4.4 Non-GAAP Per-Share Measures

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4.4 Non-GAAP Per-Share Measures

Item 10(e) does not specifically prohibit the presentation of non-GAAP per-share financial measures. However, footnote 1112 of the Release notes that certain non-GAAP per-share measures are specifically prohibited under GAAP and SEC rules. This prohibition applies to disclosure in documents both filed with the SEC and furnished to the SEC (such as press releases).

C&DIs — Non-GAAP Financial Measures

Question 102.05

Question: While Item 10(e)(1)(ii) of Regulation S-K does not prohibit the use of per share non-GAAP financial measures, the adopting release for Item 10(e), Exchange Act Release No. 47226, states that “per share measures that are prohibited specifically under GAAP or Commission rules continue to be prohibited in materials filed with or furnished to the Commission.” In light of Commission guidance, specifically Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data, and Accounting Standards Codification 230, are non-GAAP earnings per share numbers prohibited in documents filed or furnished with the Commission?

Answer: No. Item 10(e) recognizes that certain non-GAAP per share performance measures may be meaningful from an operating standpoint. Non-GAAP per share performance measures should be reconciled to GAAP earnings per share. On the other hand, non-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission, consistent with Accounting Series Release No. 142. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure. When analyzing these questions, the staff will focus on the substance of the non-GAAP measure and not management’s characterization of the measure. [May 17, 2016]

Prohibited per-share measures include:

Cash flow per share and other per-share measures of liquidity — Under ASC 230, “[f]inancial statements shall not report an amount of cash flow per share. Neither cash flow nor any component of it is an alternative to net income as an indicator of an entity’s performance, as reporting per-share amounts might imply.” The SEC’s guidance in ASR 142 contains a similar prohibition. Free cash flow is a liquidity measure and, therefore, per-share presentation is expressly prohibited. In addition, C&DI Question 103.02 notes that EBIT or EBITDA should not be presented on a per-share basis. The C&DI does not discuss the presentation of earnings per share on adjusted EBIT or adjusted EBITDA. The determination of whether they are acceptable may depend on the nature of the adjustment and whether the measure is clearly, in substance, a liquidity measure. See Section 4.11 for a discussion of free cash flow, and see Sections 3.5 and 4.6 for a discussion of EBIT, EBITDA, and adjusted EBIT and EBITDA.
Per-share measures derived from prohibited non-GAAP measures — While there is no explicit restriction on the presentation of non-GAAP per-share measures, other than the restriction described above, registrants are not allowed to disclose a non-GAAP per-share measure that is derived from a prohibited non-GAAP financial measure. That is, the numerator in the non-GAAP per-share measure must be a non-GAAP measure permitted by Item 10(e). See discussion below regarding the denominator.

Registrants may generally disclose other non-GAAP per-share performance measures as long as they comply with other SEC requirements for such measures (including the reconciliation to GAAP earnings per share). C&DI Question 102.05 indicates that in a registrant’s discussion of its operations, certain non-GAAP per-share performance measures “may be meaningful.” However, the C&DI also specifies that the SEC staff may challenge measures designated as performance measures that appear to be more like liquidity measures (i.e., the staff will look at the substance of the disclosure, not necessarily its form or characterization). When a performance measure can be used as a liquidity measure, per-share presentation of the measure is prohibited. See Section 3.2.2 for more information.

Registrants are reminded to comply with all disclosure requirements in Item 10(e), including the requirement to reconcile both the numerator and denominator. A reconciliation of the denominator is not necessary, however, if the denominator represents diluted shares in accordance with ASC 260. If the denominator does not represent diluted shares, registrants should use caution in presenting the measure and consider whether the resulting measure could potentially be misleading (see footnote 49 of the Release).13

Footnotes

Footnote 11 states, “While we have not included a prohibition on per share non-GAAP financial measures in Item 10 of Regulation S-K or Item 10 of Regulation S-B, per share measures that are prohibited specifically under GAAP or Commission rules continue to be prohibited in materials filed with or furnished to the Commission. See, for example, the prohibition on cash flow per share in paragraph 33 of FASB Statement No. 95, Statement of Cash Flows.”

Regulation G indicates that a non-GAAP measure should not contain “an untrue statement of a material fact” or omit material facts that would make its presentation misleading.

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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.