The SEC's renewed focus on non-GAAP financial measures
The usage of non-GAAP metrics, not only in publicly filed financial statements but in other media such as press releases and company websites, has proliferated in recent years. According to the SEC, public companies became increasingly creative with their income statements, for example, smoothing out the negative effects of non-recurring items or excluding certain expenses like stock options in calculating non-GAAP earnings. The SEC has updated their guidance on how earnings and revenues should be reported in May 2016 titled “Non-GAAP Financial Measures”.
Tesla, the high-profile electric automaker founded by Elon Musk became the most prominent companies working to meet the new standard after receiving a comment letter from the SEC requesting for further clarification surrounding its non-GAAP disclosures.
Note: According to NASDAQ, Tesla Motors, Inc. is estimated to report earnings on 02/08/2017. We will write a follow-up blog to take a closer look at Tesla's earnings release.
While searching for the comment letters sent to Tesla, we were curious how many companies in the same industry have received similar letters from the SEC? A quick search has revealed Tesla was the only one received the letter in 2016, but GM has received a letter questioned why “EBIT-adjusted is the first measure presented in the exhibit, prior to net income” in 2015. Prior to that, Kandi technologies Group and Navistar International Corp have also received similar letters.
Investors need high-quality, transparent non-GAAP measures
Investors definitely can benefit from the renewed focus by the SEC. Non-GAAP measures are valuable, but Investors need high quality, well defined non-GAAP measure and need companies to implement strong disclosure controls and procedures around them.
The idaciti platform provides data for both GAAP and non-GAAP measures, and our customers can very easily combine measures to get a clearer picture. For example, idaciti users can compare the GAAP and non-GAAP EBITDA for a company and make annotations for company-specific adjustments for better transparency and analyses.
if non-GAAP reporting “isn’t topic number one among regulators, it must be close.”
Luckily, accounting firms have provided helpful guidance in helping companies navigate the topic. Examples include Deloitte's “A roadmap to non-GAAP financial measures” and KPMG's class on “Non-GAAP Performance Measures”. We certainly applaud the renewed focus by the SEC to make sure investors get the bets possible financial measures when making important investment decisions.