This earnings season will be the first since the SEC’s May 17th revised C&DIs (Compliance and Disclosure Interpretations) guidance regarding the presentation of GAAP and non-GAAP measures in earnings releases.
SEC Chair White recently spoke of having noteworthy concerns about issuers who present non-GAAP measures “too far and beyond what is intended and allowed by the SEC’s rules” and “troublesome practices which can make non-GAAP disclosures misleading.” Lets tag them as the bad non-GAAPles.
The SEC is aware that just a few bad non-GAAPles have ruined the whole batch
To address this, the SEC has issued new and updated CD&Is regarding non-GAAP measures. The new and revised C&DIs do not represent a formal rule change. However, they are a warning signal to issuers and absolutely demonstrate the SEC’s concerns regarding inappropriate adjustments presented by companies on their non-GAAP financial measures. The SEC is watching earnings releases closely.
Much of the new guidance is strategic if not “philosophical” around the actual measures that an issuer uses to calculation their earnings and guidance. That’s for the Audit Committee to work on. Tactically, the SEC called-out some non-GAAP disclosure presentation practices that are common in earnings releases. The bottomline is that issuers cannot disclosure their results in manner that places undue prominence on the non-GAAP numbers.
“Prominence” is the key concept here. Earnings release practices that the SEC has specified as non-acceptable include:
- Presenting a non-GAAP measure before its most directly comparable GAAP measure – including within an earnings release headline or caption
- Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure
- Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures
- Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures
- Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.
To mitigate risk of non-compliance, issuers that plan to present non-GAAP financial measures in their earnings releases may need to modify their disclosure practices. Chair White strongly urged issuers to consider the updated guidance and “revisit their approach to non-GAAP disclosures.”
Although the SEC is uber-focused on earnings releases with this new guidance, the SEC also urges issuers to uphold these new guidelines in their non-earnings (EDGAR filed) shareholder communications such as in presentations to investors and analysts, annual reports and IR websites. Issuers should communicate with shareholders in a consistent manner – the stock narrative told outside of the SEC filings should be the same as the narrative found within in the issuer’s SEC filings.
By now, hopefully IROs have had in-depth conversations with their corporate securities lawyers. NIRI members should listen to the educational webinar.