5.3 Use of Non-GAAP Measures to Assess Materiality of Errors
A registrant performs a materiality analysis to determine the impact of identified misstatements on its (1) financial statements and (2) conclusions about ICFR and DCPs. SAB Topics 1.M (SAB 99) and 1.N (SAB 108) contain the SEC staff’s guidance on assessing the materiality of misstatements.
The SEC staff has observed that certain registrants have argued that a quantitatively large error in the GAAP financial statements is immaterial when the error has a quantitatively small impact on non-GAAP metrics. While it may be appropriate for a registrant to look at metrics other than those that are GAAP-based in determining whether the financial statements taken as a whole are materially misstated, the SEC staff will most likely focus primarily on the GAAP metrics. Also, while the SEC staff acknowledged that it is possible for quantitatively small errors to be material and for quantitatively large errors to be immaterial, a quantitatively material GAAP error does not become immaterial simply because of the presentation of non-GAAP measures. Further, there may be circumstances in which an error that is otherwise quantitatively immaterial to the GAAP financial statements — when taken as a whole and depending on the focus that management, investors, and financial statement users have historically placed on non-GAAP information — is qualitatively material in the context of non-GAAP information.