Non-GAAP Financial Disclosure in Earnings Releases

Astute readers of the WSJ and accounting geeks from
coast-to-coast have no doubt heard that on May 17, 2016, the SEC issued a new and
revised set of best practices for public companies regarding non-GAAP financial

The first lesson is that the SEC IS paying close attention to where, when and how you utilize non-GAAP measures, and they should be used to augment your disclosures – not as a replacement for GAAP reporting.  

Two of the top ways for Issuers to avoid an SEC comment letter are;

1.  Use good judgment to ensure GAAP and non-GAAP measures are equally prominent in quarterly earnings releases – both headlines and release text and tables. 

2.  Quotes from the C-Suite should not promote ‘record’ non-GAAP measures if the comparable GAAP measure is not in lockstep.

Rather than summarize the
findings, Catalyst invites you to read a very well written memo from our
friends at Skadden, Arps (and there are others publicly available from
other prominent law firms.) 

The Skadden brief can be found via the following URL;

Additionally, NIRI National hosted a conference call last week on the same topic and it’s replay can be found here;

Catalyst has always been a proponent of transparent
disclosure and communication and helping investors to look through some of the “noise” in financial reporting to get at recurring, sustainable trends trends.

 The use of
non-GAAP financial measures helps provide this very service and continues to be a valid tool to help investors analyze income statement measures and cash flows.  The SEC edict, however, is a smart reminder that there are some fairly clear guidelines on what is and is not appropriate.  This were of course developed in response to a relatively small set of public companies that were pushing the envelope a bit too
far – and ultimately used such measures to paint pictures that were not sufficiently reflective of the actual financials.

Investors deserve a consistent and easy to understand framework
in this complicated era of financial engineering and reporting requirements.  ‘All things in moderation’ is a great slogan
to help markets avoid the volatility and excesses of the last twenty years.  It works for us and we hope this note and accompanying brief will be helpful in your disclosure efforts. 

The Catalyst Team