Non-GAAP Measures, Rev Rec and Leases Highlight Preparers’ Q1 Reporting Concerns

by Erik Bradbury

During the last quarter, a number of new standards and regulatory matters including the growing use of non-GAAP measures, revenue recognition implementation and the new leasing standard affected FEI members.

FEI’s Committee on Corporate Reporting (CCR) met in March to discuss these and other standard-setting, regulatory, and financial reporting matters with the FASB and professional accounting experts.

Non-GAAP Measures

SEC interest in preparer disclosure of non-GAAP earnings has been a major headline recently as companies like Valeant Pharmaceuticals, Groupon, Equifax, and T-Mobile continue to receive media attention for their liberal use of non-GAAP financial measures. This isn’t surprising given multiple signals provided by SEC Chair Mary Jo White and SEC Chief Accountant James Schnurr in recent speeches. We highlighted this issue for our members in recent FEI publications including our January Professional Accounting Update titled, Non-GAAP Financial Measures – The Details Matter.

The first formal SEC rules on non-GAAP measures date back to early 2003, and came in response to Sarbanes-Oxley Act requirements.  These have been supplemented by Compliance and Disclosure Interpretations (CDIs) over the years, as well as numerous Division of Corporation Finance (Corp Fin) comments to registrants posted in EDGAR.

Some key statistics about the prevalence of non-GAAP earnings include:

  • 88 percent of the S&P 500 use non-GAAP numbers
  • Over 80 percent of the adjustments are upward
  • Non-GAAP earnings for the Dow were 30 percent higher than the GAAP earnings last year
Adding to this, the largest number of non-GAAP adjustments are for, in order: (1) acquisition and divestiture items, (2) restructurings, (3) litigation, (4) depreciation and amortization, (5) impairment, and (6) stock-based compensation. Impairments notably contribute to the largest dollar amount of adjustments.

For more insights and advice on specific areas for preparers to focus on to avoid unnecessary headaches with non-GAAP reporting, click on the link to gain access to our members-only article through FEIConnect.

Revenue Recognition and SAB 74 Disclosures

The new revenue recognition standard is possibly the most significant overhaul of any accounting standard in some time. The converged standard, Revenue from Contracts with Customers (Topic 606), was issued on May 28, 2014, and adoption is required for public companies in 2018. However, recent findings suggest many companies, including those in the Fortune 500, have not yet begun the revenue recognition adoption process — which is surprising.

While forward-looking, registrants are required to discuss the impact adopting the new standard will have on their future filings (interim and annual) with the SEC in accordance with Staff Accounting Bulletin (SAB) No. 74 (codified in SAB Topic 11-M).

In addition, while the initial SAB 74 disclosures about the standard’s effect may not be specific, preparers can expect the Staff to be looking for more informative disclosures and continued enhancement as the adoption date gets closer. This may come in the form of additional comment letters from Corp Fin asking for more discussion from registrants.

Lease Accounting

The new lease accounting standard was issued on February 25, 2016. Its effects will be felt by all companies, and the standard is expected to have a major impact in a number of industries. The most significant change will be the recording of lease obligations on the balance sheets of lessees.

For additional insight into these important topics and other standard-setting and regulatory issues, visit FEIConnect to obtain access to a members-only article.

Lease Accounting Conference

FEI will be hosting a one-day Lease Accounting Conference in Dallas, Texas, on June 16th. Participants will hear directly from firm and industry experts on the impact of the new standard and learn what they need to know.

About CCR

FEI’s Committee on Corporate Reporting (CCR)  represents approximately 45 of the largest Fortune 100 companies making up more than $5 trillion in market capitalization, and is highly influential to the preparer community as it monitors accounting and financial reporting developments of the Financial Accounting Standards Board (FASB), International Financial Reporting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and Public Company Accounting Oversight Board (PCAOB). The Committee frequently engages in discussions with these respective bodies on issues important to FEI membership, and provides feedback through the formal comment letter process.