SEC Critiques Tesla for Use of Non-GAAP Metrics

By:
Chris Gaetano
Published Date:
Nov 29, 2016
'MIND THE GAP 5023794412' by http://www.cgpgrey.com. Licensed under CC BY 2.0 via Wikimedia Commons

The Securities and Exchange Commission criticized electric car company Tesla Motors over its use of non-GAAP revenue calculations that the commission felt was outside the realm of acceptability, leading the company to eventually drop its use of non-GAAP metrics from earnings filings, according to The Wall Street Journal. Specifically, the company had added back certain costs to the GAAP revenue calculation to come up with a custom figure. The SEC said that the company lacked substantive reasons for presenting this tailored figure to investors, and dismissed Tesla's reasoning that management uses the figures internally, noting that the justification needs to involve why using it is better for investors in particular. The back and forth took place over the course of several weeks, from mid-September to mid-October, according to The Journal, eventually concluding with Tesla deciding to drop the custom metric and the SEC deciding that no further action was needed. 

The exchange came amid a time when the SEC has been increasingly worried about the use of non-GAAP metrics.  In a speech late last year, SEC Chair Mary Jo White expressed concern that the use of non-GAAP measurements could be a source of confusion for investors and other financial statement users, and she called for more prudent use of the figures. In another speech earlier this year, then-SEC Chief Accountant James Schnurr said he was "troubled" by the extent and nature of the adjustments used in non-GAAP measures to arrive at alternative measures of profitability and cash generation. 

To address these concerns, the SEC released a Compliance and Disclosure Interpretation aimed at clarifying what was and was not acceptable in terms of using non-GAAP measurements. The guidance goes over the more problematic themes that the commission has been observing with regard to these alternative measures. Deputy Chief Accountant for the SEC's Division of Corporate Finance Craig Olinger, speaking at the FAE's annual SEC Conference on Oct. 25, noted that the guidance is meant to clarify that the commission is only looking into the more problematic uses of non-GAAP measures being employed by public companies. It is not looking to end their use entirely. 

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