Public company financial reporting under Generally Accepted Accounting Principles (GAAP) fits the Securities and Exchange Commission’s objective to provide the investing public consistent disclosure from company to company, but GAAP does not always meet a management team’s objective to evaluate operations, set strategy, and monitor day-to-day business results. Using non-GAAP measures in public disclosure can offer a clearer picture of how management team views a company’s results, but requires caution and precision. This article breaks down (1) the differences between GAAP, non-GAAP, and not non-GAAP; (2) which non-GAAP rules apply to different reporting methods; and (3) areas the SEC has cautioned companies to avoid when using non-GAAP measures.
What is GAAP?
US Generally Accepted Accounting Principles set by the Financial Accounting Standards Board (FASB).
What is non-GAAP?
- number, calculation, or ratio
- may exclude amounts that would be included in the GAAP measure
- may include amounts that would be excluded from the GAAP measure
What is not non-GAAP?
- operating and statistical measures, such as number of employees
- numbers calculated using exclusively GAAP measures or operating measures that are not non-GAAP
- measures required to be disclosed by GAAP
- measures required to be disclosed by the SEC or other governmental authority, such as bank regulatory reporting measures like leverage ratio and capital ratios
SEC Regulations Applicable to Using Non-GAAP Measures
Regulation G |
Reg S-K Item 10(e) |
When the regulation applies:
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Any public announcement of material information:
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Certain announcements of material information:
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Required disclosure:
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Cannot contain an untrue statement of material fact or omit to state a material fact necessary to make the non-GAAP measure not misleading |
Cannot contain an untrue statement of material fact or omit to state a material fact necessary to make the non-GAAP measure not misleading |
| Label as a non-GAAP measure | Label as a non-GAAP measure |
| Include most directly comparable GAAP measure | Include most directly comparable GAAP measure with equal or greater prominence than the non-GAAP measure |
| Reconciliation from the GAAP measure to the non-GAAP measure | Reconciliation from the GAAP measure to the non-GAAP measure |
| Disclosure explaining the reasons why management believes the presentation of the non-GAAP measure provides useful information to investors | |
| If applicable, disclosure explaining how management uses the non-GAAP measure |
Using non-GAAP measures is a tricky area of financial reporting that is also a frequent subject of SEC comment letters. If you have questions about using non-GAAP measures, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.