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Non-GAAP financial measures result in frequent comments regarding compliance with Item 10(e) of Regulation S-K and the related Compliance and Disclosure Interpretations (C&DIs), sometimes resulting in requests to remove or substantially modify non-GAAP metrics.
In December 2022, the SEC staff updated its C&DIs relating to non-GAAP financial measures. The staff noted that the updates were intended to memorialize existing staff views provided through public statements or comment letters. A key focus of the updates was to provide further guidance on non-GAAP measures that are considered misleading, including guidance on operating expenses that are “normal and recurring,” labeling of non-GAAP measures and adjustments, and measures that represent a tailored accounting principle. Refer to the “Non-GAAP C&DIs” guidance below for further information.
These focus areas remain relatively consistent from prior periods and have been emphasized through the updated C&DIs:
  • presentation with equal or greater prominence of the most directly comparable GAAP financial measure;
  • reconciliation to the most comparable GAAP financial measure;
  • appropriateness of adjustments to eliminate or smooth items identified as non-recurring, infrequent, or unusual;
  • use of individually tailored accounting principles; and
  • disclosure of why management believes the non-GAAP presentation provides useful information to investors regarding the financial condition or results of operations of the registrant. 
Comment examples
Guidance references
  • You disclose non-GAAP measures without presenting the comparable GAAP measures with equal or greater prominence. Please ensure any discussion regarding non-GAAP measures is preceded by an equal or more prominent discussion of the comparable GAAP measure.
  • Please include a reconciliation of core earnings that begins with the most directly comparable GAAP measure. Your revised reconciliation should provide disaggregated disclosure of all the adjustments necessary to arrive at core earnings from the most directly comparable GAAP measure.
  • Your current disclosure discusses management’s use, but not how the presentation of the measure is useful to investors. Please revise your disclosure to include a discussion of investor’s use of these measures. We note your presentation of the non-GAAP measure total gross margin. Please revise your reconciliation for this non-GAAP measure to the most directly comparable GAAP measure of gross margin in accordance with Item 10(e)(1)(i)(B) of Regulation S-K. If you do not believe gross margin that includes depreciation and amortization is the most directly comparable GAAP measure, please tell us why in your response. In addition, retitle this measure to avoid confusion with the GAAP measure of gross margin. Similar changes should be made to your earnings release.
  • We note you present Adjusted Gross Margin as a non-GAAP measure and that you reconcile this measure to operating income. Please revise to reconcile to a fully loaded GAAP gross profit or tell us why you believe operating income is the most directly comparable GAAP measure. Refer to Item 10(e)(1)(i)(B) of Regulation S-K.
  • We note that you disclose non-GAAP adjusted net income excluding the impact of "qualitative factors adjustment" as a result of sustained favorable macroeconomic conditions. It appears that this adjustment represents a tailored accounting principle prohibited by Rule 100(b) of Regulation G, as discussed in Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations (CD&Is). Please remove this adjustment from future filings. Alternatively, tell us how you comply with the guidance.
  • You view operating income as the most directly comparable GAAP measure for reconciliation of your non-GAAP measure, adjusted operating margin. However you do not report gross profit in your financial statements. We believe that gross profit as defined in GAAP represents the most comparable GAAP measure that should be identified and used in your reconciliation to comply with the requirements of Item 10(e)(1)(i)(B) of Regulation S-K. Accordingly, please revise your presentation to reconcile adjusted operating margin to a fully loaded gross profit as defined in GAAP.
  • We note that you present a free cash flow conversion measure, and that you use this measure to assess your ability to convert earnings to free cash flow. Please tell us why you believe it is appropriate to present a non-GAAP measure that appears to intermix a liquidity measure with a performance measure. Considering net income is reconciled to operating cash flows on your statement of cash flows, please also tell us how your conversion measure provides useful information to investors.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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