Securities Alert: SEC Updates Guidance on Non-GAAP Financial Measures

Related Practices

Attorneys & Professionals

On May 17, 2016, the SEC updated its Compliance & Disclosure Interpretations (C&DIs) concerning the use of non-GAAP financial measures. The new guidance focuses on the calculation and presentation of non-GAAP financial measures in SEC filings and earnings releases subject to Regulation G and/or Item 10(e) of Regulation S-K.


The new C&DIs set forth in Questions 100.01 to 100.04 provide that presenting the following types of non-GAAP financial measures may be misleading and violate Rule 100(b) of Regulation G:

Non-GAAP Per Share Performance Measures

C&DI Question 102.05 confirms that non-GAAP earnings per share measures may be included in documents filed with or furnished to the SEC and should be reconciled to GAAP earnings per share.  However, non-GAAP liquidity measures that measure cash generated may not be presented on a per share basis. Companies may not include a non-GAAP per share measure in documents filed with or furnished to the SEC that can be used as a liquidity measure (including free cash flow, EBIT and EBITDA), even if management presents it solely as a performance measure. The SEC will evaluate whether a company’s use of non-GAAP per share data is permitted based on the substance of the non-GAAP measure and not on management’s characterization of the measure.

Equal or Greater Prominence

Item 10(e)(1)(i)(A) of Regulation S-K requires that when a company presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. C&DI Question 102.10 sets forth the following examples of disclosures that would cause a non-GAAP financial measure to be more prominent than a GAAP financial measure and violate Item 10(e)(1)(i)(A) of Regulation S-K:

Income Tax Effects

C&DI Question 102.11 provides that the calculation and presentation of income tax effects related to adjustments to arrive at a non-GAAP measure depends on the nature of the measure. For a liquidity measure that includes income taxes, it may be acceptable to adjust GAAP taxes to show taxes paid in cash. For a performance measure, the company should include current and deferred income tax expense commensurate with the non-GAAP measure of profitability. Adjustments to arrive at a non-GAAP measure should not be presented “net of tax,” but should instead be shown as a separate adjustment and clearly explained.

Free Cash Flow

C&DI Question 102.07 reminds companies that present a measure of free cash flow to clearly describe how they calculate the measure and provide a required reconciliation.  Companies should not imply that free cash flow represents the residual cash flow available to the company for discretionary expenditures since many companies have mandatory debt service requirements or other non-discretionary expenditures that are not deducted from the measure.  C&DI Question 103.02 further provides that free cash flow may not be presented on a per share basis.


C&DI Question 103.02 clarifies that if EBIT or EBITDA is presented as a performance measure, the measure should be reconciled to net income as presented in the statement of operations under GAAP. The SEC does not consider operating income to be the most directly comparable GAAP financial measure because EBIT and EBITDA make adjustments for items that are not included in operating income. C&DI Question 103.02 further provides that EBIT and EBITDA may not be presented on a per share basis.

Going Forward

In light of these revised and updated C&DIs, the SEC has made clear that it will continue to focus on proper presentation and calculation of non-GAAP financial measures and companies will need to carefully review and update their disclosure of non-GAAP financial measures to ensure compliance with SEC rules, regulations and guidance.