An overriding theme of the SEC’s guidance on the use of or references to non-GAAP measures in public statements or disclosures is that they should not be misleading, whether such measures are used in a filing (e.g., Form 10-K) or elsewhere (e.g., press release). As described in Section 100 of the C&DIs, non-GAAP measures that could mislead investors include those that:
- Exclude normal, recurring cash operating expenses necessary for business operations (see Section 4.3.1).
- Are presented inconsistently between periods, such as by adjusting an item in the current reporting period, but not a similar item in the prior period, without appropriate disclosure about the change and an explanation of the reasons for it (see Section 3.6.3).
- Exclude certain nonrecurring charges but do not exclude nonrecurring gains (e.g., “cherry picking” non-GAAP adjustments to achieve the most positive measure; see Section 3.6.2).
- Are based on individually tailored accounting principles, including certain adjusted revenue measures (see Section 4.3.3).
Are mislabeled or not clearly labeled as non-GAAP measures or otherwise include adjustments that are not clearly or accurately labeled or described (see Section 4.3.4).
ROIC measures are sometimes adjusted in this manner. Registrants often estimate the depreciation expense included in the non-GAAP measure by multiplying operating lease expense by a factor (e.g., rent expense multiplied by a factor of 6) to arrive at an estimated asset base to use in calculating the depreciation adjustment.
The SEC’s position related to measures that use pro rata consolidation was clarified at the National Association of Real Estate Investment Trusts (NAREIT) Senior Financial Officer Workshop on September 27, 2016, at which “a Division staff member communicated this position.” An October 18, 2016, NAREIT alert, Further Guidance on Pro-Rata Reporting of Non-GAAP Financial Measures and Metrics, explains the staff’s position on pro rata consolidation and discusses certain other alternative presentations that may not violate the non-GAAP measure rules.