An upswing in corporate use of non-GAAP measures along with increased regulatory scrutiny of such reporting has inspired the folks at Deloitte to offer some tips on how to assess non-GAAP measures to assure they don’t run afoul of filing rules.
In an alert to companies considering use of performance measures that depart from Generally Accepted Accounting Principles, which companies are required to follow to complete their regulatory filings, Deloitte lists 10 questions companies should ask to help assure they could defend their use of any given non-GAAP measure.
Heightened concern over non-GAAP measures is driven by “three mores,” says Christine Davine, deputy managing partner at Deloitte & Touche. “More non-GAAP measures are being used by companies,” she says. “More adjustments are being made” to produce those measures that depart from GAAP accounting, and “there’s more differential between the total amounts of the GAAP numbers and the non-GAAP numbers.”
SEC Chair Mary Jo White and Chief Accountant James Schnurr have both said publicly the SEC is observing some disturbing trends in the use of non-GAAP measures, which is leading to some discussion around whether some kind of regulatory action is warranted. At a recent U.S. Chamber of Commerce summit, White said the use of non-GAAP measures is “something we are really looking at -- whether we need to actually reign that in a bit even by regulation.”
Some of the current tension arises, says Davine, because analysts and investors pay attention to corporate press releases, which are using more non-GAAP measures and often are visible before the filings of quarterly or annual reports. “You see more use of non-GAAP measures in press releases than you do in the documents of periodic reports,” she says.
The Deloitte alert advises companies to consider whether their intended non-GAAP measure is misleading or prohibited, and how it is presented, defined, described, and labeled. How is it reconciled to GAAP? Is there transparent disclosure to explain why it’s useful? Is it prepared consistently from one period to the next, and is it balanced? Is it focused on material information? Are there controls and procedures over the use of such measures, and is the audit committee involved?
Davine says she can’t speak to why companies are making such increased use of non-GAAP measures, except to surmise: “If you were to talk to public companies, they feel like this provides useful insight into items that are impacting comparability,” she says. “That this is providing useful information to analysts and investors.”
Companies would be wise to take a fresh look at their use of non-GAAP measures and their controls and procedures over their use, says Davine. “Non-GAAP measures can provide some useful information to what management is focusing on and what management believes is impacting a company’s performance,” she says. “Make sure it is not misleading, not more prominent than the GAAP number, and that disclosure is clear, particularly with respect to how the measure is useful.”