3.4 Non-GAAP Financial Measures and Key Metrics

The SEC’s January 22, 2003, final rule on the conditions for use of non-GAAP financial information defines a non-GAAP financial measure as a “numerical measure of a registrant’s historical or future financial performance, financial position or cash flows” that includes amounts that are not part of the most directly comparable GAAP measure or excludes amounts that are part of the most directly comparable GAAP measure. Common non-GAAP financial measures include operating income that excludes one or more expense items, adjusted net income, EBITDA or adjusted EBITDA, free cash flows, core earnings, net debt, funds from operations, and measures presented on a constant-currency basis.

Many registrants assert that non-GAAP measures are meaningful and provide valuable insight into the information that management considers important in running the business. Registrants may believe that GAAP numbers do not provide a full picture of their business or their results of operations and liquidity unless supplemented with non-GAAP measures that they believe are useful. While the SEC staff allows registrants to use non-GAAP measures “to tell their story,” registrants must apply the appropriate SEC guidance and provide required disclosures.

The use of non-GAAP financial information is primarily governed by the following rules (the “Rules”) that the SEC adopted in 2003:

Regulation G, which contains general rules requiring registrants to provide certain information whenever they disclose or release non-GAAP financial measures.
Amendments to Regulation S-K, Item 10, and Exchange Act Form 20-F, which provide guidance on non-GAAP measures included in SEC filings.
Amendments that require registrants to furnish to the SEC, on Exchange Act Form 8-K, earnings releases or similar announcements, with furnished press releases also having to comply with Item 10(e)(1)(i).

In addition, the SEC has issued (1) C&DIs that clarify the guidance on non-GAAP measures and (2) SEC Interpretive Release No. 33-10751 (the “January 2020 interpretive release”), which provides guidance on the disclosure and use of key performance indicators and metrics.

3.4.1 Disclosure Requirements Applicable to Domestic Registrants

The table below summarizes the disclosure requirements that apply to domestic8registrants under the Rules.

Disclosure Requirements	All Disclosure of Non-GAAP Financial Measures (Regulation G9,10)	SEC Filings (Item 10(e) of Regulation S-K11,12)	Press Releases Furnished to the SEC (Item 2.02 of Form 8-K13)
Presentation of the most directly comparable GAAP financial measure	X
Presentation, with equal or greater prominence, of the most directly comparable GAAP financial measure		X	X
Quantitative reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure	X	X	X
Statement disclosing the reasons why management believes the non-GAAP financial measure provides useful information to investors		X	X
To the extent material, a statement disclosing the additional purposes, if any, for which management uses the non-GAAP financial measure		X	X

In May 2016, in response to increasing concerns regarding the increased use and prominence of non-GAAP measures, the nature of the adjustments, and the increasingly large difference between the amounts reported for GAAP and non-GAAP measures, the SEC issued new and updated C&DIs to provide additional guidance on what it expects from registrants when they use non-GAAP measures. The SEC staff noted its expectation that these updated C&DIs would promote changes in the use of non-GAAP measures, particularly related to the undue prominence placed on such measures and to the presentation of potentially misleading measures, as well as compliance with other presentation and disclosure requirements.

In December 2022, in response to the high volume of SEC comments and questions from issuers, the SEC staff issued new and updated C&DIs on how it evaluates non-GAAP measures. This updated guidance provides greater insight into, and examples of, misleading measures and adjustments and provides further clarity regarding when a non-GAAP measure is more prominent than a GAAP measure. Since the issuance of the new and updated C&DIs in 2022, non-GAAP measures have continued to rank among the leading topics of focus in SEC comments despite improvements in registrants’ disclosures.

SEC comments have continued to cover a wide range of matters related to non-GAAP measures. Although there has been a decline in the number of comments related to prominence of non-GAAP measures, that topic has remained a focus of the staff. Comments have also focused on enhancing the disclosure related to the purpose and use of such measures, reconciliation requirements, and clear labeling. In addition, the SEC has questioned the nature of certain adjustments that may be potentially misleading, such as those that use individually tailored accounting principles. Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics provides further guidance on each of these topics of SEC focus, which are also discussed further below.

3.4.2 Undue Prominence

Examples of SEC Comments

We note that you discuss Adjusted EBITDA prior to Net loss. To avoid giving undue prominence to your non-GAAP results, please revise to present and discuss your Non-GAAP results after your discussion and analysis of GAAP results. Refer to Item 10(e)(1)(i)(A) of Regulation S-K and Question 102.10 of the Compliance and Disclosure Interpretations on Non-GAAP Measures.
Please revise your disclosure to ensure the presentation of the most comparable GAAP measures with equal or greater prominence to your non-GAAP measures. For example, free cash flow is disclosed without the most comparable GAAP measure in the Highlight section bullet points listed at the beginning of your press release. Refer to Item 10(e)(1)(i)(A) of Regulation S-K and Question 102.10 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.
You disclose Adjusted [EBITDA] as a percentage of revenue but do not disclose the comparable GAAP margin. Please revise to include the comparable GAAP margin measure, net income as a percentage of revenue, with greater prominence. Refer to Item 10(e)(1)(i)(A) or Regulation S-K and Question 102.10 of the Non-GAAP CD&Is.
We note that your reconciliation of EBITDA starts with the non-GAAP measure and reconciles to the GAAP measure (net income). In future filings please revise your presentation to start with the GAAP measure so that the GAAP measure is presented with equal or greater prominence. This comment also applies to any non-GAAP measures presented in an earnings release. Refer to Question 102.10 of the Compliance and Disclosure Interpretations.
We note your reconciliations of non-GAAP Financial Measures. Please note that the presentation of a full non-GAAP income statement may place undue prominence to the non-GAAP information and may give the impression that the non-GAAP income statement represents a comprehensive basis of accounting. Please confirm to us that you will not present non-GAAP consolidated income statements in future filings. Please refer to Question 102.10 of the Non-GAAP Financial Measures [Compliance] and Disclosure Interpretation[s].
In your tabular disclosure . . . , you present numerous non-GAAP measures but do not disclose the comparable GAAP measures. Please revise to include the comparable GAAP measure for each non-GAAP measure presented with equal or greater prominence. Refer to Item 10(e)(1)(i)(A) of Regulation S-K and Question 102.10 of the Compliance and Disclosure Interpretations for Non-GAAP Financial Measures.
We note you provide a range of forward-looking EBITDA and adjusted EBITDA for [the fiscal year] without providing reconciliations to the most directly comparable GAAP measure or a statement that providing such reconciliations requires unreasonable efforts. In future filings, please provide reconciliations to the most directly comparable GAAP measure. If all of the information necessary for the reconciliations is not available without unreasonable efforts, identify and disclose the information that is unavailable and its probable significance. Also present the most directly comparable GAAP measure with equal or greater prominence. Refer to Item 10(e)(1)(i) of Regulation S-K and Questions 102.10(a), 102.10(b), and 103.02 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.

In assessing prominence, a registrant should consider, among other items, the order of presentation, degree of emphasis, style of presentation, and volume of disclosures in a filing. C&DI Question 102.10 provides examples illustrating when the presentation of a non-GAAP measure is more prominent than that of a comparable GAAP measure. Since the SEC staff’s publication of the C&DIs on non-GAAP measures, C&DI Question 102.10 has been a leading source of SEC comments on such measures. Accordingly, it may be helpful for a registrant to note the following:

If GAAP and non-GAAP measures are presented in a particular section of a document, the GAAP measures should be presented before the non-GAAP measures. For example, if a registrant wants to use certain non-GAAP measures in its discussion of results of operations, it should discuss the GAAP results before the non-GAAP measures.
In public forums and in SEC comment letters, the SEC staff has clearly indicated that when a registrant reconciles a non-GAAP measure to the most comparable GAAP measure, it should start with the GAAP measure.
If a financial measure is presented as a ratio and, in the calculation of that ratio, the numerator or the denominator or both are a non-GAAP measure or metric, the ratio would also be a non-GAAP measure or metric. A registrant must present a comparable ratio that is calculated through the use of the most directly comparable GAAP measures.
The registrant should not present the non-GAAP measure in more detail or emphasize it more than it does the comparable GAAP measure. For example, use of terms such as “exceptional” or “record” in a discussion of the non-GAAP measure would place undue emphasis on that measure if such terms were not used to describe the comparable GAAP measure. Similarly, setting non-GAAP measures in a larger font or in boldface would place undue prominence on that measure.
The disclosures related to the purpose and use of non-GAAP measures should not state or imply that the non-GAAP measures are superior to, provide better information about, or more accurately represent the results of operations than GAAP measures.
Certain presentations that give undue prominence to non-GAAP information, such as a full non-GAAP income statement, are prohibited.

Finally, if a registrant presents forward-looking non-GAAP financial measures, it should provide a quantitative reconciliation unless it qualifies for the “unreasonable efforts” exception in Regulation G and Regulation S-K, Item 10(e). A registrant that qualifies for the exception should disclose that fact in a prominent location, identify the information that is not available, and indicate the probable significance of this information.

3.4.3 Disclosures About Purpose and Use

Example of an SEC Comment

Please revise to disclose the reasons why you believe your presentation of each of the non-GAAP financial measures provides useful information to investors regarding your financial condition and results of operations. The justification for the use of the non-GAAP financial measure must be substantive. Merely indicating that you provide such non-GAAP financial measures to give investors additional data to evaluate your operations is not sufficient support for disclosure of the non-GAAP financial measures. Please also revise to expand your disclosure of the additional purposes for which management uses each of the non-GAAP financial measures. Please refer to Item 10(e) of Regulation S-K.

A registrant should include transparent disclosures that clearly demonstrate (1) the usefulness of the non-GAAP measure to investors and (2) the additional purposes, if any, for which management uses such measure (e.g., for incentive and compensation arrangements, to manage the registrant’s business, to allocate resources, or as a debt covenant). A registrant should avoid providing boilerplate disclosures related to the usefulness and purpose of the measure. Rather, the disclosures should be specific to the measure used, to the registrant and the nature of its business and industry, and to the manner in which management assesses the non-GAAP measure. The SEC staff has commented on the extent of a registrant’s disclosures and whether the disclosures demonstrate the purpose of the measures (i.e., their usefulness to investors and how management uses them).

3.4.4 Identification and Clear Labeling

Examples of SEC Comments

[I]n your summary table of non-GAAP results, you label the items using the same name as your GAAP measures while in your discussion of the non-GAAP measures you refer to the non-GAAP measures with different titles, such as non-GAAP gross profit. In future filings when disclosing non-GAAP financial measures, please revise your presentation to use titles consistently and to use titles or descriptions for your non-GAAP financial measures that are not the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures. Refer to Item 10(e)(1)(ii)(E) of Regulation S-K.
Within your discussion of modified net operating income, we note you have indicated that some of your adjustments are non-recurring. Given the nature of these adjustments, it is not clear why they are non-recurring. Please clarify and/or revise to remove the reference to non-recurring from your disclosure. Reference is made to Question 102.03 of the Division’s Compliance and Disclosure Interpretations for Non-GAAP Financial Measures.
Gross margins appear to represent a non-GAAP financial measure. Please tell us why you believe that gross margin is presented in accordance with GAAP. If gross margin is a non-GAAP financial measure, please provide a reconciliation of the differences between the non-GAAP financial measure with the most directly comparable financial measure calculated and presented in accordance with GAAP and the other disclosures required by Item 10(e) of Regulation S-K. Also, the use of titles or descriptions of non-GAAP financial measures should not be the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures. Please refer to Item 10(e) of Regulation S-K. Please revise the title of this non-GAAP financial measure in future filings.
We note that gross margin excludes depreciation and amortization. As such, it appears gross margin represents a non-GAAP financial measure. If so, please provide the disclosures required by Item 10(e)(i) of Regulation S-K. If not, please explain to us why you do not believe gross margin is a non-GAAP financial measure.
We note your disclosure of non-GAAP financial measures of Core Earnings and Core Earnings per common share — diluted, which include adjustments for various realized and unrealized gains (losses) and provision for (reversal of) . . . credit losses. In light of these and other reconciling items, please tell us how you determined it was appropriate to title these measures as Core Earnings and Core Earnings per common share — diluted. Further, given your [previous] response . . . and consistent with other mortgage REITs, tell us whether you continue to use these measures as distributable earnings metrics; if so, revise your filing to disclose that purpose.
We note you have labeled Cash Flow from Operations as a non-GAAP measure. However, we note that this label is commonly used interchangeably with Cash Flow from Operating Activities. Please tell us why you believe you have appropriately labeled this non-GAAP measure based on the guidance in Question 100.05 of the Compliance & Disclosure Interpretations on Non-GAAP Financial Measures. In addition, please revise your disclosure to explain why this non-GAAP measure provides useful information to investors per Item 10(e)(1)(i)(C) of Regulation S-K.
Please clearly label and describe your Adjusted Financial Highlights for income from operations, operating margin, and net income attributable to [the company] as non-GAAP. Refer to Question 100.05 of the Staff’s Compliance and [Disclosure] Interpretations on Non-GAAP Financial Measures.

The SEC staff focuses on whether registrants have (1) clearly labeled and described non-GAAP measures and adjustments, (2) used appropriate conventional accounting terminology, and (3) provided context for their presentation of non-GAAP measures. C&DI Question 100.05 provides examples illustrating when a non-GAAP measure could be misleading if the measure is not appropriately labeled or described. For more information, see Sections 4.3 and 4.3.4 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

When labeling a non-GAAP financial measure, a registrant may not use titles or descriptions that are the same as, or are confusingly similar to, titles or descriptions used for GAAP financial measures or amounts presented in accordance with Regulation S-X.

For example, a registrant should not:

Use GAAP titles such as “gross margin” or “operating income” for amounts presented that exclude costs that would generally be included in these totals under GAAP or Regulation S-X, Article 5. If such costs are excluded, the label attached to the amount should clearly indicate that (1) the measure represents a non-GAAP measure, (2) such amounts are adjusted (e.g., “adjusted operating earnings” if a registrant excludes restructuring charges from its non-GAAP “operating earnings” measure), and (3) the measure complies with Regulation G and Regulation S-K, Item 10(e).
Label a measure “pro forma” if the measure was not calculated in a manner consistent with the concepts in Regulation S-X, Article 11, or in ASC 805.

In addition, some registrants do not present a gross margin subtotal on the face of the income statement; however, they may present outside the financial statements a non-GAAP margin for which the most comparable GAAP measure could be considered gross profit. This practice has been observed in the public utility and oil and gas industries (e.g., refining margin), but it is not limited to those sectors. The measure may also be labeled “non-GAAP contribution margin” or “adjusted gross margin.” The SEC staff expects such registrants to (1) disclose that these measures are non-GAAP financial measures and (2) consider the disclosure requirements in Item 10(e). Further, the SEC staff has reminded registrants that non-GAAP measures should be presented in a balanced manner and reconciled to the most comparable GAAP measure. If a registrant does not present a gross margin subtotal on the face of the income statement but concludes that gross margin is the most comparable measure, the registrant should consider calculating and presenting a “fully loaded” GAAP measure of gross margin as the starting point in the non-GAAP reconciliation.

Further, as discussed in C&DI Question 102.03, 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 past two years, it may adjust the non-GAAP performance measure (subject to Regulation G and the other requirements in Regulation S-K, Item 10(e)) but may not describe the adjustment as “nonrecurring,” “infrequent,” or “unusual” because the adjustment does not meet the specified criteria.

3.4.5 Liquidity Versus Performance Measures

Examples of SEC Comments

We continue to question whether your disclosure of non-GAAP diluted EPS is consistent with C&DI 102.05. In particular, you point out that the reconciling items from GAAP net income to non-GAAP net income will not require cash settlement. By adjusting your net income to exclude only non-cash items, it appears that you are attempting to present a cash-based earnings measure. Furthermore, we note that for the periods presented in . . . earnings releases, your non-GAAP net income was within [X]% of your cash provided by operating activities in your Statements of Cash Flows for the same periods. In light of the above, please explain how you determined that your non-GAAP net income measure could not be used as a liquidity measure. Alternatively, please remove non-GAAP diluted EPS from your future earnings releases.
It appears that you are presenting non-GAAP adjusted net loss and net loss per share as liquidity measures based on your statement that these measures remove the impact of stock-based compensation due to your emphasis on cash burn and, more specifically, cash used in operations. As such, please revise to provide a reconciliation of adjusted net loss to the most directly comparable GAAP measure for a liquidity measure (i.e., cash flows from operations). In addition, please note that non-GAAP liquidity measures that measure cash generated must not be presented on a per share basis. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure. Refer to Question 102.05 of the updated Non-GAAP Compliance and Disclosure Interpretation.
We note that you present Adjusted OIBDA as a measure of segment performance and that you also present it on a consolidated basis . . . . Please reconcile consolidated Adjusted OIBDA to the most directly comparable GAAP measure. Refer to Item 10(e)(1)(i)(B) of Regulation S-K. In this regard, you disclose both that operating income is the most directly comparable GAAP financial measure and that Adjusted OIBDA provides a meaningful representation of operating cash flows. If considered both a performance and a liquidity measure, consolidated Adjusted [OIBDA] should be reconciled to both net income and operating cash flows, respectively. Refer to Question 102.06 of the Non-GAAP Financial Measures C&DI’s. Please advise and revise, as appropriate.

A registrant must determine whether a non-GAAP measure’s purpose is to assess the registrant’s performance or its liquidity or, in some cases, both. This determination will affect (1) which GAAP measure is most directly comparable to the non-GAAP measure and (2) any prohibitions against presentation, such as per-share amounts or adjustments. For example, a performance measure should generally be reconciled to a line item from the statement of operations such as net income or income from continuing operations or, if a per-share performance measure is presented, to GAAP earnings per share. A liquidity measure should be reconciled to an amount from the statement of cash flows, such as cash provided by operating activities, and is prohibited from being presented on a per-share basis.

Registrants should consider whether the classification of a non-GAAP measure as a performance measure is appropriate if the non-GAAP measure is, in substance, a liquidity measure. The SEC staff may focus on the substance of the non-GAAP financial measure and not on management’s characterization, and it may challenge a measure designated as a performance measure that appears to be more like a liquidity measure. The context of the non-GAAP disclosure may be an important consideration. Depending in part on the size and nature of the adjustments to the corresponding GAAP measure, a registrant may need to use judgment in assessing whether a non-GAAP performance measure can be used as a liquidity measure. The SEC staff may comment if, for example:

A non-GAAP measure is located in the registrant’s discussion of financial condition and liquidity even though the registrant considers the measure to be a performance measure and reconciles it to net income.
Several adjustments (many of which are noncash amounts) must be made to reconcile a non-GAAP measure that a registrant purports to be a performance measure to the most comparable GAAP income measure, and only one or two adjustments would be needed to reconcile it to a GAAP measure from the statement of cash flows, such as operating cash flow.
The total dollar amount of the non-GAAP adjustments consists of a large percentage of noncash charges.

If the measure could be used as a liquidity measure and is ultimately determined to be a liquidity measure, a registrant would be prohibited from disclosing a per-share amount (e.g., free cash flow is a liquidity measure, and per-share presentation is expressly prohibited).

3.4.6 Reconciliation

Examples of SEC Comments

You present a summary table of non-GAAP results that includes revenues and operating expenses but we note that you did not reconcile these items to the most directly comparable GAAP financial measures as required by Item 10(e)(1)(i)(B) of Regulation S-K. In future filings when you present non-GAAP measures, please include all of the disclosures required by Item 10(e) of Regulation S-K, including the required reconciliations.
Please revise your reconciliation of EBITDA and Adjusted EBITDA to begin with net income rather than operating income. Please refer to Question 103.01 of the Non-GAAP Financial Measures Compliance & Disclosure Interpretations for guidance.

The SEC staff has continued to comment on instances when non-GAAP financial measures were presented without providing the required quantitative reconciliation or when registrants improperly reconcile a non-GAAP financial measure to a GAAP financial measure that was not the most directly comparable GAAP financial measure. C&DI Question 103.02 indicates that EBIT or EBITDA, if presented as a performance measure, should be reconciled to net income and not operating income. In other circumstances, registrants should use judgment in determining the most directly comparable GAAP measure.

3.4.7 Nature of Adjustments

Examples of SEC Comments

Please explain to us why it is appropriate to remove restructuring, integration and deal costs, termination of certain supply and distribution agreements costs and legal settlement and legal proceedings, investigations and inquiries costs from your adjusted non-GAAP income measure when they appear to be normal, recurring operating expenses that will be settled in cash. See CDI 100.01. In your response, please tell us the significant components of each of the expenses for each of the last three years and the latest interim periods with comparable amounts.
We note your disclosure . . . that EBITDAR is useful in evaluating your operating performance compared to your competitors. This measure eliminates . . . rent, which is a normal, recurring cash operating expense necessary to operate your business. Therefore, please revise this disclosure here and elsewhere within your registration statement to indicate this measure is solely used as a valuation metric and to add disclosure emphasizing the limitations of its use, including that it should not be viewed as a measure of overall performance. Please refer to Question 100.01 of our Compliance & Disclosure Interpretations for Non-GAAP Financial Measures dated April 4, 2018.
We note, regarding the non-GAAP measure identified as adjusted EBITDAR, you disclose that it is a commonly used measure to compare the enterprise value of different companies. . . . You further disclose it is “a financial valuation measure” and it is “not displayed as a performance measure”. It is unclear why it is appropriate or useful to investors to present comparative valuation measures. . . . Please refer to Rule 100(b) of Regulation G and Item 10(e)(1)(i)(C) of Regulation S-K, and revise your disclosures accordingly.
Throughout this filing, you present and discuss revenue and gross profit/(loss) on a gross basis excluding the effects of the provision for the fair value of warrants issued as sales incentives. Tell us how you considered Question 100.04 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures when presenting these measures. That guidance indicates that it is not appropriate to present non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP.
Please tell us how you determined that your removal of the effects of purchase accounting and related adjustments from your non-GAAP measures, such as Adjusted OIBDA and Adjusted Net Income (Loss) Attributable to [the company], does not substitute individually-tailored recognition and measurement methods for GAAP. Refer to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.
We note your adjustment for Covid 19 in your calculation of Adjusted EBITDA and Adjusted Net Income (Loss) includes expenses for employees on temporary furlough for whom the Company provides health benefits; non-payroll expenses including advertising, occupancy and other store expenses. Please tell us how you determined these costs are incremental to normal operations and nonrecurring.
We note your non-GAAP financial measures, Adjusted Earnings and Adjusted EBITDA, include adjustments for bad debt expense and inventory reserves that you attribute to the conflict between Russia and Ukraine; however, these expenses appear to be normal, recurring, operating expenses related to your business. Please explain how you considered Question 100.01 of the Division’s C&DI for Non-GAAP Financial Measures and why you believe excluding these expenses from non-GAAP performance measures is appropriate.

An overarching theme of the SEC’s guidance on non-GAAP measures is that such measures should not be misleading regardless of whether they are used in a filing (e.g., Form 10-K or Form 10-Q) or elsewhere (e.g., a press release). As described in Section 100 of the C&DIs, non-GAAP measures that could mislead investors include those that:

Exclude normal, recurring cash operating expenses necessary for business operations.
Are presented inconsistently between periods, such as by adjusting an item in the current reporting period, but not a similar item in the prior period, without appropriate disclosure about the change and an explanation of the reasons for it.
Exclude certain nonrecurring charges but do not exclude nonrecurring gains (e.g., “cherry picking” non-GAAP adjustments to achieve the most positive measure).
Are based on individually tailored accounting principles, including certain adjusted revenue measures.

In addition to the examples discussed in the C&DIs, various other presentations could be considered misleading depending on the facts and circumstances. The SEC staff has primarily used the SEC comment letter process, various speeches, and the C&DIs to publicize its conclusions that certain measures are misleading and that it objects to their use.

For example, if a registrant has recurring restructuring charges or frequent routine business acquisitions (i.e., the registrant is a “serial” restructurer or acquirer), the SEC staff may ask about the facts and circumstances supporting an adjustment for what may appear to be a recurring cost. Depending on its specific circumstances, the registrant may be able to support why such an adjustment is appropriate. However, the registrant may wish to consider whether enhancements to its disclosures about the nature and purpose of the adjustment or resulting non-GAAP measure would help clarify the intent of the measure or its use by management and investors.

The SEC staff has also asked certain registrants about their presentation of EBITDAR and adjusted EBITDAR because the deduction for rent could be viewed as eliminating a normal, recurring cash operating expense from a non-GAAP performance measure. In recent SEC comment correspondence, the staff has indicated that non-GAAP presentations of EBITDAR and adjusted EBITDAR should not be characterized as performance measures. However, in some circumstances, the staff may not object to disclosure of the measures if they are characterized as financial valuation measures. Further, if EBITDAR is presented as a financial valuation measure, the SEC staff may object to such presentation for all comparative periods because it may indicate that the measure is also a performance measure. Accordingly, the SEC staff may request that the measure be presented only for the most recent period.

In light of the macroeconomic impacts of the COVID-19 pandemic, registrants should consider the nature and appropriateness of COVID-19-related adjustments in a non-GAAP measure. In particular, a registrant should consider whether the adjustment is (1) directly related to COVID-19 or the associated economic downtown, (2) incremental to normal operations and nonrecurring (i.e., it is not expected to become the “new normal”), and (3) objectively quantifiable, as opposed to an estimate or projection. For more information, see Deloitte’s March 25, 2020 (updated January 11, 2021), Financial Reporting Alert.

Question 100.04 of the C&DIs on non-GAAP measures notes that a registrant is prohibited from presenting non-GAAP performance measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP. Although the examples in the C&DI focus on revenue recognition, one of those examples indicates that individually tailored accounting principles may also be prohibited when they are applied to expenses to create a non-GAAP measure. As a result, while the SEC staff continues to comment when it observes an individually tailored revenue recognition method in a non-GAAP measure, an increasing number of comments have been issued on individually tailored measures other than revenue. For example, the SEC staff has commented on measures that (1) use pro rata consolidation, (2) remove the impact of purchase accounting (“fair value”) adjustments for acquired loans from the GAAP measure, and (3) assume changes to an entity’s capital structure.14

After a registrant responds in writing to the original comment, the SEC staff may reach out to the registrant and request a phone call to discuss the presentation of a non-GAAP measure that uses individually tailored accounting principles or certain other non-GAAP presentations. As a result of the registrant’s discussion with the staff, the registrant may either (1) make prospective changes to the presentation of the non-GAAP measure to modify or eliminate certain adjustments or (2) provide additional disclosure regarding the use and limitations of the measure.

3.4.8 Income Tax Effects

Examples of SEC Comments

We note that you separately adjust for the change in U.S. Tax Law in your non-GAAP reconciliations but appear to show all other adjustments net of tax. Please present the income tax effects of your non-GAAP adjustments as a separate adjustment and explain how you calculated the income tax effects related to these adjustments in your next earnings release. Refer to Question 102.11 of the Non-GAAP Compliance and Disclosure Interpretations.
We note that you adjust the income tax provision to reflect the expected cash taxes to be paid in your calculation of Non-GAAP adjusted net income. Your income tax adjustment is inconsistent with Question 102.11 of the updated Non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016. Please revise the tax adjustment in future filings to reflect the current and deferred tax expense commensurate with the non-GAAP measure of profitability.
We note your reconciliation from Net Income (Loss) to Adjusted Net Income and your adjustment for “Income tax expense of adjustments at effective tax rate.” Please clarify how the tax impact was calculated for each period presented. In addition, explain the nature of the adjustment for “discrete income tax items.” As part of your response, tell us how the adjustments to this non-GAAP measure for the effects of income taxes are consistent with Question 102.11 of the Compliance & Disclosure Interpretations on Non-GAAP Financial Measures.

In certain circumstances, a registrant may reflect a non-GAAP measure after taxes and therefore show the tax adjustments when reconciling a non-GAAP measure to the appropriate GAAP measure. A registrant should present its reconciling adjustments gross of tax and should disclose how the tax adjustments were determined. If other tax adjustments are included in the reconciliation, such as the removal of discrete tax adjustments, a registrant should separately disclose the income tax effects of the non-GAAP adjustments from other adjustments. The SEC staff frequently reminds registrants (1) to revise their disclosures and tabular presentations to separately present the income tax impact of their non-GAAP adjustments, (2) to disclose how the tax impact of the non-GAAP adjustments was calculated, and (3) that the tax adjustments should reflect current and deferred tax expense commensurate with the non-GAAP measure of profitability.

3.4.9 Certain Financial or Operating Metrics

Examples of SEC Comments

We note your discussion . . . of the number of your customers and your annual dollar-based net expansion rate. Please tell us what consideration you have given to discussing these metrics, as well as other measures you use to evaluate your business, in a separately titled section and discussing any trends in such metrics and related material impacts on your business. For example, it appears that the growth rates of property manager customers and law firm customers are slowing. See Item 303(a) of Regulation S-K.
We note in your earnings calls that you discuss net revenue per client . . . and inventory turnover. If these metrics are used by management to manage the business, and promote an understanding of the company’s operating performance, they should be identified as key performance indicators and discussed . . . . Please tell us your consideration of disclosing these metrics, or other key performance indicators used.
For each of the metrics used in this earnings release, please consider revising to disclose the reasons why the metric is useful to investors, how management uses the metric, and if there are estimates or assumptions underlying the metric or its calculation, disclosure of such items if it’s necessary for the metric not to be misleading. See guidance in SEC Release No. 33-10751 Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Please explain whether [average revenue per unit (ARPU)] is a key performance indicator used in managing your business and consider revising to include a discussion of the measure in your MD&A section, along with comparative period amounts, or explain why you do not believe this disclosure is necessary. Refer to Section III.B.1 of SEC Release No. 33-8350 and SEC Release 33-10751.

In the SEC’s January 2020 interpretive release, the SEC indicated that a registrant should consider the need to disclose key performance indicators or metrics that it uses to manage its business in MD&A because this information may be material to investors and necessary in the evaluation of the company’s performance. While such disclosures may be required in MD&A, it may also be appropriate for registrants to disclose key performance indicators or metrics in other areas outside the financial statements, such as the business section or press releases.

The types of metrics a registrant uses may vary widely among industries. For example, the same-store sales metric is used frequently in the retail and restaurant industries, subscriber numbers are often used by cable and streaming companies, and occupancy and revenue per available room are performance metrics used throughout the hospitality industry. Such measures are not provided on the face of the financial statements or in the notes thereto, and they are not necessarily derived from any underlying financial statement amounts. While such customized metrics are generally not considered non-GAAP measures, a registrant should provide certain disclosures about them, many of which are similar to those the registrant would provide for non-GAAP measures.

While the SEC staff has provided its views on metric disclosures in various speeches, the January 2020 interpretive release formalizes the SEC’s guidance on disclosures about key performance indicators and metrics. Accordingly, a registrant should (1) clearly define the metrics used and how they are calculated, (2) indicate the reasons why a given metric is useful to investors, (3) indicate how management uses the metric in managing or monitoring the performance of the business, and (4) determine whether disclosure of estimates and assumptions underlying the metric or its calculation is necessary for the metric not to be materially misleading. The SEC emphasized in the January 2020 interpretive release that when assessing whether to include metrics in its disclosures, a registrant should consider its existing MD&A requirements. In this regard, a company’s narrative should permit an investor to view the registrant from management’s perspective; therefore, these metrics should not deviate materially from metrics used to manage operations or make strategic decisions.

For more information about metrics, see Section 2.4 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

Footnotes

For guidance on FPIs, see Regulation G; Regulation S-K, Item 10(e); Section 106 of the C&DIs; and Section 8140 of the FRM.

Regulation G applies whenever a registrant, or person acting on its behalf, publicly discloses or releases material information that includes a non-GAAP financial measure. Such information may be furnished to or filed with the SEC or publicly disclosed or released in another manner.

In certain situations, Regulation G and Item 10(e) do not apply. For example, they do not apply to non-GAAP measures related to projections or forecasts provided to a financial adviser as a part of a proposed business combination, or measures required to be disclosed by a governmental authority.

Item 10(e) applies to all SEC filings that include non-GAAP financial measures.

See footnote 8.

Form 8-K, Item 2.02, requires registrants to furnish to the SEC all releases or announcements disclosing material nonpublic financial information about completed annual or quarterly fiscal periods, regardless of whether the release or announcement includes disclosure of a non-GAAP financial measure. Item 2.02 also specifies that the requirements in Item 10(e)(1)(i) apply to such disclosures. If a registrant elects to file the release or announcement with the SEC, all the requirements in Item 10(e) apply.

For additional examples of individually tailored accounting principles, see Section 4.3.3 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.