Chapter 4 — Non-GAAP Measures That May Be Misleading or Prohibited and Other Considerations Related to Common Non-GAAP Measures

4.11 Presentation of Free Cash Flow

Free cash flow is a non-GAAP measure, commonly defined as cash flows from operating activities as presented in the statement of cash flows less capital expenditures. According to C&DI Question 102.07, the measure does not violate the liquidity measure prohibition of Item 10(e) even though some of the capital expenditures may have been or will be paid in cash. In addition to capital expenditures, other adjustments may also be used to derive free cash flow. C&DI Question 102.07 notes that the measure is not uniformly defined, and its title does not describe how it is calculated. Therefore, registrants must clearly describe how free cash flow is calculated and disclose the other information required by Item 10(e), including a reconciliation. Further, registrants that make other adjustments to cash flows from operating activities in addition to adjustments for capital expenditures should ensure that the resulting non-GAAP measure is appropriately labeled and clearly described. For example, registrants should label the measure as “adjusted” or “non-GAAP” free cash flow to distinguish it from a measure calculated in a manner consistent with the common definition of free cash flow. See Section 4.3.4 for further discussion.

C&DIs — Non-GAAP Financial Measures

Question 102.07

Question: Some companies present a measure of “free cash flow,” which is typically calculated as cash flows from operating activities as presented in the statement of cash flows under GAAP, less capital expenditures. Does Item 10(e)(1)(ii) of Regulation S-K prohibit this measure in documents filed with the Commission?

Answer: No. The deduction of capital expenditures from the GAAP financial measure of cash flows from operating activities would not violate the prohibitions in Item 10(e)(1)(ii). However, companies should be aware that this measure does not have a uniform definition and its title does not describe how it is calculated. Accordingly, a clear description of how this measure is calculated, as well as the necessary reconciliation, should accompany the measure where it is used. Companies should also avoid inappropriate or potentially misleading inferences about its usefulness. For example, “free cash flow” should not be used in a manner that inappropriately implies that the measure represents the residual cash flow available for discretionary expenditures, since many companies have mandatory debt service requirements or other non-discretionary expenditures that are not deducted from the measure. Also, free cash flow is a liquidity measure that must not be presented on a per share basis. See Question 102.05. [May 17, 2016]

Since free cash flow is presumed to be a liquidity measure, registrants would be prohibited from disclosing free cash flow per share. See the discussion of non-GAAP per-share measures in Section 4.4.

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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.