Likely to be consistent with SEC requirements and
Proceed with caution; may not be consistent with
SEC requirements and interpretations.
Unlikely to be consistent with SEC requirements
Impairment of goodwill, indefinite-lived
intangible assets, and other long-lived assets.
Contract termination costs (e.g., lease breakage
Facility or location shutdown costs.
Cleaning costs (if they will be temporary and not
become the “new normal”).
Employee-termination or other restructuring
Salary costs (e.g., hazard pay) to compensate for
risk assumed by employees (if such costs will be temporary and not become
the “new normal”).
Government grants or insurance recoveries.
Significant accounts receivable (“A/R”) reserves
— Registrants may
record A/R reserves that exceed historical levels if their customers have
experienced COVID-19-related financial difficulties and liquidity issues.
The following examples illustrate factors that a registrant might consider,
among others, when evaluating adjustments to a non-GAAP measure for
significant increases in A/R reserves:
A registrant has historically recorded an A/R
reserve of 2 percent of revenue. During the pandemic, the
registrant increases the A/R reserve to 5 percent as a result of
increased customer liquidity concerns. While the registrant may
consider whether the 3 percent increase is directly related to
the pandemic, it may be difficult to determine whether a portion
of the increase is incremental and objectively quantifiable or
whether a portion may be indicative of the “new normal.”
A registrant has written off a receivable (e.g.,
customer bankruptcy, terminated customer relationship), which
may indicate that the amount is objectively quantifiable.
Alternatively, a registrant’s intent to continue pursuing
collection may indicate that the amount may not be objectively
quantifiable given the unknown outcome of such pursuit.
A registrant should also be
aware that revenues directly tied to the A/R reserves were (or will be)
recognized and that a non-GAAP adjustment of such reserves could therefore
be inconsistent with SEC requirements and interpretations.
Expected credit losses
— As a result of the effects of COVID-19 on a
registrant’s financial assets, the registrant may incur expected credit
losses under the current expected credit losses (CECL) standard (ASU
). In such a case, a registrant should carefully assess whether an
adjustment is objectively quantifiable. For example, the registrant should
consider whether it can differentiate between changes in expected credit
losses for financial assets that are (1) directly related to COVID-19 and
(2) attributable to other market factors and conditions.
— A registrant whose inventories are seasonal
or subject to expiration may be required to record unprecedented markdowns
for slow-moving or obsolete merchandise. Since markdowns are typically
recurring costs that vary on the basis of multiple factors, a registrant
should consider whether it can differentiate between a markdown that is
directly related to COVID-19 and one that is attributable to other market
factors and conditions.
In addition, determining
whether an adjustment is objectively quantifiable could be complicated as a
result of uncertainties associated with the ability to sell a product on a
future date. For example, a retailer may mark down slow-moving merchandise
but still expect to sell that merchandise in a subsequent period for a price
that could vary on the basis of several market conditions. Alternatively, a
restaurant owner may write off the cost of spoiled food inventory because of
the unexpected closure of its restaurants.
Depreciation of idled facilities
noncash cost, depreciation expense is a common adjustment in some non-GAAP
measures (e.g., EBITDA). Although depreciation expense incurred on an idled
facility may be directly related to the pandemic and objectively
quantifiable, it is not incremental (i.e., a registrant would have incurred
depreciation expense regardless).
Furloughed employees and
other related payments to idle employees
— Although compensation may
be paid to idled, salaried employees during the pandemic, such cash costs
generally are not incremental because they have historically occurred and
are expected to be incurred in the future. Alternatively, a registrant may
elect to compensate hourly employees for hours not worked, in which case the
registrant may consider whether an adjustment is warranted since the
compensation may be (1) incremental to the normal practice of compensating
hourly employees only on the basis of hours worked and (2) directly related
to COVID-19. However, a registrant should also consider that such
“voluntary” compensation is not incremental to historical activity and
therefore may reflect expected levels of compensation to be incurred after
Estimated lost revenue or profit
— Amounts cannot be objectively
quantified (i.e., the estimate is not an actual cost or benefit).
Nontemporary increases or decreases to salary
— Expenses will become
part of the registrant’s “new normal.”
— Costs may need to be expensed immediately as
opposed to being capitalized into inventory because of abnormally low
production. Typically, such overhead expenses are not incremental and may
include recurring cash costs.