4.9 Non-GAAP Measures That Exclude Depreciation and Amortization From Cost of Sales
Under Regulation S-X, Rule 5-03, although a subtotal line item for
gross margin (or for a similar measure such as gross profit) is not required on the
face of the income statement, many registrants present this subtotal.
SAB Topic
11.B addresses the inclusion of depreciation and amortization in cost
of sales and states, in part:
If cost of sales or operating
expenses exclude charges for depreciation, depletion and amortization of
property, plant and equipment, the description of the line item should read
somewhat as follows: “Cost of goods sold (exclusive of items shown separately
below)” or “Cost of goods sold (exclusive of depreciation shown separately
below).” [D]epreciation, depletion and amortization should not be positioned in
the income statement in a manner which results in reporting a figure for income
before depreciation.
Further, SAB Topic 11.B indicates that if a registrant presents a
subtotal for such a measure, it should not exclude depreciation and amortization,
because doing so would result in the presentation of a “figure for income before
depreciation.”
Certain registrants do not present a gross margin subtotal on the
face of the income statement but instead discuss this measure in MD&A. This
practice has been frequently observed in the public utility and oil and gas
industries, but it is not limited to those sectors. The SEC staff expects such
registrants to (1) disclose that the measures are non-GAAP financial measures if
they exclude depreciation and amortization from cost of sales and (2) consider the
disclosure requirements in Item 10(e). The SEC staff has reminded registrants that
non-GAAP measures of gross margin should be presented in a balanced manner and
reconciled to the appropriate nearest GAAP measure.