5.2 Auditor Responsibility for Non-GAAP Measures
Because the Rules do not permit registrants to include non-GAAP financial
information in their financial statements or in the notes thereto, the external
auditor’s opinion does not cover such information (i.e., it is not subject to
audit). Accordingly, the auditor’s responsibility with respect to non-GAAP financial
information is limited. As discussed in Section
2.5.2, the measure of segment profit or loss that a company must
disclose for each of its reportable segments in accordance with ASC 280 is not
considered a non-GAAP measure under the Rules, even if the measure would otherwise
meet the definition of a non-GAAP measure. However, at the 2023 AICPA Conference,
the SEC staff communicated its view that if a company voluntarily discloses segment
profitability measures in addition to the measure it is required to disclose and
those additional measures have not been calculated in accordance with GAAP, the
additional measures would be considered non-GAAP measures under the Rules. See
Section 5.2.1 for further discussion.
In general, when registrants include other information, such as a non-GAAP measure,
in a document containing financial statements covered by the auditor’s report,
professional auditing standards require the auditor to read the other information
and consider whether it is materially inconsistent with the information in the
audited financial statements. Auditors may also be asked by underwriters to provide
“comfort” regarding the reconciliation between a non-GAAP measure and the closest
GAAP measure that was presented in an offering document.
Changing Lanes
As discussed in Section 2.1.2, the IASB issued IFRS 18
in April 2024. Since IFRS 18 requires entities to disclose information
related to management-defined performance measures in the notes to the
financial statements, such disclosures would be subject to the registrant’s
ICFR and covered by the external auditor’s opinion. Companies reporting
under IFRS Accounting Standards will be required to adopt IFRS 18 for annual
periods beginning on or after January 1, 2027, with retrospective
application and early adoption permitted. For more information, see
Deloitte’s iGAAP in Focus on IFRS 18.
5.2.1 Voluntary Inclusion of Additional Non-GAAP Segment Measures of Profit and Loss in the Financial Statements
As discussed in Section 2.5.2, after the adoption of ASU
2023-07, the SEC staff would not object to a registrant’s voluntary inclusion of
additional non-GAAP segment measures of profit or loss in the segment footnote
disclosures if the information is provided in accordance with ASC 280-10-50-28B
and 50-28C. However, because such additional measures are neither required nor
expressly permitted by GAAP, they would be considered non-GAAP measures;
accordingly, a registrant would have to comply with the Rules’ presentation and
disclosure requirements for them.
In accordance with PCAOB AS 3101, the external auditor must evaluate whether the
financial statements “are presented fairly, in all material respects, in
conformity with the applicable financial reporting framework.” Therefore, the
external auditor is required to evaluate whether the registrant’s disclosures of
segment information in the financial statements are in compliance with the
guidance in ASC 280. However, within the scope of the procedures it performs,
the external auditor would not have to include an evaluation of whether a
registrant has complied with any incremental disclosure requirements under the
Rules or other SEC interpretations of the Rules.
A registrant may elect to provide the incremental disclosures
needed for compliance with the Rules in a location outside the financial
statements, such as MD&A. However, if the registrant elects to include such
disclosures in the notes to the financial statements and the external auditor
does not audit those additional disclosures, the information should be labeled
as “unaudited.” Since that the additional segment profitability measures
themselves are disclosed in accordance with ASC 280, they should not be labeled
as “unaudited,” but the audit opinion may emphasize any items that were not
subject to audit.
While the external auditor may not be required to audit the
incremental disclosures that a registrant must provide under the Rules,
Regulation S-X, Rule 4-01(a), and PCAOB AS 2810 would still apply to additional
non-GAAP segment profitability measures that the registrant includes
voluntarily. Therefore, considerations related to whether the financial
statements as a whole are misleading are still applicable.