Revisiting SEC Guidance on Non-GAAP Reporting

Capital Markets Blog
February 15, 2023

On December 13, 2022, the staff of the Division of Corporate Finance (the “SEC”) revised and expanded its Compliance and Disclosure Interpretations (“CDIs”) on reporting non-GAAP financial measures in SEC filings and press releases.  The CDIs present an opportunity for counsel to review the use of non-GAAP financial measures with their public company clients.

The SEC requires companies that publicly disclose non-GAAP financial measures to present the most directly comparable GAAP measure and to provide a reconciliation showing the differences between the non-GAAP and GAAP measure.  Companies must present the comparable GAAP measures with “equal or greater prominence” as the relevant non-GAAP measure.

Summary of CDI Guidance

  • The new CDIs reaffirm prior guidance that certain adjustments to GAAP financial measures may be misleading even if not expressly prohibited.
    • The SEC indicates that presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate the business could be misleading. It views operating expenses that occur “repeatedly or occasionally including at irregular intervals” as recurring.
    • In addition, the SEC provides further examples regarding improper adjustments to GAAP measures to calculate non-GAAP measures that could be potentially misleading, including the following:
      • changing the pattern of recognition of revenue recognized ratably over time in accordance with GAAP such that revenue is recognized when customers are billed;
      • presenting a non-GAAP measure of revenue in a manner that deducts transaction costs when gross presentation is required by GAAP or vice versa (i.e., reporting on a gross basis when net presentation is required by GAAP); and
      • changing the basis of accounting for revenue or expenses in a non-GAAP performance measure from an accrual basis in accordance with GAAP to a cash basis.
  • The CDIs expand on the prior guidance regarding the requirement that when non-GAAP financial measures are reported the comparable GAAP financial measure must be presented with “equal or greater prominence” in the report. In particular, the new guidance emphasizes that the equal or greater prominence requirement applies, not just to non-GAAP performance measures, but also to descriptions and analysis of those measures.  Where discussion or analysis is provided in a public disclosure of a non-GAAP performance measure, a similar discussion and analysis must be provided (with equal or greater prominence) for the comparable GAAP performance measure.  The CDIs provide the following examples of disclosure practices that may violate this requirement:
    • presenting a non-GAAP measure before the comparable GAAP measure, including in an earnings release headline or caption;
    • presenting a ratio where a non-GAAP financial measure is the numerator or denominator without also presenting the ratio calculated using the most directly comparable GAAP measures with equal or greater prominence;
    • presenting a non-GAAP measure in a style of presentation (e.g., bold, larger font, etc.) that emphasizes the non-GAAP measure over the comparable GAAP measure;
    • describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure;
    • providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence;
    • presenting charts, tables or graphs of non-GAAP financial measures without doing the same for the comparable GAAP measures with equal or greater prominence; and
    • presenting an income statement of non-GAAP measures.
  • The CDIs provide guidance on labeling non-GAAP measures and ‎indicate that a non-GAAP measure can be misleading even if it is accompanied by ‎disclosure about the nature and effect of each adjustment made to the most directly ‎comparable GAAP measure.‎ The SEC offers the following examples as practices that would be considered misleading:
    • presenting a non-GAAP measure with a label that does not reflect the nature of the non-GAAP measures such as
      • a contribution margin that is calculated as GAAP revenue less certain expenses labeled “net revenue”;
      • a non-GAAP measure labeled the same as a GAAP line item; or
      • a non-GAAP measure labeled “pro forma” that is not calculated in a manner consistent with the pro forma requirements in Article 11 of Regulation S-X.


In-house counsel and outside law firm advisers have an opportunity to reinforce proper use of non-GAAP financial measures, using the new CDIs to emphasize the SEC’s focus on requiring that GAAP numbers be treated at least similarly and given greater or equal prominence.  The expanded guidance in the CDIs and the SEC’s use of additional examples may help companies to appreciate the need to refine or change the way they present their results.

If you have any questions about these changes, your regular Locke Lord contact or any of the authors can discuss these matters with you.

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