Non–GAAP: Can it still be used in the United States?

22 February 2017

The U.S. Securities and Exchange Commission (“SEC”) does not prohibit the use of non-GAAP (non-IFRS) measures but it’s not a free for all. The SEC staff issued interpretive guidance known as Compliance Disclosure Interpretations (“CDIs”) in May 2016.  The CDIs were issued to address concerns expressed by the Chair of the SEC and senior staff about recent developments in the presentation of non-GAAP information.

In presenting non-GAAP information companies should pay attention to the detailed requirements in the rules and the CDIs.

What is Non GAAP?

A non-GAAP financial measure is a numerical measure of financial performance, financial position, and cash flow that:

  1. Excludes amounts that are included in the most directly comparable measure presented in accordance with GAAP; or
  2. Includes amounts that are excluded from the most directly comparable measure presented in accordance with GAAP. 

There are two SEC regulations relating to non GAAP. Regulation G - relates to any public disclosure, subject to one exception described below. It requires a reconciliation between non-GAAP and the most directly comparable GAAP number. The non-GAAP information cannot be misleading. Item 10(e) of Regulation S-K – relates to documents that are filed with SEC such as an annual report or registration statement. This regulation includes all of the conditions of Regulation G and has a number of other restrictions.

Item 10(e) of Regulation S-K applies equally to domestic and foreign private issuers.

Limited Exception of Regulation G for Foreign Private Issuers.  

Regulation G does not apply to foreign private issuers that

  1. are listed or quoted on a non U.S. exchange;
  2. don’t use U.S. GAAP; and
  3. disclosure is made outside of the US and or is included in a written communication that is released outside of the U.S.Companies that conduct road shows and investor meetings within the U.S. should discuss the applicability of Regulation G with their U.S. legal counsel.

Companies that conduct road shows and investor meetings within the U.S. should discuss the applicability of Regulation G with their U.S. legal counsel.

What do the CDIs say?  

The Staff’s new CDIs focused on several areas where they believe companies are not complying with current regulations. The CDIs highlight what a company must do and equally things they are prohibited from doing. See Top 5 for each category (must and prohibited) below.

Must Do

1) Present GAAP measures before non-GAAP measures 

Prominence and order matter. GAAP information must be presented before non-GAAP information. The staff’s primary concern were earnings releases that are filed by domestic companies on Form 8-K and some of the key points include: 

  • The headlines to an earnings release must present the GAAP information first.
  • Discussions and information should present GAAP amounts first.
  • Discussions cannot focus on non-GAAP amounts.

The reconciliation must start with GAAP and reconcile to non-GAAP.  

 2) Reconcile EBIT & EBITDA to net income

If either is used as a performance measure it should be reconciled to net income and not to operating income.

3) Present non-GAAP measures consistently 

If a company changes how it presents non-GAAP information it needs to describe the change and the reason for it. Recasting prior measures to conform to the current presentation may be necessary.

4) Calculate tax on all non-GAAP measures presented

Companies need to determine the non GAAP tax expense that would be recognized based on non-GAAP pretax amounts. Simply applying the effective tax rate is not acceptable especially when the effective tax rate is very low because of losses recognized under GAAP.

5) Present Per share information only  for performance measures

Per share information can only be presented for performance measures.   It cannot be provided if the amount could be viewed as a liquidity measure. 


1) Presentation of misleading non-GAAP measures

Measures that are not explicitly prohibited could still be misleading. No bright lines but some companies were excluding normal, recurring cash operating expenses, necessary to operate the business from a performance measure. A company should evaluate why they believe it is appropriate to exclude a cost that is continuously incurred.

2) ‘Cherry picking’ non-recurring charges over non-recurring gains

Exclude non-recurring charges and you’ll also need to exclude non-recurring gains. Non-recurring charges are usually easily identifiable. Companies need to have controls and procedures to identify non-recurring gains. Especially important for companies that make numerous small adjustments.

3) Making up adjustments that change GAAP

A company cannot accelerate revenue that is recognized over time in accordance with GAAP to recognize it in the current year when the customer is billed.

4) Use of unusual’, ‘non-recurring’ or ‘infrequent’ unless the item meets those criteria.

The words matter: an adjustment should not be referred to as “unusual”, “non-recurring” or infrequent unless it meets the specified criteria.

5) Present free cash flow as a performance measure. 

It’s a liquidity measure. Period.  

The guidance can be found here:

This week's guest blogger is Wayne Carnall, US Partner, PwC SEC Leadership Team. Connect with him on LinkedIn here.  


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