United States: SEC's Continued Concern With The Use Of Non-GAAP Financial Measures

On May 5, 2016, SEC Deputy Chief Accountant Wesley Bricker and the SEC Division of Corporation Finance's Chief Accountant Mark Kronforst spoke at the 2016 Baruch College Financial Reporting Conference. Deputy Chief Accountant Bricker identified several specific concerns with non-GAAP reporting practices. First, the use of individually tailored accounting principles to calculate non-GAAP earnings fails to help the investor understand and analyze core operating results. Second, companies that opt to provide per-share data for non-GAAP performance measures that look like liquidity measures are frequently higher than per-share GAAP earnings and do not necessarily represent accurate measures of what could be distributed to investors. Third, recent company practices regarding the use of non-GAAP tax expense have caused concern. Fourth, recent company practices related to operating metrics also have caused concern. Chief Accountant Kronforst, echoing comments made at a Northwestern University legal conference on April 28, 2016, also critiqued companies' calculation of the tax impact from non-GAAP financial measures.

Deputy Chief Accountant Bricker also made a few recommendations. First, issuers should consider how their disclosure controls and procedures apply to the disclosure of non-GAAP financial measures. Second, investors are encouraged to refer back to a company's financial statements to place non-GAAP figures in the proper context. Third, audit committees should review the use of non-GAAP financial measures and the required related disclosures in order to consider the appropriateness and reliability of such non-GAAP financial measures. Deputy Chief Accountant Bricker also noted that the SEC will be sharing its observations on non-GAAP financial measures in various forums and might consider recommendations for rulemaking in this area, but companies should seize this opportunity to review their practices and make any necessary changes.

Deputy Chief Accountant Bricker's "Remarks before the 2016 Baruch College Financial Reporting Conference" on May 5, 2016 are available at: https://www.sec.gov/news/speech/speech-bricker-05-05-16.html

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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