On December 13, 2022, the staff of the Division of Corporation Finance (“staff”) of the Securities and Exchange Commission (“Commission”) has updated the following Compliance & Disclosure Interpretations (“C&DI”) on Non-GAAP Financial Measures:

• In old Question 100.01, the staff noted it would be misleading (and a violation of  Rule 100(b) of Regulation G) to present a non-GAAP performance measure that excludes “normal, recurring, cash operating expenses” necessary to operate a registrant’s business. Updated Question 100.01 clarifies that (a) “normal, operating expense” is determined by considering the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment and (b) a “recurring” operating expense is one that occurs repeatedly or occasionally, including at irregular intervals.

• Old Question 100.04 illustrated a potential violation of Rule 100(b) of Regulation G through misleading non-GAAP measures (e.g., an individually tailored revenue recognition and measurement method) that substituted those prescribed by GAAP. Updated Question 100.04 elucidates this point by providing two additional examples.

• New Question 100.05 advises that, and provides some examples on how, a non-GAAP measure can be misleading to investors and would violate Rule 100(b) of Regulation G if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly described.

• A new Question 100.06 clarifies that a non-GAAP measure can still be misleading, and violate Rule 100(b) of Regulation G, even if accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure.

• Old Question 102.10 is renumbered and is now Question 102.10(a), which includes updated samples of non-GAAP measures that are more prominent than the comparable GAAP measures. These samples are consistent with Item 10(e)(1)(i)(A) of Regulation S-K’s requirement to present the most directly comparable GAAP measure with equal or greater prominence when a registrant presents a non-GAAP measure, particularly when presented in documents filed with the Commission and in earnings releases furnished under Item 2.02 of Form 8-K. 

• A new Question 102.10(b) shares some sample disclosures that would cause the non-GAAP reconciliation required by Item 10(e)(1)(i)(B) of Regulation S-K to give undue prominence to a non-GAAP measure.

• A new Question 102.10(c) explains that an income statement which is comprised of non-GAAP measures and includes all or most of the line items and subtotals found in a GAAP income statement is considered a “non-GAAP income statement” which, by itself or as part of the required non-GAAP reconciliation, gives undue prominence to non-GAAP measures.

The text of the updated C&DIs on Non-GAAP Financial Measures may be viewed here, and the comparison against their earlier version may be viewed here.

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