant should consider, among other items, the
order of presentation, degree of emphasis, style of presentation, and volume of
disclosures in a filing. As noted above, since the SEC staff’s publication of the
updated C&DIs on non-GAAP measures, C&DI Question 102.10 has been a leading
source of SEC comments on such measures. Accordingly, it may be helpful for a
registrant to note the following:
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If GAAP and non-GAAP measures are presented in a particular section of a document, the GAAP measures should be presented before the non-GAAP measures. For example, if a registrant wants to use certain non-GAAP measures in its discussion of results of operations, it should discuss the GAAP results before the non-GAAP measures.
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When a registrant reconciles a non-GAAP measure to the most comparable GAAP measure, it should start with the GAAP measure (see Section 3.2).
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The registrant should not present a non-GAAP measure in more detail, or emphasize it more, than the comparable GAAP measure. For example, use of phrases such as “exceptional” or “record” in a discussion of the non-GAAP measure would place undue emphasis on that measure if such phrases were not used to describe the comparable GAAP measure.
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The disclosures related to non-GAAP purpose and use should not state or imply that the non-GAAP measures are superior to, provide better information about, or more accurately represent the results of operations than GAAP measures (see Section 3.4).
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Certain presentations that give undue prominence to non-GAAP information, such as a non-GAAP income statement, are prohibited (see the separate discussion below).
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The registrant should not present charts or graphics of trends in a non-GAAP measure without presenting the same charts or graphics for the comparable GAAP measure first.
Finally, as noted above, if a registrant presents forward-looking non-GAAP financial measures, it should
provide a quantitative reconciliation unless it qualifies for the “unreasonable efforts” exception in
Regulation G and Item 10(e). A registrant that qualifies for the exception should disclose that fact in a
prominent location, identify the information that is not available, and indicate the probable significance
of this information.
3.3.1 Non-GAAP Income Statement
As noted in C&DI Question 102.10 (see Section 3.3), the SEC generally prohibits the
presentation of a non-GAAP income statement in documents filed with or furnished
to the SEC, including quarterly and annual earnings press releases furnished on
Form 8-K.
In certain circumstances, a registrant may want to present a non-GAAP income
statement in a columnar form that adjusts many (or all) of the line items from
the GAAP comparable amounts. For example, such a presentation may occur in a
reconciliation of non-GAAP measures or in a constant-currency income statement.
A registrant should consider whether this presentation would give the appearance
of a non-GAAP income statement. The SEC staff believes that a non-GAAP income
statement creates multiple non-GAAP measures and may result in the inappropriate
impression that the non-GAAP income statement is being presented on a
comprehensive basis of accounting. A registrant may want to first consider which
specific non-GAAP measures are useful to investors and then assess whether to
present and disclose those various individual non-GAAP measures as an
alternative to presenting a non-GAAP income statement. The registrant should
consider separately presenting and reconciling each individual measure, and
should disclose, for each measure, the reasons why the measure is useful to an
investor as well as any other appropriate non-GAAP information.
It is important for a registrant to balance (1) its need to provide a clear,
understandable reconciliation of non-GAAP measures to the most directly
comparable GAAP measures with (2) its consideration of whether its
reconciliation appears to be a non-GAAP income statement that is based on its
GAAP financial statements.
Example 3-1
Company C presented a summary of its statement of operations in its first
quarter 20X1 earnings release. To arrive at its
“ongoing” operations, C presented its line items on a
GAAP as-reported basis as well as adjustments to various
expense items that it believes should be excluded.
Although not all line items from the historical
statement of operations in the “as-reported” column have
been adjusted, the presentation includes all or most of
the line items and subtotals found in a GAAP income
statement, which may represent a non-GAAP income
statement and could be prohibited: