SEC Homes In on Problem Areas in Non-GAAP Filings

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By Rob Tricchinelli

Nov. 3 — Questionable revenue reporting techniques are garnering Securities and Exchange Commission attention as it continues to scrutinize company financial filings that deviate from generally accepted accounting principles.

Companies shouldn’t over-rely on non-GAAP measures or feature them too prominently when giving insights into their performance, especially when reporting revenue, Mark Kronforst, the chief accountant in the SEC’s Division of Corporation Finance, said Nov. 2 at a Practising Law Institute conference in New York.

Some companies tell the agency that it is “literally impossible” to provide insight to shareholders in an accounting filing without using a particular bottom-line number in a non-GAAP metric, he said. “That argument doesn’t really resonate with us.”

Sharpened SEC Focus

The SEC has sharpened its focus on non-GAAP accounting in the past year.

In March, Chairman Mary Jo White warned that the agency was trying to “rein that in” because of the risk of misleading disclosures.

Agency guidance followed in May, cautioning that adjustments to earning measures could run afoul of disclosure regulations, particularly if they are applied inconsistently across filings.

Filers may use non-GAAP measures, provided they also point to the “most directly comparable” GAAP financial measure in the same disclosure. Common non-GAAP measures include earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA).

Reconcile With GAAP Data

Filers that prominently display non-GAAP data should explain their reasons thoroughly and reconcile the data with GAAP, Kyle Moffatt, an associate director in the Division of Corporation Finance, said Nov. 3.

“We don’t want to issue comments on this topic,” Moffatt said. He cautioned registrants to “take a fresh look” at disclosures and make sure non-GAAP measures are sufficiently explained.

“Ask yourself whether this is really capturing why it’s useful,” he said. “You don’t want comments from us.”

The “vast majority” of filings don’t raise these concerns, Kronforst said.

“We’re trying to be practical about this,” he said. “We’re not trying to prevent companies from communicating with their investors.”

To contact the reporter on this story: Rob Tricchinelli in New York at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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