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SEC chief accountant discusses non-GAAP reporting issues

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Mar 22, 2016

On March 22, 2016, at the 12th annual Life Sciences Accounting and Reporting Congress in Philadelphia, SEC Chief Accountant James Schnurr indicated that the SEC staff has observed “a significant and, in some respects, troubling increase . . . in the use of, and nature of adjustments within, non-GAAP measures” as well as their prominence.

Mr. Schnurr commented that non-GAAP measures are intended to “supplement . . . and not supplant” the information in the financial statements. These concerns, as well as the increase in the difference between the amounts reported for GAAP measures and those reported for non-GAAP measures, have led to an increased focus by the SEC staff. He indicated that the staff will continue to be “vigilant in [its] review of the use of these measures for compliance with the rules.”

Mr. Schnurr further indicated that the “proliferation of non-GAAP reporting measures . . . should warrant increased focus by management and the audit committee” and suggested that companies should not only comply with the rules but question why “the non-GAAP measure is an appropriate way to measure . . . performance” and provide useful information to investors. He also emphasized that the measure should include “appropriate controls and oversight procedures.”  Mr. Schnurr’s remarks build on recent comments by SEC Chair Mary Jo White at the U.S Chamber of Commerce 2016 Capital Markets Summit earlier in March, where she indicated that the staff is concerned that the prevalent use of non-GAAP measures in financial reporting may be confusing for investors and analysts and that the staff may consider regulation in this area.

Registrants should pay close attention to SEC staff guidance and ensure that the non-GAAP measures comply with the disclosure requirements of Regulation S-K, Item 10(e), which requires (1) “a presentation, with equal or greater prominence,” of the GAAP measure, (2) a reconciliation to the GAAP measure, and (3) disclosure of the reasons why the non-GAAP measure is useful and its purpose. The staff will continue to challenge (1) registrants that inappropriately present non-GAAP measures with greater prominence than the related GAAP measures, (2) the labeling and nature of adjustments, and (3) non-GAAP measures that are presented in the current period differently from those used in prior period(s).

The full text of Mr. Schnurr's speech is available on the SEC's Web site.

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