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Whether a non-GAAP measure is more prominent than the comparable GAAP measure can depend on the facts and circumstances. In CDIs posted in 2016, the staff provided some useful examples of the types of presentations where the non-GAAP measures would be viewed by the staff to be more prominent:

• “Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures;
• Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures;
• Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure;
• A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);
• 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 tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table;
• Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the ‘unreasonable efforts’ exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
• 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.”

An analysis from Audit Analytics showed that the percentage of companies that received staff comments with regard to the issue of the presentation of GAAP measures with equal or greater prominence fell from 37.6% in the last six months of 2016 to 22.1% in the first six months of 2018.  As this article revealed, according to Audit Analytics, in 2016, over 25% of the companies in the S&P 500 index had shifted their presentations to put GAAP at the top of their quarterly earnings releases and 81% made GAAP numbers most prominent, compared with only 52% for the prior quarterly earnings.

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Interestingly, the Order in this case relates only to the prominence issue and not to the more perplexing issues that have arisen of late regarding individually tailored recognition and measurement methods. According to the Audit Analytics study mentioned above, the incidence of comments on individually tailored recognition and measurement methods nearly doubled from the last six months of 2016 to the first six months of 2018, from 6.5% to 12.3%. Under the 2016 CDIs, certain adjustments that result in a non-GAAP measure can be misleading, such as adjustments excluding normal recurring charges, “cherry picking” of adjustments or inconsistent presentation of measures between periods (such as when a measure adjusts a particular charge or gain in the current period but similar charges or gains were not adjusted in prior periods). For example, in one CDI, the staff indicated that non-GAAP measures that substituted individually tailored recognition and measurement methods for those of GAAP could violate Rule 100(b) of Reg G. The illustration provided described a company that improperly used a non-GAAP measure that accelerated revenue—which, under GAAP, would be recognized ratably over time—to make it appear that the company earned revenue when customers were billed. The staff viewed as impermissible the replacement of an important accounting principle with an alternate accounting model that did not conform to the company’s business. In that regard the then-Deputy Chief Accountant had observed that, “if you present adjusted revenue, you will likely get a comment; moreover, you can expect the staff to look closely, and skeptically, at the explanation as to why the revenue adjustment is appropriate.” The analysis concluded that companies may be self-correcting on the easy changes, such as undue prominence, resulting in fewer SEC comments in those areas; however, issues that are more complex, “such as tailored accounting and free cash flows, are being addressed more often in SEC comment letters to registrants.”