3.5 EBIT and EBITDA, and Adjusted EBIT and EBITDA
EBIT and EBITDA are two of the most commonly used non-GAAP measures
and may be used to assess a registrant’s performance, its liquidity, or in some
cases both. See Section
3.2.2 for further discussion.
C&DI Question 103.02 provides guidance on the most directly
comparable GAAP measure for EBIT and EBITDA if they are used as a performance
measure and notes that they should not be reconciled to operating income.
C&DIs — Non-GAAP Financial Measures
Question: If EBIT or
EBITDA is presented as a performance measure, to which GAAP
financial measure should it be reconciled?
Answer: If a company
presents EBIT or EBITDA as a performance measure, such
measures should be reconciled to net income as presented in
the statement of operations under GAAP. Operating income
would not be considered the most directly comparable GAAP
financial measure because EBIT and EBITDA make adjustments
for items that are not included in operating income. In
addition, these measures must not be presented on a per
share basis. See Question 102.05. [May 17, 2016]
Registrants often make additional adjustments to EBITDA for items
such as restructuring activities or impairments, which they disclose as “adjusted
EBITDA” or in a similar manner. Any adjustments to net income beyond those described
in the traditional definition of EBIT or EBITDA create an “adjusted” non-GAAP
measure. In a manner consistent with the concepts discussed in Section 4.3.4, a registrant should not characterize
or label the non-GAAP measure as EBIT or EBITDA if the measure does not meet these
traditional definitions. Instead, the registrant should distinguish the measure from
EBIT or EBITDA by using a title such as “adjusted EBITDA.”
C&DIs — Non-GAAP Financial Measures
Question: Exchange
Act Release No. 47226 describes EBIT as “earnings before
interest and taxes” and EBITDA as “earnings before interest,
taxes, depreciation and amortization.” What GAAP measure is
intended by the term “earnings”? May measures other than
those described in the release be characterized as “EBIT” or
“EBITDA”? Does the exception for EBIT and EBITDA from the
prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K apply
to these other measures?
Answer: “Earnings”
means net income as presented in the statement of operations
under GAAP. Measures that are calculated differently than
those described as EBIT and EBITDA in Exchange Act Release
No. 47226 should not be characterized as “EBIT” or “EBITDA”
and their titles should be distinguished from “EBIT” or
“EBITDA,” such as “Adjusted EBITDA.” These measures are not
exempt from the prohibition in Item 10(e)(1)(ii)(A) of
Regulation S-K, with the exception of measures addressed in
Question 102.09. [Jan. 11, 2010]
Note that if EBIT or EBITDA are presented as liquidity measures,
they are exempt from the liquidity measure prohibitions12 under GAAP (see Section
4.5); however, they are still considered non-GAAP measures and are
subject to all required disclosures. Further, for presentations of per-share
amounts, the SEC staff considers EBIT and EBITDA to be liquidity measures;
therefore, a registrant may not disclose them on a per-share basis regardless of
whether the registrant considers them to be performance measures or liquidity
measures.
The C&DIs do not expressly prohibit the presentation of earnings
per share on adjusted EBIT and adjusted EBITDA. However, a registrant’s
determination of whether it is acceptable to present these measures on a per-share
basis may depend on the nature of the adjustments and on whether the measures are,
in substance, performance or liquidity measures. If the measures are, in substance,
liquidity measures, presentation on a per-share basis would be prohibited. See Section 4.4 for additional
information.
Footnotes
12
As noted in
Section 4.1, Regulation S-K, Item 10(e), prohibits a registrant
from excluding “charges or liabilities that required, or will require, cash
settlement, or would have required cash settlement absent an ability to
settle in another manner, from non-GAAP liquidity measures, other
than [EBIT and EBITDA]” (emphasis added), referred to as the “liquidity
measure prohibition.”