4.2 MD&A Considerations Related to Prohibited Disclosures
Regulation S-K, Item 303, provides guidance on the information a registrant should consider providing in
its MD&A. A registrant is generally required to quantify, discuss, and analyze in its MD&A material items
that affect the registrant’s results of operations (e.g., material charges regardless of whether they are
recurring or nonrecurring items).
As discussed in Section 2.1, depending on the way a registrant discloses material changes in MD&A, the
disclosure may or may not be a non-GAAP measure. For example, a registrant may want to disclose the
effect of a cash legal settlement on operating cash flows. Disclosure of an amount for “operating
cash flows before legal settlement” would be a non-GAAP measure, and the registrant would need
to consider the prohibition against excluding charges that required cash settlement from non-GAAP
liquidity measures. If, however, the registrant disclosed GAAP operating cash flows and noted that the
amount was significantly affected by the $XX payment of the legal settlement, those amounts individually
are not considered non-GAAP measures, and the disclosure would therefore not be subject to the
prohibition discussed above.
A registrant is also generally permitted to disclose in MD&A the individual
effect of otherwise prohibited non-GAAP performance adjustments on GAAP earnings and
earnings per share, such as by showing the per-share impact of a significant charge
or gain. For example, the interpretative response to Question 3 of SAB Topic 5.P states, in
part:
Discussions in MD&A and elsewhere which quantify
the effects of unusual or infrequent items on net income and earnings per share
are beneficial to a reader’s understanding of the financial statements and are
therefore acceptable.
Such discussions may be necessary and appropriate in MD&A for a registrant
to be able to analyze the impact of unusual or infrequent items, provided that the
registrant maintains the proper context and balance. However, if the registrant
“does the math” and presents a total earnings measure or related per-share total
excluding the unusual or infrequent item, it must consider all of the applicable
non-GAAP rules.