SEC Continues to Closely Monitor the Use of Non-GAAP Financial Measures

by Stinson Leonard Street

Stinson Leonard Street

On May 17, 2016, the U.S. Securities and Exchange Commission (SEC) issued new Compliance and Disclosure Interpretations (C&DIs). The C&DIs provide added guidance on the use of non-GAAP financial measures in public disclosures (GAAP: Generally Accepted Accounting Principles). Since May, the SEC has stepped up its enforcement of non-GAAP regulations and the revised C&DIs, stressing the importance of consistent reporting and the need to protect investors from misleading performance statements.


Regulation G regulates the use of non-GAAP in public disclosures. Similarly, Item 10(e) in Regulation S-K addresses the use of non-GAAP in SEC filings. The regulations define non-GAAP as a measurement of a company's "historical or future financial performance, financial position or cash flows" that excludes amounts and measurements typically included when preparing statements or disclosures in accordance with GAAP standards. The regulations require reporting companies utilizing non-GAAP to:

  • Present measurements that closely comply with GAAP standards
  • Reconcile the difference between non-GAAP and GAAP measurements
  • State the reason for using non-GAAP

These requirements, along with others stated in the regulations, are designed to provide investors and analysts with consistent and reliable performance measurements.


In December of last year, SEC Chair Mary Jo White foreshadowed the SEC's focus on use of non-GAAP. She noted that reporting companies should restrict their use of non-GAAP to situations when the added information provided by non-GAAP would help investors better understand the reporting company's performance.1 In June of this year, after the SEC issued the updated C&DIs, Chair White reiterated the SEC's continued focus on the use of non-GAAP, expressing concern that use of non-GAAP extends "beyond what is intended and allowed" by the SEC's rules.2 She specifically cited concern over the lack of consistency, use of tailored non-GAAP revenues, use of cash flow per share, and a tendency to allow non-GAAP to take precedence over GAAP measures.3


In light of the SEC's focus on the use of non-GAAP, audit committees and finance and legal teams should review the use of non-GAAP by reporting companies in the next round of SEC filings and when making public disclosures. They are encouraged to refer to the C&DIs for guidance and to ensure consistent reporting in their filings. Recently issued SEC comment letters, routinely cite non-compliance with the revised C&DIs. In the letters, the SEC cautioned filers on the use of free cash flow per shares, the prominence of non-GAAP over GAAP, failure to reconcile non-GAAP and GAAP, and inconsistent reporting. While the SEC grants reporting companies some latitude in their use of non-GAAP, the SEC continues to closely monitor non-GAAP and will consider whether enforcement and additional rulemaking is needed.




1 SEC Chair Mary Jo White, Keynote Address at the 2015 AICPA National Conference: "Maintaining High Quality, Reliable Financial Reporting: A Shared and Weighty Responsibility (December 9, 2015) available at:
2 SEC Chair Mary Jo White, Keynote Address, International Corporate Governance Network Annual Conference: Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability, (June 27, 2016) available at
3 Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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