How the SEC's renewed focus on non-GAAP can benefit both businesses and investors
The use of non-GAAP metrics continues to gain traction among public companies, not only in publicly filed financial statements, but in other media such as press releases and company websites. And as non-GAAP increasingly proliferates financial reporting of all types, the SEC is taking note and more closely monitoring the use of these measures.
In May 2016, the SEC updated its guidance governing how earnings and revenue should be reported in response to public companies’ growing use of non-GAAP financial data. According to the SEC, public companies have used non-GAAP to smooth out the negative impacts of non-recurring items, and to exclude certain expenses like stock options when calculating earnings.
The business world took note last year when high-profile electric automaker Tesla received a comment letter from the SEC requesting further clarification surrounding its non-GAAP disclosures.
Tesla, founded by Elon Musk, worked quickly to meet a new standard as a result of the letter, and again included non-GAAP in its February 2017 earnings report, which did not garner any SEC correspondence. Tesla’s non-GAAP financial measures included gross margin, net income (loss) attributable to common stockholders, net income (loss) attributable to common stockholders on a per share basis, and operating cash flows plus change in collateralized lease borrowing. Commenting on its use of non-GAAP Tesla said in the report, “Management ... believes that presentation of the non-GAAP financial measures provides useful information to our investors regarding our financial condition and results of operations because it allows investors greater transparency to the information used by Tesla management in its financial and operational decision-making so that investors can see through the eyes of Tesla management regarding important financial metrics that Tesla management uses to run the business as well as allows investors to better understand Tesla’s performance.”
While searching for the comment letters sent to Tesla, we were curious how many companies in the same industry received similar letters from the SEC in 2016. A quick search to determine whether other automakers received SEC letters revealed that Tesla was the only one. In 2015, however, General Motors received a letter questioning why “EBIT-adjusted is the first measure presented in the exhibit, prior to net income.” Prior to that, Kandi Technologies Group and Navistar International Corp. also received similar letters.
Investors need high-quality, transparent non-GAAP measures
While companies like Tesla can benefit from the use of non-GAAP measures, investors can certainly benefit from the renewed focus by the SEC to monitor the use of this financial data. Non-GAAP measures are valuable, but investors need high quality, well-defined non-GAAP measures and will benefit from the implementation of strong disclosure controls and procedures surrounding them.
Leveraging financial tools in reporting
When it comes to financial data software, companies can benefit from platforms that provide data for both GAAP and non-GAAP measures, allowing measures to be easily combined to better tell a company’s complete financial story. You should be able to compare GAAP and non-GAAP EBITDA and make annotations for company-specific adjustments for better transparency and analysis, for example:
Accounting firms are providing helpful guidance in helping companies navigate the topic of meeting guidelines and therefore avoiding SEC comment letters. For example, Deloitte released a roadmap to non-GAAP financial measures last year, which combines the SEC’s guidance on non-GAAP measures with interpretations and examples from Deloitte. It features a set of questions for registrants to consider when disclosing such measures, highlights from recent SEC remarks, and examples of comments on non-GAAP measures from completed SEC staff reviews.
And KPMG launched a class on “Non-GAAP Performance Measures.” The one-day seminar provides an in-depth review of non-GAAP and how to use it while remaining SEC compliant.
These types of resources will help public companies get the most out of non-GAAP. And a renewed focus by the SEC, meanwhile, will ensure investors get the best possible financial measures when making important investment decisions. The combination of these will truly make non-GAAP a win-win when it comes to financial and earnings reports for businesses and the investors looking to buy into them.
If you’re looking for a financial data platform that can provide data for both GAAP and non-GAAP measures, idaciti can help. Our financial data software empowers your company to tackle deeper and more insightful analysis of financial data.