Non-GAAP Financial Measures and Metrics

The registrant should also ensure that its disclosure of the usefulness and purpose of the measure is consistent with the categorization of the measure as a liquidity or a performance measure.

In comments on misleading adjustments, the SEC staff often focuses on individually tailored accounting principles and the exclusion of normal, recurring cash operating expenses. The staff has indicated that adjustments that change the accounting policy or the method of recognition of an accounting measure may be misleading and therefore may not be permitted. In particular, the staff continues to challenge any adjustments to GAAP revenue, emphasizing that revenue is “special.” For example, the staff has issued interpretive guidance on a prohibited non-GAAP performance measure that reflects revenue recognized ratably over time under GAAP on an accelerated basis as if the registrant earned revenue when it billed its customers. The measure is prohibited because it is an individually tailored accounting principle and does not reflect the registrant’s required GAAP measurement method. Similarly, the SEC would object to the presentation of gross or adjusted revenue that adds back sales discounts, return allowances, or other concessions to revenue as an adjusted gross sales measure because this presentation would be a substitute for a GAAP accounting recognition and measurement method.

A registrant should also consider whether its non-GAAP performance measure removes costs necessary to generate revenues or normal, recurring cash charges. The SEC staff has, for example, commented when non-GAAP measures have excluded expenses that a registrant has incurred over several successive quarters or years that appear to be necessary for operating its business, such as rent, preopening costs, or up-front and milestone payments in a collaboration arrangement.

In interactions with the SEC staff regarding non-GAAP measures viewed as misleading, some registrants have proposed supporting continued presentation of such measures by adding transparent disclosures related to the calculation of the measures or about the measures’ purpose and use. However, even detailed disclosures about a misleading measure may not prevent it from being misleading.

The SEC staff has also indicated that once a non-GAAP measure or adjustment is concluded to be misleading or otherwise inconsistent with non-GAAP rules, the staff expects the registrant to correct the presentation in the next filing or publicly available SEC document by removing the measure or adjustment. If comparable periods are presented, the non-GAAP measure or adjustment should be removed from all periods presented.

The SEC has issued an interpretive release that highlights disclosure considerations related to metrics and KPIs and addresses the application of the existing MD&A rules to them. Accordingly, a registrant should (1) clearly define the metrics used and how they are calculated, (2) describe the reasons why each metric provides useful information to investors, and (3) describe how management uses each metric in managing or monitoring the performance of its business. A registrant should also disclose any key estimates, assumptions, and limitations specific to a metric (e.g., whether the metric is a “hard” amount or an estimate).