On December 13, 2022, the staff of the Division of Corporation Finance of the Securities and Exchange Commission released seven new and updated Compliance & Disclosure Interpretations (“C&DIs”) relating to the use of non-GAAP financial measures. A summary of the updates is below, and the full text of the recently revised C&DIs is attached.

Misleading Non-GAAP Measures

• Adjustments that are not explicitly prohibited may nonetheless cause a non-GAAP measure to be misleading based on the company’s individual circumstances.In particular, the C&DIs state that normal, recurring, cash operating expenses that are necessary to the operation of the company’s business may be considered misleading based on the company’s operations, revenue generating activities, business strategy, industry and regulatory environment.The staff further clarifies that an expense is “recurring” even if it occurs occasionally, including at irregular intervals. (Q&A 100.01)
• Adjustments that have the effect of changing the recognition and measurement principles required to be applied in accordance with GAAP may also cause a non-GAAP measure to be misleading. (Q&A 100.04)
• A non-GAAP measure lacking an appropriate label and clear description, including failing to describe a measure as non-GAAP or utilizing a label that does not reflect the nature of the non-GAAP measure, such as “pro forma” when it is not calculated in a manner consistent with Article 11 of Regulation S-X, could be misleading. (Q&A 100.05)
• In certain circumstances, a non-GAAP measure could mislead investors even if accompanied by extensive, detailed disclosure about the nature and effect of each adjustment. (Q&A 100.06)

Prominence of Non-GAAP Measures vs. GAAP Measures

• The staff reminds companies that whether a non-GAAP measure would be considered more prominent than the corresponding GAAP measure depends on the facts and circumstances in which the disclosure is made, including a consideration of the related discussion and analysis of the non-GAAP measure. Disclosures of non-GAAP measures that the staff would consider more prominent now include presenting a ratio where a non-GAAP measure is a numerator and/or denominator, without also presenting the measure using the most directly comparable GAAP measures, and presenting charts, tables or graphs of non-GAAP measures, without such disclosures of GAAP measures being presented with equal or greater prominence. (Q&A 102.10(a))
• The staff further notes that a reconciliation may give undue prominence to a non-GAAP measure if it starts with the non-GAAP measure or, if presenting a forward-looking non-GAAP measure, the company does not disclose reliance on the exception to providing a quantitative reconciliation and identify the information that is unavailable and its probable significance in a location of equal or greater prominence. (Q&A 102.10(b))
• A so-called “non-GAAP income statement,” defined as an income statement comprised of non-GAAP measures and that includes all or most of the line items and subtotals found in a GAAP income statement, gives undue prominence to the non-GAAP measures. (Q&A 102.10(c))