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UPDATE: Mind the (Non) GAAP: The SEC Elevates Its Attention to Non-GAAP Measures

UPDATE: Mind the (Non) GAAP: The SEC Elevates Its Attention to Non-GAAP Measures

UPDATE: Mind the (Non) GAAP: The SEC Elevates Its Attention to Non-GAAP Measures

Financial Executives International (FEI) Daily
By Erik Bradbury

New York (May 19, 2016)

In remarks Thursday during the 2016 Baruch College Financial Reporting Conference, SEC Deputy Chief Accountant Wesley Bricker and Mark Kronforst, Chief Accountant of the Division of Corporation Finance, provided stern warning against what the Commission views as the inappropriate use of non-GAAP financial reporting.

Shedding additional light on how the SEC “crackdown” will play out, Kronforst noted that while not public yet, comment letters on registrant filings will be issued in the next few weeks and preparers can expect a focus on the following areas:

  • The use of individually-tailored accounting principles to calculate non-GAAP earnings
  • Adjusted revenues
  • Providing per-share data for non-GAAP performance measures that look like liquidity measures (e.g., cash flow per share or free cash flow per share)
  • Non-GAAP tax expense (linking the impact of adjusting revenues to its effect on income taxes)

As an example of an “Individually-tailored accounting principle,” Bricker described a scenario where a company has a subscription-based business and bills for the full subscription at the outset — but since it delivers the service over time, it earns and recognizes GAAP revenue over time as the services are provided.

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