Speaker: SEC Crackdown On Non-GAAP Measures To Include Only Highly Problematic Metrics

By:
Chris Gaetano
Published Date:
Oct 25, 2016
'MIND THE GAP 5023794412' by http://www.cgpgrey.com. Licensed under CC BY 2.0 via Wikimedia Commons

There was one thing Craig Olinger, deputy chief accountant for the Division of Corporation Finance at the Securities and Exchange Commission, wanted his audience to know: The SEC is not looking to eliminate all non-GAAP measures. Speaking to NYSSCPA members at the FAE's annual SEC Conference on Oct. 25, Olinger said that while the commission is indeed looking into the more problematic uses of non-GAAP measures being employed by public companies, it is not looking to end their use entirely. 

The use, and abuse, of non-GAAP measures is something that he said has been a "pretty big focus" in the past year for not just the department but the SEC as a whole. 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, 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. Olinger said that the guidance went over the more problematic themes that the commission has been observing with regard to these alternative measures. 

One theme is what he described as prominence issues in which, he said, someone will see the non-GAAP information in big print and bold headlines, while "six paragraphs later" the actual GAAP information will be presented in smaller print. Another issue the commission addressed in its interpretation is the way that some companies will exclude normal cash operating expenses from non-GAAP measurements. 

Olinger said that, essentially, the interpretation asks, " 'Hey, does the company kinda wholesale exclude the costs of the major things that the company does?' If they are, it's probably going to be a problem." 

The SEC interpretations also covered practices such as cherry picking favorable adjustments and pulling out unfavorable ones, substituting individually tailored revenue recognition measurement standards for the one in GAAP, accelerating revenue from subscriptions into a larger lump sum, including things in a non-GAAP measurement under which the company has no control, and income tax adjustments that have little, if any, connection with reality. 

Olinger said that the SEC is currently working to get a consistency of approach, which means focusing most of its attention on the more problematic non-GAAP measures and not get too caught up in edge cases. He recognized, though, that for certain companies the use of non-GAAP metrics is a longstanding practice and conceded that they will need a period of time "to figure out how they're going to tell their story differently." However, he said that, as of the second quarter, companies have reacted positively to the new interpretations.

"We felt many people responded, especially [regarding] the prominence issues and the customized measure issues, and a lot of companies dealt with that in a positive way in the second quarter," Olinger said. 

He said that SEC staff will continue to monitor companies to "see how things are coming along" in the third quarter. 

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