by Cydney Posner

In a webcast yesterday, “Non-GAAP Disclosures: The SEC Speaks,” sponsored by, Corp Fin Chief Accountant Mark Kronforst, speaking for himself and not the SEC, shed more light on the recent guidance from the Corp Fin staff on non-GAAP financial measures (NGFMs). (See this PubCo post.)   Kronforst noted that, while the staff issued some “futures” comments on the first quarter disclosures (referring recipients to the new CDIs), companies should expect to see more comments related to application of the new CDIs in connection with second quarter press releases and 10-Qs. Much more was covered in the program available at

Kronforst then addressed some of the specific CDIs:

  • 100.04 concerns a non-GAAP presentation of revenue that, under GAAP, is recognized ratably over time, but, as a NGFM, accelerates revenue to make it appear that the company earned revenue when customers were billed. The staff’s conclusion in the CDI was that “[n]on-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b),” as could individually tailored recognition and measurement methods for other financial statement line items. Apparently, a number of companies have attempted to challenge the guidance, but so far, the staff has not been persuaded to take a different view. According to Kronforst, “the bar is high.” He did confirm, however, that companies may still report “bookings” and “billings,” so long as they are properly characterized as such.  In his view, those measures can be useful and they are not NGFMs — they report facts, not adjustments from revenue.

With regard to disclosures related to the pending transition to the new revenue recognition standard, Kronforst indicated that the staff will not object if companies use NGFMs to present the impact of the new standard on current results.  He views this presentation as essentially an “old GAAP/new GAAP” type of measure.

Recognizing that some companies have used the same, now problematic, revenue NGFMs for many years and provided guidance to analysts and others on that basis, Kronforst indicated that companies will be able to continue to present the same NGFM for one quarter, disclosing their intent to discontinue use of the NGFM in the future — essentially, “one and done.” Likewise, it would not be problematic, for one quarter, to provide a roadmap to a new NGFM that does not transgress the guidance.  Companies may also provide bridging disclosures to help analysts cope with change, for example, in the circumstances of the CDI above, by presenting the GAAP numbers recognized ratably in future periods and allowing readers to “do the math.”

  • 100.02 advises that a non-GAAP measure can be misleading when it is presented inconsistently between periods, such as when the measure adjusts a particular charge or gain in the current period but similar charges or gains were not adjusted in prior periods. In those cases, the staff advises, the change between the periods must be disclosed and the reasons for it explained. While acknowledging that these types of disclosures are not common, Kronforst stressed that companies should not “move the goalposts” without disclosure, including the reasons for the change.  (Presumably, those reasons will not include “earnings management.”)
  • 102.05 relates to the prohibition in S-K Item 10(e) on the use, in documents filed with or furnished to the SEC (such as earnings releases), of per-share non-GAAP liquidity measures. In contrast, non-GAAP per-share performance measures “may be meaningful from an operating standpoint.”  The CDI adds that “[w]hether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure.  When analyzing these questions, the staff will focus on the substance of the non-GAAP measure and not management’s characterization of the measure.” [Emphasis added.]  Kronforst noted, in the past, the staff tended to defer to management’s view as to whether the measure was a liquidity or performance measure, resulting in the near extinction of per-share liquidity measures.  In a change from the past approach, the staff will no longer defer to management’s interpretation.  Kronforst observed that many measures are either at one end of the spectrum or the other — clearly related to net income or to operating or free cash flow.  But some measures are really a mixed bag, about which reasonable people may differ.  According to Kronforst, the staff’s focus — for now — will be the liquidity end of the spectrum.  For example, if there are a dozen adjustments necessary to arrive at the measure from net income and only one adjustment to reach operating cash flow, the measure will draw staff scrutiny.
  • 102.10 expands on the “equal or greater prominence” provision in S-K Item 10(e). S-K Item 10(e)(1)(i)(A) requires, both in SEC filings and furnished earnings releases that include NGFMs, that the most directly comparable GAAP measure be presented with equal or greater prominence relative to the NGFM.  Kronforst confirmed that, depending on the particular presentation, once the comparable GAAP measure has been disclosed at the beginning with equal or greater prominence, it would not be necessary to clutter the entire presentation with a reference to the comparable GAAP measure each and every time the NGFM is used.

The CDI provides some useful examples of the types of presentations where the NGFMs would be viewed by the staff to be problematic because they are more prominent. The first example characterizes as problematic a presentation of a full income statement of NGFMs or of a full NGFM income statement when reconciling NGFMs to the most directly comparable GAAP measures. Kronforst acknowledged that there is a range here;  the more the presentation looks just like GAAP financial statements, the more likely it is to draw staff objections. However, he indicated, the staff is still looking to find the right balance between a presentation designed to provide a useful reconciliation and one that appears the same as an income statement (and, presumably, could be misleading).

Another example involved the exclusion of a quantitative reconciliation with respect to a forward-looking NGFM in reliance on the “unreasonable efforts” exception (in S-K Item 10(e)(1)(i)(B)) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence.  Kronforst commented that the concept here is not new — in fact, the language of the example reflects the language of the SEC.  The problem is that these requirements have not been regularly observed.  The company must first determine whether it qualifies for the exception and then add the required disclosure. With regard to prominence, while the staff does not want the disclosure to be buried in a footnote, Kronforst assured that the staff would be reasonable.

 In connection with a discussion of some recent staff comments, Kronforst provided additional color on the topic of the required “usefulness” disclosure of S-K Item 10(e), a frequent subject of staff comment.  According to Kronforst, staff scrutiny of “usefulness” disclosure tends to scale with the uniqueness of the measure. In contrast to a recognized measure such as the standard EBITDA, a measure that is more complex and original would require more transparency in the associated  usefulness disclosure.  Kronforst also added that, with respect to measures like EBITDA, companies should take care to label them correctly.  If there are non-standard adjustments involved, that should be clear from the title used to describe the measure.

Posted by Cydney Posner