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SEC 6020 - Non-GAAP measures
Publication date: 31 Jan 2023
us PwC SEC Volume 6020
.1 General
[Editor's note: The guidance set forth in SEC 6020 was prepared with a view toward U.S. domestic SEC registrants. Foreign private issuers and investment companies should refer to the relevant rules, form instructions and interpretive guidance.]
.11 What is a non-GAAP financial measure?
The SEC has defined the term “non-GAAP financial measure” in S-K 10(e)(2) and Rule 101(a)(1) of Regulation G and has provided additional information about what is (or is not) a non-GAAP financial measure in S-K 10(e)(4) and (5) and Rule 101(a)(2) and (3) of Regulation G.
In general terms, a non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position, or cash flows that:
- includes amounts that are excluded from the most directly comparable GAAP measure, or
- excludes amounts that are included in the most directly comparable GAAP measure.
Non-GAAP financial measures exclude:
- operating and other statistical measures (such as unit sales, number of employees, number of subscribers or number of advertisers);
- ratios or statistical measures calculated using exclusively one or both of:
- financial measures calculated in accordance with GAAP; and
- operating measures or other measures that are not non-GAAP financial measures; and
- financial measures required to be disclosed by GAAP, SEC rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant.
See SEC FRM 8120.2 for common examples of measures that generally constitute non-GAAP measures and SEC FRM 8120.3 for common examples of measures that are generally not non-GAAP measures.
.2 Presentation and disclosure requirements
.21 Applicable requirements
There are three basic sets of presentation and disclosure requirements which should be considered when evaluating whether a particular non-GAAP financial measure and the manner of its presentation comply with the relevant SEC rules. The appropriate requirements to apply generally depend on where the non-GAAP financial measure is disclosed. Accordingly, it is important to ensure that the proper requirements are being considered. The three sets of presentation and disclosure requirements are:
- Regulation G (applicable to non-GAAP financial measures prepared by a registrant required to file reports under section 13(a) or 15(d) of the Exchange Act (other than an investment company) or a person acting on the registrant’s behalf),
- Instruction 2 to Item 2.02 of Form 8-K (applicable to a non-GAAP financial measure furnished to the SEC under Item 2.02 of Form 8-K -- e.g., a quarterly or annual earnings release), and
- S-K 10(e) (applicable to information filed with the SEC -- e.g., in a Form 10-K or Form 10-Q or included/incorporated by reference in a registration statement).
[Editor’s note: The requirements of Regulation G and S-K 10(e) do not apply to non-GAAP financial measures included in disclosure relating to a proposed business combination transaction, the entity resulting from the business combination transaction, or an entity that is a party to the business combination transaction if the disclosure is contained in a communication that is subject to the SEC's communications rules applicable to business combination transactions. See S-K 10(e)(6). See Non-GAAP Financial Measures CDI 101.02, CDI 101.03 and, CDI 101.04.]
If a registrant is considering disclosure of a particular non-GAAP financial measure in multiple places (e.g., in an earnings release and in a Form 10-K or Form 10-Q), the registrant should consider all relevant potential presentation and disclosure models. Certain non-GAAP financial measure disclosures may be allowable in information "furnished" to the SEC (e.g., under Item 2.02 Form 8-K), but not allowed if "filed" with the SEC (e.g., in Form 10-K or Form 10-Q). See SEC 3150.13 for a discussion of the distinction between "furnishing" and "filing" information with the SEC.
.22 The Regulation G presentation and disclosure model
The Regulation G presentation and disclosure model provides registrants with the broadest amount of flexibility as compared to the other models.
The provisions of Regulation G apply to any registrant (or person acting on the registrant's behalf), other than an investment company, that publicly discloses a non-GAAP financial measure (e.g., orally, telephonically, in a press release, by webcast, etc.). Regulation G contains a general requirement that a non-GAAP financial measure should not be made public if that measure, taken together with the information accompanying it, is misleading. Additionally, Regulation G requires that a non-GAAP financial measure be accompanied by:
- the most directly comparable financial measure calculated and presented in accordance with GAAP; and
- a reconciliation (by schedule or other clearly understandable method) between the non-GAAP financial measure disclosed or released and the most comparable financial measure or measures calculated and presented in accordance with GAAP.
The reconciliation must be quantitative for historical non-GAAP financial measures.
The reconciliation must also be quantitative for forward-looking non-GAAP financial measures to the extent available without unreasonable effort. If a quantitative reconciliation with respect to a forward-looking non-GAAP measure is not presented in reliance on the “unreasonable efforts” exception, the registrant should disclose that fact and identify the information that is unavailable and its probable significance. See Non-GAAP Financial Measures CDI 102.10(b).
.23 Presentation and disclosure of non-GAAP financial measures in information "furnished" to the SEC under Item 2.02 of Form 8-K (e.g., earnings releases)
Non-GAAP financial measures "furnished" to the SEC under Item 2.02 of Form 8-K are subject to the provisions of Regulation G (i.e., not misleading and presentation of most directly comparable GAAP measures together with a reconciliation). Additionally, Instruction 2 to Item 2.02 of Form 8-K requires:
- the registrant to disclose the most directly comparable financial measure calculated and presented in accordance with GAAP with equal or greater prominence (as compared to the non-GAAP financial measure). See Non-GAAP Financial Measures CDI 102.10;
- a statement disclosing the reasons why management believes that the non-GAAP financial measure provides useful information to investors; and
- a statement disclosing the additional purposes, if any, for which management uses the non-GAAP financial measure (to the extent material).
[Editor's note: There is no prohibition against disclosing a non-GAAP financial measure that is not used by management in managing its business. See Non-GAAP Financial Measures CDI 102.04.]
[Editor’s note: S-K 10(e)(iii) provides that a filing need not include disclosure relating to (i) the reasons management believes the non-GAAP financial measure is useful for investors or (ii) management's "other uses" for the non-GAAP financial measure, if the filing is not an annual report on Form 10-K and those disclosures were included in the registrant's most recent annual report on Form 10 K (or a more recent filing). However, the required information should be updated to the extent necessary to meet the disclosure requirements at the time of the current filing.]
The SEC staff has indicated that if a registrant issues a press release with "preliminary" or "estimated" earnings and results of operations for a completed quarterly period, this preliminary earnings release must comply with all of the requirements of Item 2.02 Form 8-K. See Form 8-K CDI 106.07.
.24 Presentation and disclosure of non-GAAP financial measures in information "filed" with the SEC (e.g., Form 10-K, Form 10-Q or registration statements)
Non-GAAP financial measures included in information that is "filed" with the SEC are subject to the requirements of Regulation G and the requirements contained in Instruction 2 to Item 2.02 Form 8-K (i.e., the requirements of S-K 10(e)(1)(i)). Additionally, S-K 10(e)(1)(ii) generally prohibits the following in any documents "filed" with the SEC:
- Excluding charges or liabilities that require cash settlement from non-GAAP liquidity measures, (other than the measures of earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA)).
- Adjusting a non-GAAP performance measure to eliminate or smooth items identified as nonrecurring, infrequent or unusual, when (i) the nature of the charge or gain is such that it is reasonably likely to recur within two years or (ii) there was a similar charge or gain within the prior two years.
- Presenting non-GAAP financial measures on the face of the financial statements prepared in accordance with GAAP or in the accompanying notes.
- Presenting non-GAAP financial measures on the face of any pro forma financial information required to be disclosed by S-X Article 11; and
- Using titles or descriptions of non-GAAP financial measures that are the same, or confusingly similar to, titles or descriptions used for GAAP financial measures (e.g., referring to EBITDA as "operating earnings").
The prohibitions for non-GAAP measures in S-K 10(e)(1)(ii) are more restrictive than the general disclosure requirements of Regulation G or the instructions to Item 2.02 of Form 8-K. As a result of these prohibitions, certain non-GAAP financial measures may be acceptable if included in documents "furnished" to the SEC (e.g., under Item 2.02 of Form 8-K) but may not be appropriate if included in documents "filed" with the SEC (e.g., in Form 10-Q or Form 10-K).
.3 Additional SEC staff interpretive guidance
The following SEC staff interpretive guidance should also be considered when evaluating the provisions of S-K 10(e).
.31 General interpretive guidance
The SEC staff has stated that presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. When assessing the appropriateness of a non-GAAP adjustment relating to normal, operating expense, the SEC staff has indicated that the company’s operations, revenue generating activities, business strategy, industry and regulatory environment will be considered. In addition, the SEC staff has indicated that it would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring. See SEC Non-GAAP Financial Measures CDI 100.01.
The SEC's rules prohibit a company from describing a charge or gain as "non-recurring, infrequent or unusual" when there was a similar item during the prior two years or when it is reasonably likely that a similar item will arise during the next two years. However, this prohibition only applies to how the adjustment is described. The SEC staff makes clear in its interpretive guidance that the prohibition was not intended to establish a blanket prohibition on disclosing non-GAAP performance measures that exclude recurring items. Companies may make adjustments (even for recurring items) they think are appropriate and consistent with the SEC's rules. See Non-GAAP Financial Measures CDI 102.03.
The SEC staff has indicated that the prohibitions in S-K 10(e) would not preclude the presentation in MD&A of an otherwise prohibited non-GAAP financial measure if such measure is a material debt covenant and that information about the covenant is material to an investor's understanding of the company's financial condition and/or liquidity. See Non-GAAP Financial Measures CDI 102.09.
Certain financial measures (or information) prepared in accordance with guidance published by a government, governmental authority or self-regulatory organization that is applicable to the registrant are excluded from the definition of a non-GAAP financial measure if the registrant is required to disclose the measure. If not required by a system of regulation that is applicable to the registrant, then the information is considered a non-GAAP financial measure and the registrant must provide the disclosures required by Regulation G or S-K 10(e), if applicable, including the quantitative reconciliation from the non-GAAP financial measure to the most comparable measure calculated in accordance with GAAP. See Non-GAAP Financial Measures CDI 102.12.
Non-GAAP financial measures that are presented inconsistently between periods should disclose the change and the reasons for the change. In addition, depending on the significance of the change, it may be necessary to recast prior measures to conform to the current presentation and place the disclosure in the appropriate context. See Non-GAAP Financial Measures CDI 100.02.
Non-GAAP financial measures that exclude non-recurring charges should also exclude non-recurring gains. See Non-GAAP Financial Measures CDI 100.03.
Non-GAAP financial measures that use recognition and measurement principles that are inconsistent with those required by GAAP (e.g., accelerating revenue recognition, presenting a non-GAAP measure of revenue that deducts transaction costs when gross presentation is required by GAAP or the inverse presenting a measure of revenue on a gross basis when net presentation is required by GAAP or changing the measurement of revenue or expenses in a non-GAAP performance measure from an accrual basis to a cash basis) would be considered misleading. See Non-GAAP Financial Measures CDI 100.04.
A non-GAAP financial measure could be misleading if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly disclosed. Non-GAAP Financial Measures CDI 100.05 includes examples of disclosures that the SEC staff has indicated would be considered misleading.
Non-GAAP financial measures could be misleading even if they are accompanied by detailed disclosures about the nature and effect of each adjustment. See Non-GAAP Financial Measures CDI 100.06.
.32 Interpretive guidance on prominence
As noted above, S-K 10(e)(1)(i)(A) requires that when a registrant presents a non-GAAP financial measure it must present the most directly comparable GAAP measure with equal or greater prominence.
In Non-GAAP Financial Measures CDI 102.10(a) and CDI 102.10(b), the SEC staff has provided a number of disclosure examples that the SEC staff believes would cause a non-GAAP measure to be more prominent than the comparable GAAP measure. For instance, the SEC staff has identified the presentation of an income statement of non-GAAP measures or the presentation of a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures as situations where the disclosure of non-GAAP measures is more prominent. The SEC staff considers a non-GAAP income statement to be one that is comprised of non-GAAP measures and includes all or most of the line items and subtotals found in a GAAP income statement. See Non-GAAP Financial Measures CDI 102.10(c).
Additionally the SEC staff has indicated that when omitting the quantitative reconciliation relating to a forward looking non-GAAP financial measure in reliance on the exception provided by S-K 10(e)(1)(i)(B), the non-GAAP measure would be considered to be presented with greater prominence than the comparable GAAP measure if the registrant does not disclose its reliance upon the exception and identify the information that is unavailable and its probable significance in a location of equal or greater prominence. See Non-GAAP Financial Measures CDI 102.10(b).
.33 Interpretive guidance on EBIT/EBITDA
By its very nature, EBITDA oftentimes excludes charges/liabilities that require (or will require) cash settlement (e.g., taxes and interest). The SEC has stated that EBIT and EBITDA were exempted from the prohibition to exclude charges/liabilities that require (or will require) cash settlement (see S-K 10(e)(1)(ii)(A)) because of their wide and recognized existing use. However, registrants that present these measures in filings with the SEC must reconcile these measures to the most directly comparable GAAP financial measure. Also, in discussing why the measure is useful to investors, registrants should consider discussing why investors would find the measure valuable in the context in which it is presented. Although the SEC’s non-GAAP financial measures rules do not specifically indicate that EBIT and EBITDA can only be considered non-GAAP liquidity measures, registrants intending those measures to be used as non-GAAP performance measures should consider disclosing why a measure that excludes the income statement impact of assets that are likely integral to the entity’s performance (e.g., depreciation charges for fixed assets used in operations) is a reasonable measure of operating performance.
Registrants that conclude that EBIT and EBITDA are non-GAAP measures of liquidity would need to consider the most directly comparable GAAP measure (which would likely be cash flows from operating activities) and use that measure to satisfy the reconciliation requirements. This may require registrants to provide reconciliations that are different from those that have been traditionally presented.
The SEC staff has indicated that it views the definition of earnings for purposes of calculating EBIT or EBITDA to be net income as presented in the statement of operations. See Non-GAAP Financial Measures CDI 103.01.
EBIT and EBITDA per share amounts should not be presented. See Non-GAAP Financial Measures CDI 103.02.
[Editor’s note: With respect to liquidity measures, the exemption that permits the presentation of EBIT or EBITDA does not extend to the presentation of “adjusted EBIT” or “adjusted EBITDA.” Registrants should evaluate any such measures in light of the requirements and prohibitions established in S-K 10(e) without regard to the exemption in the preparation of a liquidity measure for EBIT and EBITDA. See Non-GAAP Financial Measures CDI 103.01.]
Refer to the discussion in SEC 6020.31 and Non-GAAP Measures CDI 102.09 regarding presentation of a non-GAAP measure that is a material debt covenant.
.34 Interpretive guidance on segment reporting
Although measures of profit or loss and total assets for reportable segments continue to be allowed under GAAP applicable to segment reporting, registrants should consider including a robust discussion of all items materially impacting the consolidated financial statements as well as the impacted segments without regard to whether they are included in or excluded from the measure of segment profitability in accordance with GAAP applicable to segment reporting. See footnote 28 to FRP 501.06a and Non-GAAP Financial Measures CDIs 104.01 through 104.06.
The presentation of the total segment profit or loss measure in any context other than the ASC 280 required reconciliation in the footnote would generally be considered the presentation of a non-GAAP financial measure because it has no authoritative meaning outside of the ASC 280 required reconciliation in the footnotes to the company's consolidated financial statements. As such, a registrant should consider the applicable non-GAAP disclosure requirements if the total of each segment measure of profitability is presented outside the ASC 280 disclosures. See Non-GAAP Financial Measures CDI 104.04.
.35 Interpretive guidance on non-GAAP per share measures
Although there is no per se prohibition in S-K 10(e) on non-GAAP per share measures in documents filed with the SEC, this should not be interpreted as a repeal of the SEC's long-standing position on non-GAAP per share measures detailed in Accounting Series Release (ASR) No. 142. Certain registrants (e.g., those in the real estate industry) will not necessarily be precluded from using funds from operations per share (subject to the other presentation and disclosure requirements applicable to the particular non-GAAP financial measure). See Non-GAAP Financial Measures CDIs 102.01 and 102.02.
Per share measures that are prohibited specifically under GAAP (e.g., cash flow per share) or SEC rules (e.g., non-GAAP liquidity measure that measures cash generated) continue to be prohibited in materials filed with, or furnished to, the SEC. ASR No. 142 explains the SEC’s concern that certain financial information (e.g., sales, current assets, funds flow, total assets, cash and other similar figures) presented on a per share basis cannot logically be related to the common shareholder without adjustment. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management characterizes it solely as a performance measure (see Non-GAAP Financial Measures CDI 102.05). The SEC staff has also indicated that EBIT or EBITDA measures should not be presented on a per share basis. See Non-GAAP Financial Measures CDI 103.02.
.36 Interpretive guidance – income tax effects
A registrant should provide income tax effects on its non-GAAP measures, depending on the nature of the measures, and should provide transparent disclosure of the tax effects. See Non-GAAP Financial Measures CDI 102.11.
.4 Key performance indicators and metrics in MD&A
The SEC has issued interpretive guidance on the disclosure of key performance indicators and metrics in MD&A. In the guidance, the SEC reminded companies that present key performance indicators and metrics in MD&A to consider the existing MD&A requirements including any existing regulatory frameworks such as generally accepted accounting principles or, with respect to non-GAAP measures, Regulation G or S-K 10(e). Additionally, the SEC reminded companies to consider whether they may need to include additional material information in order to keep the presentation of the key performance indicator/metric from being misleading (e.g., estimates or assumptions underlying the metric or its calculation).
The guidance also indicates that the SEC would generally expect the following disclosures (based on the relevant facts and circumstances):
- A clear definition of the metric and how it is calculated;
- A statement indicating the reasons why the metric provides useful information to investors; and
- A statement indicating how management uses the metric in managing or monitoring the performance of the business.
The SEC also provided guidance on disclosures relating to a change in the method of calculation or presentation of a metric (to the extent material).
Refer to Section 501.16 of the Codification of Financial Reporting Policies for further detail.
.5 How to access Regulation G
The text of Regulation G is available on Viewpoint under SEC Reporting / SEC Rules and Regulations.
.6 How to access non-GAAP financial measures compliance and disclosure interpretations
The text of the SEC staff’s Non-GAAP Financial Measures Compliance and Disclosure Interpretations is available on Viewpoint under SEC Reporting / SEC Interpretative Guidance / Compliance and Disclosure Interpretations.
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