4.7 Performance Measure Prohibitions
Many registrants adjust GAAP earnings for items they consider to be
one-time, nonrecurring, infrequent, or unusual, such as restructuring charges, asset
impairments, and gains and losses on asset sales. Depending on the description of
the item, these same items may be a prohibited adjustment for a non-GAAP performance
measure. Item 10(e) prohibits registrants from adjusting a non-GAAP performance
measure “to eliminate or smooth items identified as non-recurring, infrequent or
unusual, when the nature of the charge or gain is such that it is reasonably likely
to recur within two years or there was a similar charge or gain within the prior two
years.” C&DI Question 102.03 clarifies that a charge or gain may be presented as
an adjustment as long as it is not inappropriately labeled or described as
nonrecurring, infrequent, or unusual when it is not.
C&DIs — Non-GAAP Financial Measures
Question: Item 10(e)
of Regulation S-K prohibits adjusting a non-GAAP financial
performance measure to eliminate or smooth items identified
as non-recurring, infrequent or unusual when the nature of
the charge or gain is such that it is reasonably likely to
recur within two years or there was a similar charge or gain
within the prior two years. Is this prohibition based on the
description of the charge or gain, or is it based on the
nature of the charge or gain?
Answer: The
prohibition is based on the description of the charge or
gain that is being adjusted. It would not be appropriate to
state that a charge or gain is non-recurring, infrequent or
unusual unless it meets the specified criteria. The fact
that a registrant cannot describe a charge or gain as
non-recurring, infrequent or unusual, however, does not mean
that the registrant cannot adjust for that charge or gain.
Registrants can make adjustments they believe are
appropriate, subject to Regulation G and the other
requirements of Item 10(e) of Regulation S-K. See Question
100.01. [May 17, 2016]
Thus, if management concludes that an adjustment to a non-GAAP
performance measure is appropriate, but that the adjustment is reasonably likely to
recur within two years or there was a similar charge in the last two years, it may
adjust the non-GAAP performance measure (subject to Regulation G and the other
requirements in Item 10(e)) but may not describe the adjustment as nonrecurring,
infrequent, or unusual because it does not meet the specified criteria.
Example 4-2
A registrant reflects an impairment charge
in its 20X0 statement of operations that it believes is an
appropriate adjustment to its non-GAAP performance measure.
Management believes that it is reasonably likely that an
impairment will recur within one of the next two years.
Management may adjust the non-GAAP performance measure for
the impairment charge but may not label it or describe it in
a note as nonrecurring, infrequent, or unusual since it does
not meet the criteria in Item 10(e).