Non-GAAP Financial Measures in the Spotlight

May 5, 2016

Non-GAAP financial measures, such as EBITDA and free cash flow, are used by a significant number of public companies in their periodic reports to supplement and explain financial statement data. During the past year, however, the SEC has been issuing comment letters regarding non-GAAP financial measures and has repeatedly expressed concerns about potentially misleading presentation techniques. The term “non-GAAP financial measure” was coined by the SEC in 2003 with the adoption of Regulation G, the primary rules governing such disclosures. According to the SEC’s Chief Accountant James Schnurr, “The proliferation of non-GAAP reporting measures among registrants, and reliance and reporting by analysts, should warrant increased focus by management and the audit committee. I believe the focus should go beyond determinations that the measures comply with the Commission’s rules and include probing questions on why, in contrast to the GAAP measure, the non-GAAP measure is an appropriate way to measure the company’s performance and is useful to investors.” In an April 28, 2016 speech, Mark Kronforst, also of the Office of the Chief Accountant, noted that particularly concerning measures include earnings per share measures that resemble liquidity measures, such as cash flow per share; financial measures that are separate from GAAP, such as billings per period; and the impact of non-GAAP measures on effective tax rates. Read remarks by SEC Commissioner Stein and Chief Accountant Schnurr and an article in The Wall Street Journal.

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