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Chapter 3 — Disclosures About Non-GAAP Measures

3.4 Disclosure of the Use and Purpose of Non-GAAP Measures

3.4 Disclosure of the Use and Purpose of Non-GAAP Measures

A registrant should provide transparent disclosure that clearly demonstrates (1) the usefulness of the non-GAAP measure to investors and (2) the additional purposes for which management uses such measure (e.g., for incentive and compensation arrangements, to manage its business, to allocate resources, or as a debt covenant).11 The 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 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. For example, a measure used for debt covenant purposes is generally considered a liquidity measure whereas a measure used for compensation, budgeting, or resource allocation purposes is generally a performance measure. If the purpose of the non-GAAP measure is not disclosed, investors and analysts may not understand its relevance. Footnote 44 of the Release states, in part:
[T]he fact that the non-GAAP financial measure is used by or useful to analysts cannot be the sole support for presenting the non-GAAP financial measure. Rather, the justification for the use of the measure must be substantive.

Footnotes

11
See Section 1.2.2 for a discussion of reasons why a registrant may use a non-GAAP measure.