3.5 EBIT and EBITDA, and Adjusted EBIT and EBITDA

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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 103.02

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 103.01

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 prohibitions14 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

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.”

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.