Non-GAAP Financial Measures – The Details Matter

by Erik Bradbury

The use of “non-GAAP” measures is extremely common in financial reporting today, but can result in unwanted regulatory and media scrutiny.

Non-GAAP disclosures have been a significant focus area in the financial news media and in regulatory circles recently. According to a recent Audit Analytics report, approximately 88 percent of companies in the S&P are using non-GAAP measures to communicate financial performance, with the vast majority of those adjusted measures resulting in a positive effect on net income.

The SEC has made a number of public statements in late 2015 that indicate that use of non-GAAP measures will be an area of emphasis, and that there may be additional rule-making or interpretive guidance forthcoming in the year ahead. Based on the heightened focus on the use of non-GAAP measures, companies need to make sure that they are complying with all of the requirements that apply to their use to reduce the risk of adverse media and regulatory attention. In addition, as noted multiple times in recent communications from the SEC, there are clear signals of increased regulatory focus and concern over what appears to be a growing trend of non-compliance among reporting companies.

While the use of non-GAAP measures is common, it’s important to understand the implications and risk associated with disclosing non-GAAP measures. Complying with the SEC’s non-GAAP requirements protects a company from regulatory scrutiny. Some recent high-profile enforcement actions have resulted from inappropriate reporting of non-GAAP measures, and therefore, there are some things to avoid. The press is also picking up on the issue, as noted in a recent article on Valeant Pharmaceuticals International.

Best Practices

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