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May 5 — Securities and Exchange Commission staff accountants reiterated that the agency plans to be more vigilant in warning companies about their use of earnings yardsticks that aren't sufficiently tied to generally accepted accounting principles.
“For lack of a better way to say it, we are going to crack down,” Mark Kronforst, chief accountant at the SEC's Division of Corporation Finance, said May 5.
Wesley Bricker, an SEC deputy chief accountant in the Office of Chief Accountant, concurred when he and Kronforst participated in a Baruch College accounting conference.
Bricker suggested his colleague's words about non-GAAP measures amount to a “perfect” description of the SEC's intensified scrutiny.
Kronforst made similar comments at a Chicago conference April 28, advising then that “the comments are coming. We are going to challenge these measures” (12 APPR 09, 5/6/16) (31 CCW 139, 5/4/16).
Companies have increased their inappropriate use of non-GAAP measures after the SEC relaxed guidance in 2010, Kronforst said, “and we are very concerned,”
“I think there are some abuses out there,” Kronforst added.
SEC Chairman Mary Jo White has mentioned the possibility of a commission rulemaking in the realm of non-GAAP measures, Bricker said.
Kronforst and Bricker provided details on dubious scenarios in companies' increased use of non-GAAP measures that don't appear to be anchored firmly enough in rules issued by the Financial Accounting Standards Board. Under 13-year-old SEC Regulation G, if companies cite non-GAAP measures, use of GAAP in reporting on the same or related item should be accorded equal or greater prominence.
The Division of Corporation Finance plans to issue comments “in a couple of weeks” aimed at “non-GAAP taxes,” Kronforst said. The scenario is marked by a company's using its “current situation” with regard to earnings to derive a tax rate.
“Are you sure that if you made that much money that you, indeed, would still have all of these deductions?” Kronforst said in describing a question that the scenario raises with the SEC staff.
“I have a feeling that companies really haven't thought through that,” Kronforst said.
Bricker's speech to Baruch conference cited examples of company practices related to non-GAAP measures that have caused concern among SEC staff, including the tax-expense issue raised by Kronforst.
The deputy chief accountant warned about “the use of individually-tailored accounting principles to calculate non-GAAP earnings” and SEC registrants “providing per-share data for non-GAAP performance measures that look like liquidity measures.”
Kronforst suggested that the SEC staff has shown “a bit of deference” to companies' managers on the latter, which he described as including the use of a “liquidity measure on steroids.”
“I think we're going to end that deference,” Kronforst said, citing, for example, the use of something called “free cash flow per share.”
The increasing use of non-GAAP measures could have implications for the Financial Accounting Standard Board, FASB member Marc Siegel said at the conference. He suggested the board's project on financial performance reporting, now in a research stage, might be a place where the kind of reporting reflected in non-GAAP numbers would find a rulemaking home. Fellow FASB member Thomas Linsmeier agreed.
Empirical research doesn't signal that non-GAAP information “points to a fundamental problem with financial accounting recognition,” Siegel said. However, he added, “I think the proliferation points to a need to consider how similar information might be better organized or presented in the income statement.”
FASB is weighing whether to add the performance-reporting topic to its active standard-setting agenda.
Siegel also suggested that non-GAAP metrics can be informative. In his former work-life as a security analyst, the FASB member said the combination of information from audited reporting under GAAP with that gleaned from non-GAAP measures was a “powerful analytical tool in understanding the underlying business because they complement each other.”
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Bricker's May 5 speech is available at https://www.sec.gov/news/speech/speech-bricker-05-05-16.html.
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