Non-GAAP financial measures have long been lauded by financial analysts and investors as an important part of painting a company’s complete financial picture. This data — which includes measures such as earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted EBITDA, and non-GAAP income — is typically a part of the MD&A portion of a company’s quarterly 10-Q and annual 10-K filings. If used properly, it can also be invaluable for investors.
The SEC originally provided guidance on non-GAAP in 2002, and in March 2003 issued Regulation G, which stipulates that public companies that disclose non-GAAP measures must include the more directly comparable GAAP measure and reconcile the two in SEC filings and other reports. In 2010, the SEC loosened its reporting restrictions, but in May 2016 issued new Compliance Disclosure Interpretations, modifying and revising its guidance on the use of non-GAAP. These revisions have brought to light many of the ways in which non-GAAP measures can be misleading or give undue prominence to a particular set of data.
Regulation G and related SEC amendments are intended to ensure that investors and other users of financial information are not misled by the use of non-GAAP measures, by requiring the reconciliation of non-GAAP measures with their most directly comparable GAAP measures to provide more accurate evaluations. The SEC believes this will enable better evaluation of companies’ securities, and therefore result in more accurate securities pricing.
More to the story
But there’s more to the story for those involved in collection and providing the financial data — and for those consuming it. While these amendments and measures are important and useful in regulating how non-GAAP is used, it’s important to understand the other far-reaching implications of non-GAAP if data collectors and consumers hope to maximize its potential benefit.
Data providers must understand that non-GAAP data without context isn’t of much use at all. And even worse, it can be misleading and potentially harmful for investors.
To use non-GAAP to its full benefit, data providers need to be looking at more than one company to help put data into context that is useful and valuable. Today, powerful financial reporting platforms allow data collectors to look across an entire industry to identify outliers, trends and to normalize financial data in order to understand how it applies to that particular industry or business segment.
In order to get the most out of the non-financial data, it’s important to understand where the information comes from and how it was calculated. While platforms such as Bloomberg and Thomson Reuters provide non-GAAP data, they have yet to simplify the process of sourcing and deciphering the origins of these measures. For the most part, this information is scattered throughout earning releases and MD&As.
Putting all of the non-GAAP data available into context requires the proper tools that facilitate doing so in an efficient way. That’s why the idaciti platform provides traceability that makes it easy and fast for data consumers to understand where information originated and how it was compiled and calculated. For SEC and other filings, this level of analysis allows you to see how your peer groups are reporting. And when it comes to providing data to investors, sourcing non-GAAP measures can be the difference between a sound investment and a disastrous one.
It’s the context that matters
The problem when it comes to consuming the non-GAAP data — it’s essentially data without context, if you can’t tell where the data comes from and how was it calculated.
Show GAAP and non-GAAP data in the same chart is powerful.
Showing where the non-GAAP data is coming from and the math behind the data provides the critically needed context to the non-GAAP data.
Whether you’re collecting non-GAAP data from 10-Q, 10-K or from other SEC filings, idaciti can provide the context you need.