United States: On Point. - Understanding The Requirements Related To The Use Of Non GAAP Financial Measures

Last Updated: May 8 2019
Article by Ryan Castillo

It is no secret that the use of non-GAAP financial measures, which are financial measures that are neither calculated nor presented in accordance with U.S. generally accepted accounting principles ("GAAP"), has been a focus of attention for the U.S. Securities and Exchange Commission ("SEC"). In December 2015, the then SEC Chair Mary Jo White called this an area that "deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices."1Wesley R. Bricker, then the SEC's chief accountant, observed in a speech in May 2016 that certain company practices related to the use of non-GAAP financial measures have raised concerns and may be potentially misleading to investors.2 On May 17, 2016, the SEC's Division of Corporation Finance (the "Staff") provided guidance on the use of non-GAAP financial measures in the form of new and updated Compliance and Disclosure Interpretations ("C&DIs").3 Since that time, the use of non-GAAP financial measures has become one of the most cited issues in Staff comment letters. In addition, since the release of said C&DIs, there have been SEC enforcement actions and a criminal action brought by the U.S. Attorney's Office for the Southern District of New York that have culminated in a securities fraud conviction relating to the use of non-GAAP financial measures.

In this guide, we discuss the nature and purpose of non-GAAP financial measures and the rules governing the use of such financial measures. We also examine recent SEC comment letters and discuss areas of concern identified by the Staff. Last, we look at recent pronouncements that provide guidance on best practices for companies and offer some practical guidance.

What is a non-GAAP financial measure?

The SEC adopted the term "non-GAAP financial measures" in order to identify information targeted by the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), which sought to eliminate the manipulative or misleading use of what the Sarbanes-Oxley Act referred to as "pro forma financial information" and enhance the comparability with GAAP financial measures. In 2003, the SEC adopted Regulation G and Item 10(e) of Regulation S-K ("Item 10(e)"), which both define a non-GAAP financial measure as a numerical measure of a company's historical or future financial performance, financial position, or cash flows, that:

  • excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP (or in the case of foreign private issuers ("FPIs") whose primary financial statements are prepared in accordance with non-U.S. generally accepted accounting principles, references to GAAP also include the principles under which those primary financial statements are prepared) in the statement of income, balance sheet, or statement of cash flows (or equivalent statements) of the issuer; or
  • includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

In addition, the SEC's releases leading to the 2003 adoption of Regulation G and Item 10(e) (the "SEC Releases") explain that the non-GAAP financial measure definition is intended to capture all measures that have the effect of presenting:

  • a measure of performance that is different from that presented in the financial statements, such as income or loss before taxes, or net income or loss as calculated in accordance with GAAP; or
  • a measure of liquidity that is different from cash flow or cash flow from operations computed in accordance with GAAP.4

The following are excluded from the definition of a non-GAAP financial measure:

  • operating and other statistical measures such as unit sales, number of employees, subscribers or advertisers;
  • ratios or statistical measures that are calculated using exclusively one or both:
    • financial measures calculated in accordance with GAAP. For example, operating margin derived from GAAP revenue divided by GAAP operating income would not be considered a non-GAAP measure; and
    • operating measures or other measures that are not non-GAAP financial measures such as measures calculated in accordance with GAAP (i.e., sales per square foot or same store sales);
  • financial information that does not have the effect of providing numerical measures that are different from the comparable GAAP measure such as:
    • disclosure of amounts of expected indebtedness, including contracted and anticipated amounts;
    • disclosure of amounts of repayments that have been planned or decided upon but not yet made;
    • disclosure of estimated revenues or expenses of a new product line, so long as such amounts were estimated in the same manner as would be computed under GAAP; and
    • measures of profit or loss and total assets for each segment required to be disclosed in accordance with GAAP; and
  • financial measures required to be disclosed by GAAP, SEC rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant such as measures of capital or reserves calculated for regulatory purposes.5

Examples of commonly used non-GAAP measures include "adjusted net income" or EBITDA. If a company takes a GAAP measure like net income and adjusts that by excluding or including one or more expense or revenue items which are "non-recurring," the resulting measure, or "adjusted net income" as it is sometimes presented, would be considered a non-GAAP measure. Companies that use EBITDA derive this non-GAAP measure by taking GAAP earnings, such as GAAP net income as presented in the statement of operations, and adjusting for interest, taxes, depreciation, and amortization components, which are elements derived from GAAP financial presentations. Other common examples of non-GAAP financial measures include variations of EBITDA, such as EBIT (earnings before interest and taxes), EBITA (earnings before interest, taxes, and amortization), EBITD (earnings before interest, taxes, and depreciation or sometimes called PBDIT or profit before depreciation, interest, and taxes), EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs), adjusted EBITDA, core earnings, adjusted earnings, adjusted earnings per share, adjusted revenues, free cash flow, funds from operations ("FFO"), and Adjusted FFO ("AFFO").

Do non-GAAP measures serve a purpose?

Companies usually present non-GAAP financial measures in order to supplement GAAP financial presentations and to provide investors with a better illustration of their performance, liquidity, and financial position. Non-GAAP financial measures often enable a company's management to present a company's financial condition or results of operations and provide meaningful performance measures in a manner that GAAP results alone may not properly convey. The SEC allows the presentation of non-GAAP financial measures in order to provide information to investors that a registrant believes is relevant and useful in understanding its performance or liquidity. When used, non-GAAP financial measures are typically disclosed in the "Management's Discussion and Analysis" ("MD&A") section of periodic reports, earnings releases, investor presentations, and other company communications. In addition, research analysts, rating agencies, and other financial professionals often use non-GAAP operating measures to evaluate or compare the performance of comparable companies. For example, EBITDA is commonly found in debt covenants and used in financial projections and assessments of a company's operating cash flow or cash available to service its debt. Analysts also use EBITDA in the valuation of businesses, including a company's enterprise value which is usually calculated as a multiple of EBITDA.

To read the full article click here


1 See Mary Jo White, "Keynote Address at the 2015 AICPA National Conference: 'Maintaining High-Quality, Reliable Financial Reporting: A Shared and Weighty Responsibility,'" December 9, 2015, available at https://www.sec.gov/news/speech/keynote-2015-aicpa-white.html.

2 See Wesley R. Bricker, "Remarks before the 2016 Baruch College Financial Reporting Conference," May 5, 2016, available at http://www.legalexecutiveinstitute.com/wp-content/uploads/2016/09/22.-Bricker-May-Speech-Baruch-College-Financial-Reporting-Conference.pdf.

3 See Compliance & Disclosure Interpretations on Non-GAAP Financial Measures, available at: https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

4 See SEC Release No. 33-8145, Proposed Rule: Conditions for Use of Non-GAAP Financial Measures (Nov. 4, 2002), available at: https://www.sec.gov/rules/proposed/33-8145.htm (hereinafter, the "Proposing Release"), and SEC Release No. 33-8176, Final Rule: Conditions for Use of Non-GAAP Financial Measures (Jan. 22, 2003), available at: https://www.sec.gov/rules/final/33-8176.htm (hereinafter, the "Final Rule Release" and, together with the Proposing Release, the "SEC Releases")

5 Regulation G, Rule 101(a)(2) and (3); Regulation S-K, Item 10(e)(4) and (5); see also Final Rule Release.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions