On May 17, 2016, the Securities and Exchange Commission issued revised and expanded Compliance & Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures. Non-GAAP figures have been a recent focus of public comments by the SEC staff, and the new C&DIs indicate heightened SEC scrutiny in this area. In some instances, the new C&DIs prohibit practices that have been widely used in the past.

One important aspect of the new guidance is how non-GAAP financial measures should be presented in relation to their corresponding GAAP figures. SEC rules have long required that the most directly comparable GAAP measure be provided with equal or greater prominence when non-GAAP measures are disclosed in SEC filings and earnings releases. The new C&DIs provide a number of scenarios where the presentation of non-GAAP measures violates this requirement. As a result, many companies will need to adjust how they present non-GAAP measures going forward.

The new C&DIs also address how certain adjustments to GAAP financial measures can be misleading to investors. One example given is the inconsistent presentation of non-GAAP measures between different periods, such as adjusting a particular charge or gain in the current period but not in a prior period. Another is the presentation of a non-GAAP measure that is adjusted for non-recurring charges but not non-recurring gains in the same period. Other topics addressed by the new C&DIs include the presentation of non-GAAP revenue measures, per share non-GAAP measures, specific non-GAAP measures such as “free cash flow” and adjustments for income tax effects.

Reporting companies should review the new C&DIs, which are effective immediately, to ensure compliance in their presentation of non-GAAP financial information. We expect that this will be an area where companies can expect additional scrutiny from both the SEC and investors going forward.

This Client Alert is for information purposes only and should not be construed as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information or an explanation about the matters discussed in this Alert, please contact one of the attorneys in the firm’s Securities Regulation and Corporate Finance Practice. To learn more about Maynard Nexsen’s Securities Regulation and Corporate Finance Practice, please click here.


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