SEC Concerned over Companies Using Non-GAAP Earnings Measures
Public companies’ growing use of non-GAAP earnings measures has caught the attention of Securities and Exchange Commission (“SEC”) Chair Mary Jo White. At a November 17th conference in Washington, D.C., White said the SEC’s Division of Corporation Finance want to make sure that companies’ reliance on non-GAAP measures for presenting better-looking financial results does not mislead investors. In particular, SEC officials want to determine if companies are adequately disclosing why non-GAAP measures provide valuable information regarding their financial conditions and results of operations. White cited the lack of consensus on how companies define certain non-GAAP measured decreases comparability between companies. In addition, White noted several examples including the following:
- Removing certain expenses from the non-GAAP measure of “Core Earnings” that are in-fact core to the operations of the company;
- Lack of consistency by a company in defining a non-GAAP measure.
Under Regulation G, companies that use non-GAAP measures must present the following:
- The most directly comparable GAAP measure in equal or greater prominence than the non-GAAP measure;
- Reconcile the difference between non-GAAP and GAAP measures; and
- Why non-GAAP measures provide useful information.