Non-GAAP Financial Measures: SEC Staff Comments Focus on Compliance With 2016 Guidance, Particularly the Undue Prominence of Non-GAAP Measures

Sullivan & Cromwell LLP - April 19, 2017

In May 2016, the SEC’s Division of Corporation Finance issued new guidance in the form of Compliance and Disclosure Interpretations, or C&DIs, identifying a number of potentially problematic uses of non-GAAP financial measures. This 2016 guidance evidenced a more restrictive stance by the SEC staff, particularly as compared to SEC staff guidance issued in 2010 that was widely viewed as permitting greater flexibility. The 2016 guidance was also accompanied by public statements by SEC staff members as to their intent to increase scrutiny of non-GAAP measures used in SEC filings.

To date, the SEC staff has publicly released close to 300 comment letters (containing over 500 comments) to nearly 250 companies challenging the calculation and presentation of non-GAAP financial measures in filings made subsequent to the issuance of this guidance. Based on our analysis of these comment letters, we have identified a number of areas of SEC staff focus during this period, in descending order of frequency:

  • Failure to present GAAP measure with equal or greater prominence (C&DI 102.10)
  • Inadequate explanation of usefulness of non-GAAP measure
  • Misleading adjustments, such as exclusion of normal, recurring cash expenses (C&DI 100.01)
  • Inadequate presentation of income tax effects of non-GAAP measure (C&DI 102.11)
  • Individually tailored revenue recognition or measurement methods (C&DI 100.04)
  • Misleading title or description of non-GAAP measure
  • Use of per share liquidity measures (C&DI 102.05)