On December 13, 2022, the staff (Staff) of the U.S. Securities and Exchange Commission (SEC) issued updates and additional explanations to its Non-GAAP Financial Measures Compliance and Disclosure Interpretations (the Non-GAAP C&DIs). The updates to the non-GAAP C&DIs reflect the Staff’s continued focus on non-GAAP financial measures and codify positions the Staff previously took in speeches and comment letters.

The full text of the updated non-GAAP C&DIs can be found here and a comparison of the updated non-GAAP C&DIs to their immediately preceding versions is included in the Appendix below.

The updates clarify existing guidance related to potentially misleading non-GAAP financial measures as follows:

• The Staff affirmed that the determination of whether an adjustment could be misleading depends on facts and circumstances, noting that presenting a non-GAAP performance measure that excludes normal, recurring cash operating expenses necessary to operate a company’s business is just one example of an adjustment that could be misleading. The Staff also clarified that 1) when evaluating what is a “normal, operating expense,” the Staff will look at the nature and effect of the adjustment as it relates to the company’s operations, revenue generating activities, business strategy, and regulatory environment; and 2) an operating expense is “recurring” if it occurs repeatedly or occasionally, including at irregular intervals. (See Question 100.01.)
• The Staff clarified that non-GAAP adjustments that have the effect of changing the recognition and measurement principles required to be applied in accordance with GAAP would be considered “individually tailored” and may be misleading. In other words, the Staff is extending “individually tailored” measures beyond those only affecting revenue recognition. The Staff provided three specific deviations from GAAP that could run afoul of Regulation G: 1) changing the pattern of recognition (e.g., including an adjustment in a non-GAAP performance measure to accelerate revenue recognized ratably over time in accordance with GAAP to make it appear as though it was earned when customers were billed); 2) presenting a non-GAAP measure of revenue that deducts transaction costs as if the company acted as an agent in the transaction, when gross presentation as a principal is required by GAAP, or the inverse; and 3) changing the basis of accounting for revenue or expenses in a non-GAAP performance measure from an accrual basis to a cash basis. (See Question 100.04.)
• The Staff introduced a new Non-GAAP C&DI indicating that a non-GAAP measure can be misleading if it, or any adjustment made to a GAAP measure, is not appropriately labeled and clearly described so that investors can distinguish a company’s formulation from those of other companies. (See Question 100.05.) The Staff provided two examples of violations of Regulation G: 1) failure to identify and describe a measure as non-GAAP and 2) presenting a non-GAAP measure with a label that does not reflect the actual nature of the measure, such as:
  • Contribution margin calculated as GAAP revenue less certain expenses, and labeled as “net revenue”;
  • A non-GAAP measure labeled the same as a GAAP line item or subtotal even though it is calculated differently from the GAAP measure (e.g., “Gross Profit” or “Sales”); and
  • A non-GAAP measure labeled as pro forma that is not calculated in a manner consistent with the requirements under Regulation S-X.
  We understand the Staff’s position is that a company is not required to use the term “non-GAAP” in the title of each non-GAAP measure, but if they do not, they must clearly label the related disclosures as non-GAAP.
• The Staff introduced a new Non-GAAP C&DI indicating that even if a non-GAAP measure is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure, it may still be misleading. Put another way, no amount of disclosure can cure a non-GAAP measure if it is misleading. The Staff provided no examples of this new guidance and will retain broad discretion in determining when a non-GAAP measure is misleading even when there is extensive and detailed disclosure regarding the nature and effect of an adjustment. (See Question 100.06.)

The updates clarify existing guidance related to prominence of non-GAAP measures under Item 10(e) of Regulation S-K, which is applicable to earnings releases furnished to the SEC in an Item 2.02 Form 8-K as well as documents filed with the SEC such as quarterly and annual reports, as follows:

• The Staff indicated that the equal or greater prominence requirement applies not just to the presentation of the non-GAAP measure, but also to any related discussion and analysis of such measure. Consistent with its previous C&DI, the updated C&DI provides that the determination of whether a non-GAAP measure is more prominent than the comparable GAAP measure is a matter of facts and circumstances. (See Question 102.10.)
• The Staff provided several new and updated examples of non-GAAP measures that it would consider to be more prominent than the comparable GAAP measure:
  • Presenting an income statement of non-GAAP measures, alone or as part of the required non-GAAP reconciliation. This example is similar to the example in the previous C&DI, but was changed from “full income statement” to “an income statement.” The Staff considers a non-GAAP income statement to be an income statement comprised of non-GAAP measures and that includes all or most of the line items and subtotals found in a GAAP income statement.
  • Presenting a non-GAAP measure before the most directly comparable GAAP measure or omitting the comparable GAAP measure (including in an earnings release headline or caption).
  • Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence.
  • Presenting a non-GAAP measure using a style of presentation that emphasizes the non-GAAP measure over the comparable GAAP measure (e.g., bold, larger font, etc.).
  • Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure.
  • Presenting charts, tables, or graphs of a non-GAAP financial measure without presenting charts, tables, or graphs for the comparable GAAP measure with equal or greater prominence.
  • Providing discussion and analysis of a non-GAAP measure without similar discussion and analysis of the comparable GAAP measure in a location of equal or greater prominence.
  • Starting a reconciliation with a non-GAAP measure.
  • Presenting a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures.
  • When presenting a forward-looking non-GAAP measure and excluding a reconciliation under the “unreasonable efforts” exception, a non-GAAP measure would be more prominent than the comparable GAAP measure if it is presented without disclosing reliance upon such exception, identifying the information that is unavailable, and disclosing its probable significance in a location of equal or greater prominence.

Appendix

Comparison of Updated/New Non-GAAP C&DIs to Previous Non-GAAP C&DIs

Section 100. General

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a Whether or not an adjustment results in a misleading non-GAAP measure depends on a company’s individual facts and circumstances.

Presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading. [May 17, 2016]

When evaluating what is a normal, operating expense, the staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment.

The staff would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring. [December 13, 2022]

Question 100.04

Question: A registrant presents a non-GAAP performance measure that is adjusted to accelerate revenue recognized ratably over time in accordance with GAAP as though it earned revenue when customers are billed. Can this measure be presented in documents filed or furnished with the Commission or provided elsewhere, such as on company websites?

Answer: No. Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G. Other measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also violate Rule 100(b) of Regulation G. [May 17, 2016]

Question: Can a non-GAAP measure violate Rule 100(b) of Regulation G if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP?

Answer: Yes. By definition, a non-GAAP measure excludes or includes amounts from the most directly comparable GAAP measure. However, non-GAAP adjustments that have the effect of changing the recognition and measurement principles required to be applied in accordance with GAAP would be considered individually tailored and may cause the presentation of a non-GAAP measure to be misleading. Examples the staff may consider to be misleading include, but are not limited to:

•           changing the pattern of recognition, such as including an adjustment in a non-GAAP performance measure to accelerate revenue recognized ratably over time in accordance with GAAP as though revenue was earned when customers were billed;

•           presenting a non-GAAP measure of revenue that deducts transaction costs as if the company acted as an agent in the transaction, when gross presentation as a principal is required by GAAP, or the inverse, presenting a measure of revenue on a gross basis when net presentation is required by GAAP; and

•           changing the basis of accounting for revenue or expenses in a non-GAAP performance measure from an accrual basis in accordance with GAAP to a cash basis. [December 13, 2022]

Question 100.05

Question: Can a non-GAAP measure be misleading if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly described?

Answer: Yes. Non-GAAP measures are not always consistent across, or comparable with, non-GAAP measures disclosed by other companies. Without an appropriate label and clear description, a non-GAAP measure and/or any adjustment made to arrive at that measure could be misleading to investors. The following examples would violate Rule 100(b) of Regulation G:

•           Failure to identify and describe a measure as non-GAAP.

•           Presenting a non-GAAP measure with a label that does not reflect the nature of the non-GAAP measure, such as:

       o          a contribution margin that is calculated as GAAP revenue less certain expenses, labeled “net revenue”;

       o          non-GAAP measure labeled the same as a GAAP line item or subtotal even though it is calculated differently than the similarly labeled GAAP measure, such as “Gross Profit” or “Sales”; and

       o          a non-GAAP measure labeled “pro forma” that is not calculated in a manner consistent with the pro forma requirements in Article 11 of Regulation S-X. [December 13, 2022]

Question 100.06

Question: Can a non-GAAP measure be misleading, and violate Rule 100(b) of Regulation G, even if it is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure?

Answer: Yes. It is the staff’s view that a non-GAAP measure could mislead investors to such a degree that even extensive, detailed disclosure about the nature and effect of each adjustment would not prevent the non-GAAP measure from being materially misleading. [December 13, 2022]

Section 102. Item 10(e) of Regulation S-K

Question 102.10

Question 102.10(a): Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?

Answer: Yes. Although whetherThis requirement applies to the presentation of, and any related discussion and analysis of, a non-GAAP measure. Whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made, the. The staff would consider the following to be examples of disclosure of non-GAAP measures asthat are more prominent than the comparable GAAP measures:

•           Presenting a fullan income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures; . See Question 102.10(c).

• Omitting       Presenting a non-GAAP measure before the most directly comparable GAAP measures from measure or omitting the comparable GAAP measure altogether, including in an earnings release headline or caption that includes non-GAAP measures; • Presenting a non-GAAP measure using .

•           Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence.

•           Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font, etc.) that emphasizes the non-GAAP measure over the comparable GAAP measure; .

• A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);

•           Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure; .

•           Presenting charts, tables or graphs of a non-GAAP financial measures without presenting charts, tables or graphs of the comparable GAAP measures with equal or greater prominence, or omitting the comparable GAAP measures altogether.

•           Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. [December 13, 2022]

Question 102.10(b): Are there examples of disclosures that would cause the non-GAAP reconciliation required by Item 10(e)(1)(i)(B) of Regulation S-K to give undue prominence to a non-GAAP measure?

• Providing tabularAnswer: Yes. The staff would consider the following examples of disclosure of non-GAAP financial measures without preceding it with an equallyas more prominent tabular disclosure ofthan the comparable GAAP measures or including the comparable GAAP measures in the same table; :

•           Starting the reconciliation with a non-GAAP measure.

•           Presenting a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures. See Question 102.10(c).

• Excluding a quantitative reconciliation with respect to         When presenting a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” , a registrant may exclude the quantitative reconciliation if it is relying on the exception inprovided by Item 10(e)(1)(i)(B) of Regulation S-K.  A measure would be considered more prominent than the comparable GAAP measure if it is presented without disclosing that fact andreliance upon the exception, identifying the information that is unavailable, and its probable significance in a location of equal or greater prominence; and. [December 13, 2022]

 • Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. [May 17, 2016]

Question 102.10(c): The staff considers the presentation of a non-GAAP income statement, alone or as part of the required non-GAAP reconciliation, as giving undue prominence to non-GAAP measures. What is considered to be a non-GAAP income statement?

Answer: The 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. [December 13, 2022]