4.5 Liquidity Measure Prohibitions
Implicit in the reconciliation requirement of Item 10(e) is that a
registrant must characterize any non-GAAP financial measure in a filing as either a
liquidity measure or a performance measure. See Section 3.2.2 for a discussion of liquidity and
performance measures.
The characterization of a non-GAAP measure is important since it
dictates the disclosures required and the nature of the adjustments to the non-GAAP
measure that are permitted under Item 10. For example, a registrant is prohibited
from excluding cash charges (or charges that will in the future require cash
settlement) from a liquidity measure in information that is filed with the SEC.
(Note that this prohibition does not apply to information furnished to the SEC; see
Section 3.1 for further discussion.)
However, the Rules provide an exception to the liquidity prohibitions specifically
for EBIT and EBITDA, which, by definition, would exclude cash charges such as
interest and taxes. If the measure is a performance measure, a registrant may be
able to exclude cash or noncash charges, but it should appropriately describe the
charges excluded. The ability to eliminate recurring items from a non-GAAP
performance measure is further discussed in Section 4.7 (see also Section 4.14, which discusses certain exceptions
for material credit agreement covenants).
For additional guidance on non-GAAP per-share liquidity measures,
see the discussion in Section
4.4.