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Sept. 19 — Companies are doing a better job at financial reporting by not excessively relying on performance measures that depart from generally accepted accounting principles, a staff accountant at the Securities and Exchange Commission said.
“We feel like we have seen improvements, just in the second-quarter earnings releases,” with regard to public companies not giving prominence to non-GAAP measures in financial reporting, the commission’s Jenifer Minke-Girard told the main advisory council of the Financial Accounting Standards Board Sept. 19.
The SEC staff issued more guidance on non-GAAP measures in May.
Since the early spring, SEC staff accountants have signaled that they are being especially vigilant about public companies’ use of non-standardized, tailor-made measures that often are showcased in quarterly earnings reports (12 APPR 12, 6/17/16). Securities regulations bar presenting non-GAAP measures more prominently than numbers drawn from audited use of accounting rules and in a way that misleads investors.
The presentation of non-GAAP yardsticks in earnings calls and news releases has increased in recent years (12 APPR 19, 9/23/16). This has drawn the attention of the SEC’s enforcement division as well as its Division of Corporation Finance according to Linda Griggs, a partner at law firm Morgan, Lewis & Bockius, LLP. She made her comments at the Sept. 19 meeting of FASB’s Financial Accounting Standards Advisory Council.
Companies see great benefits in non-GAAP measures, said a financial executive who, like Griggs, is a a council member.
“Non-GAAP gets a bad rap,” said Marie Gallagher, senior vice president and controller at PepsiCo, Inc. “But if done well, consistently, transparently, using good governance, it’s really the best way to tell the company’s story to the investors and analysts and the users” of financial statements, she said.
A FASB staff accountant cited the most relevant SEC rules, Regulation G and Item 10(e) of Regulation S-K, in defining non-GAAP financial measures.
“A non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes [includes] amounts ... that are included [excluded] in the most directly comparable measure calculated and presented in accordance with GAAP,” according to a slide presented at the advisory council meeting.
Non-GAAP financial measures don’t include operating and other statistical measures such as unit sales, numbers of employees, numbers of subscribers or numbers of advertisers, said the FASB staff’s Ryan Egan, a project manager.
Examples of non-GAAP measures include, in the income statement; adjusted revenue; adjusted earnings before income taxes, depreciation, and amortization, or EBITDA; and adjusted operating income. In the cash flow statement, examples are adjusted cash flows from operations; cash flows excluding share repurchases and changes in debt; and cash flows available for dividends.
Minke-Girard, an assistant deputy chief accountant in the SEC’s Office of Chief Accountant, cited recent findings reported in The Wall Street Journal that she suggested to Bloomberg BNA amounted to change in the right direction on non-GAAP practices.
Before the SEC staff issued the guidance in May, about one-half of Fortune 500 companies had “prominence issues,” she told the advisory council and FASB members. After the guidance was released, The Journal reported last month, that portion of companies indicating compliance problems on non-GAAP had dropped to about 20 percent.
Minke-Girard, who didn’t speak for the SEC or its staff, said some companies are changing their non-GAAP reporting practices in a relatively quick, “rip-the-Band-Aid-off approach, and went quickly to changing their measures.”
Others are modifying reporting practices more gradually—perhaps taking a more deliberative approach, “adopting a sort of two-quarter transition plan.
“That’s fine,” said Minke-Girard, but the Division of Corporation Finance “would expect companies to be clear with their investors about what changes are contemplated.”
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