On 26 December 2018, the SEC issued a cease and desist order and imposed a $100,000 civil penalty on a company for including financial measures that do not conform to U.S. GAAP (referred to as "non-GAAP measures") in earnings releases without giving equal or greater prominence to the most directly comparable GAAP financial measures. Under Item 10(e)(1)(i)(A) of Regulation S-K and other SEC rules and guidance, the presentation of any non-GAAP financial measure in an SEC filing (including, for foreign issuers, non-IFRS financial measures) must be accompanied, with equal or greater prominence, by the most directly comparable U.S. GAAP (or IFRS, as applicable) financial measure.
In this case, the SEC found that the company included non-GAAP measures in the headlines and in bullet points in the "highlights" section on the first page of its earnings releases without giving equal or greater prominence to the comparable U.S. GAAP financial measures, which were disclosed later in the body of the earnings release. This practice violated Section 13(a) of the U.S. Securities Exchange Act of 1934 and SEC rules regarding disclosure of non-GAAP measures.
As a reminder, the staff of the SEC's Division of Corporation Finance ("Staff") has provided guidance on the use of non-GAAP measures in its Compliance and Disclosure Interpretations (C&Dis). The C&DIs provide the following examples where the Staff would consider the disclosure of a non-GAAP measure to be more prominent (and therefore in violation of the rule):
- Presenting a full income statement of non-GAAP measures or a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures.
- Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures.
- Presenting a non-GAAP measure using a style that emphasizes the non-GAAP measure over the GAAP measure (bold text or a larger font).
- A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline).
The SEC's enforcement action is available here.
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