At a large financial reporting conference in December, several representatives of the Securities and Exchange Commission mentioned disclosures regarding non-GAAP financial measures as an area of concern. Over the past 15 years, the pendulum on how much enforcement was thought to be needed to regulate these measures has swung back and forth several times. It seems that once again, we are at a point where stronger regulatory actions may be coming.
Non-GAAP financial measures (also known as “Pro Forma” measures) are measures derived from the accounting records but calculated in a way that is not spelled out in Generally Accepted Accounting Principles. Perhaps the most common one is EBITDA (earnings before interest, taxes, depreciation, and amortization). SEC rules passed in 2003 require such measures be explained fully and reconciled to a relevant GAAP measure, but don’t prohibit their use. The goal was to ensure that non-GAAP financial measures would only be used if they provided insight and were not used in a misleading manner, as such measures had sometimes been used prior to that time.
