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Non-Generally Accepted Accounting (Non-GAAP) Measures (United States) are non-GAAP standardized financial measures. The Securities and Exchange Commission (SEC) has increased oversight of such non-GAAP measures in the past few years.

History
The Securities and Exchange Commission first began regulating non-GAAP financial measures usage in 2003. Section 401(b) of the Sarbanes-Oxley Act of 2002 granted the SEC the authority to adopt rules governing non-GAAP disclosures in filings with the SEC or in any public disclosure, press, or release.

Pursuant to this regulatory authority, the SEC adopted three major authoritative guidance regarding non-GAAP financial measures:


 * Regulation G, which applies whenever a company publicly discloses or releases material information that includes a non-GAAP financial measure, in an SEC filing or public announcements of material information; and
 * Item 10 of Regulation S-K, which applies to US registrants that include non-GAAP financial measures in an SEC filing; and
 * Exchange Act Release No. 47226 (2003), titled Conditions for Use of Non-GAAP Financial Measures (although these were later superseded by more recent C&DI).

SEC Guidance
Non-GAAP measures have received increasing SEC scrutiny in the following ways:

Comment letters
According to AuditAnalytics,. The 5 primary non-GAAP metrics that have been singled out include:


 * Undue prominence (see C&DI 102.10);
 * Net of tax presentation (see C&DI 102.11);
 * Individually tailored recognition & measurement methods (see C&DI 100.04);
 * Measures excluding normal, recurring, or cash operating expenses (see C&DI 100.01); and
 * Free cash flow metrics (see C&DI 102.07).

According to AuditAnalytics, immediately after the SEC's 2016 guidance, registrants have been modifying or improving their disclosures, such that the volume of SEC comments on non-GAAP measures has dropped to pre-2016 C&DI levels.

Free cash flow measures
The SEC has found especially problematic per-share measures that are liquidity based. Generally, Item 10(e)(1)(ii) permits non-GAAP per share measures, so long as they are reconciled. However, there is a blanket prohibition on per-share liquidity measures. Per C&DI 102.05, "non-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission, consistent with Accounting Series Release No. 142." The Staff refuses to take for granted a company's stance on how to define a particular measure: "Whether 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." In keeping with this scrutiny, the Chief Accountant Mark Kronforst for the SEC's Division of Corporation Finance has stated that the SEC staff will no longer show deference to a company's characterization of a non-GAAP metric as a performance or liquidity measure.

The distinction between liquidity measures (which are geared toward measuring generated cash), and performance measures (which capture the entity's general operational health), are thus determinative of the SEC's treatment of the particular metric.

Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data, says the two-fold problems with reporting “cash flow” data on a per share basis are:


 * 1) Lack of investor understanding; and
 * 2) Relevance: the aggregate data may be important, but because "they are not items which accrue directly to the benefit of the owner of a part of the common equity ... [t]o reflect such items on a per share basis may mislead the unsophisticated… [and] such data are only meaningful from an operating viewpoint and not from that of an external investment unit.”)

SEC guidance
The SEC recently came out with a series of updated Compliance and Disclosure Interpretations (C&DI), last updated as of April 4, 2018.

The SEC's internal Financial Reporting Manual defines non-GAAP financial measures as a "numerical measure of a registrant's historical or future financial performance, financial position, or cash flow" that excludes certain amount included in the directly comparable GAAP measure, or includes certain amounts excluded in the directly comparable GAAP measure.

Public comments by SEC officials
Non-GAAP metrics have been a topic of SEC concern across the several commissioners, including:


 * June 27, 2016: Commissioner Mary Jo White re-emphasized that the SEC was heightening scrutiny of public companies' usage of non-GAAP financial measures, given that such information, "which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation."
 * May 5, 2016: Wesley R. Bricker, SEC Deputy Chief Accountant, Remarks before the 2016 Baruch College Financial Reporting Conference
 * December 9, 2015: Commissioner Mary Jo White speech, Maintaining High-Quality, Reliable Financial Reporting: A Shared and Weighty Responsibility.
 * 2018 AICPA Conference, Chairman Clayton's and Chief Accountant Wes Bricker's remarks on the SEC's continued focus on consistency in reported non-GAAP numbers.

Enforcement actions: Cease-and-desist proceeding
The SEC recently began its first cease-and-desist proceeding against issuer ADT Inc. for violating a non-GAAP financial measure-related rule. Specifically, the SEC found a violation of Item 10(e)(1)(i)(A) of Regulation S-K, which requires that issuers show non-GAAP financial measures with the most directly comparable financial measures calculated and presented in accordance with GAAP, to be of equal or greater importance. The SEC did not challenge whether the issuer's non-GAAP measure was misleading, but instead challenged the issuer's lack of compliance with SEC rules.