Tag: non-GAAP financial measures
SEC staff takes issue with widely used pharma non-GAAP financial measure
Pharmas, biotechs and others may want to take notice—if they haven’t already—of a series of SEC comment letters to global biopharmaceutical company, Biogen, about one of the company’s non-GAAP financial measures. More specifically, in 2021, the SEC staff objected to the company’s exclusion from non-GAAP R&D and non-GAAP net income of material upfront and premium payments made in connection with collaboration agreements. In the end, Biogen agreed to discontinue these adjustments going forward and to recast prior period information. As reported in this article in MarketWatch, this year a number of biopharmas have taken a lesson from the exchange between Biogen and the SEC staff and have included language in their earnings releases explaining similar changes in practice, following guidance from the SEC staff, regarding exclusion of upfront payments from non-GAAP R&D. Moreover, the article indicated, the impact of the changes was “not insignificant,” leading, in one example, to a change of $0.15 in EPS for a single quarter.
Is there a resurgence in the use of non-GAAP financial measures?
In 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. In May 2016, the Corp Fin chief accountant, as reported in CFO.com, cautioned companies in neon lights that, with regard to non-GAAP financial measures, “[f]or lack of a better way to say it, we are going to crack down.” (See, e.g., this PubCo post and this PubCo post.) By early 2017, the SEC staff were apparently sufficiently satisfied (see this PubCo post) with the responses to their campaign that the pendulum swung back, and the relentless finger-wagging by the staff about non-GAAP financial measures appeared to have tailed off. (See this PubCo post.) And, according to this analysis from Audit Analytics, in 2018, SEC staff comments regarding non-GAAP financial measures actually began to decline. But, MarketWatch has reported, with the onset of COVID-19, there seems to have been something of a resurgence in the use of non-GAAP measures. Will we see another crackdown?
Auditors address non-GAAP financial measures in the context of COVID-19
Is EBITDAC a thing? Yes, according to the FT. This article describes the use of a new non-GAAP metric: “earnings before interest, tax, depreciation, amortisation—and coronavirus.” Applying the new metric, a few companies have actually added back profits they contend they would have earned but for the mandatory lockdowns resulting from COVID-19. Hmmm. While, according to the article, the add-back has “bemused some observers,” it does raise the question: how should companies employ non-GAAP financial measures (NGFMs) in the context of COVID-19? How should audit committees conduct oversight of the use of NGFMs that have been adjusted for coronavirus-related effects? Auditors weigh in.
Corp Fin issues Disclosure Guidance: Topic No. 9 Coronavirus (COVID-19)
Today, the staff of Corp Fin issued Disclosure Guidance Topic No. 9, which offers the staff’s views regarding disclosure considerations, trading on material inside information and reporting financial results in the context of COVID-19 and related uncertainties. The guidance includes a valuable series of questions designed to help companies assess, and to stimulate effective disclosure regarding, the impact of the coronavirus. As always these days, the guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.
Secret sauce, sausages and cookie jars…
No, it’s not an episode of Top Chef, but it is about “cooking the books.” And those are just some of the ingredients and tools used by Brixmor Property Group, a publicly traded REIT, and four of its executives to do the cooking: manipulation of a key non-GAAP financial measure, according to this SEC complaint and order and, even more to the point, this SDNY criminal indictment of the executives. As alleged, management sought to create the impression that a static pool of its existing properties showed steady and predictable income growth across a number of quarters. In contrast, however, Brixmor’s actual income growth rate was “volatile and frequently fell above or below the company’s publically issued guidance range” for the period. So, according to the order, the company architected the desired illusion—touted as its “secret sauce”—by engaging in some “sausage-making” with regular hits to the “cookie jar.” While it doesn’t sound very appetizing, it did create the desired deception—until, of course, it didn’t. The lesson is that manipulation of a non-GAAP measure, together with violations of GAAP, to mislead the public can be trouble—and perhaps even criminal. Although cases of accounting fraud may not be as common as they once were, this case should serve as a reminder that the SEC and the Justice Department are still on the lookout for it.
SEC enforcement action for violation of non-GAAP “equal or greater” prominence requirement
In case you were questioning whether the SEC continues (assuming it reopens at some point) to address the inappropriate use of non-GAAP financial measures with the same level of gravity as in prior years, you might take note of this recent (cusp of SEC shutdown) enforcement action against ADT. In the proceeding, the SEC sought a cease-and-desist order, alleging that the company violated the non-GAAP disclosure requirements. Interestingly, however, the allegations did not involve any of the more thorny issues regarding individually tailored recognition measures that the SEC sometimes considers misleading, but rather the more prosaic “equal or greater prominence” requirements.
Are non-GAAP financial measures still problematic?
A couple of years ago, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as one enforcement action—toward requiring issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. For example, companies were advised that they needed to present GAAP measures with equal or greater prominence relative to the non-GAAP measures. (See, e.g., this PubCo post.) And, as this article revealed, according to Audit Analytics, in 2016, over 25% of the companies in the S&P 500 index had shifted their presentations to put GAAP at the top of their quarterly earnings releases and 81% made GAAP numbers most prominent, compared with only 52% for the prior quarterly earnings releases. (See this PubCo post.) By the end of 2017, the SEC was apparently sufficiently satisfied with the response that the pendulum had swung back, and there was less staff focus and comment on non-GAAP financial measures. (See this PubCo post.) But is that really the end of the story? How “good” are the numbers that are fed to investors?
Corp Fin posts two new CDIs regarding non-GAAP financial measures in the M&A context
Corp Fin has posted two new CDIs regarding the use of non-GAAP financial measures in connection with business combinations, summarized below:
Highlights of the 2017 PLI Securities Regulation Institute
Summarized below are some of the highlights of the 2017 PLI Securities Regulation Institute panel discussions with the SEC staff (Michele Anderson, Wesley Bricker, Karen Garnett, William Hinman, Mark Kronforst, Shelley Parratt, Ted Yu), as well as a number of former staffers and other commentators. Topics included the Congressional and SEC agendas, fresh insights into the shareholder proposal guidance, as well as expectations regarding cybersecurity, conflict minerals, pay ratio disclosure, waivers and many other topics.
SEC staff comment letters regarding non-GAAP financial measures
You might recall that, in 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. For example, companies were advised that they needed to present GAAP measures with equal or greater prominence relative to the non-GAAP measures. (See, e.g., this PubCo post.) By early 2017, the SEC staff were apparently sufficiently satisfied (see this PubCo post) with the responses to their campaign that the pendulum swung back, and the relentless finger-wagging by the staff about non-GAAP financial measures appeared to have tailed off. (See this PubCo post.) But, according to this analysis from Audit Analytics, it wasn’t until this year that the SEC staff’s comments regarding non-GAAP financial measures actually began to decline.