The practice of reporting non-GAAP earnings is back on the SEC’s radar, highlighted in recent speeches by SEC Chair Mary Jo White (see here) and SEC Chief Accountant James Schnurr (see here).  A series of news articles focusing on the increasing number of companies that report non-GAAP earnings (often confusingly called “pro forma” earnings) and the widening gap between these companies’ reported GAAP and non-GAAP earnings have also shed negative light on using NGFMs (see, e.g., here (paywall), here (paywall) and here).

The “New” Old Problem

The use of non-GAAP financial measures (“NGFMs”) and the concerns they raise are not new.  In the 1990s, it was popular for companies, especially internet technology firms during the first “dot-com” boom, to use NGFMs to report earnings.  The SEC took note.  In September 1998, Arthur Levitt, then-Chairman of the SEC, gave a speech titled “The ‘Numbers Game’,” in which he expressed concerns about the widespread practice of “earnings management” (lamenting that there is a gray area “where earnings reports reflect the desires of management rather than the underlying financial performance of the company.”).[1]  A few years later in October 2000, Lynn Turner, then the SEC’s Chief Accountant, coined the term “EBS” or “Everything but Bad Stuff,” and told investors to be wary of EBS earnings releases that provide “incomplete or inaccurate” information.[2]  As the use of NGFMs continued to proliferate, in December 2001, the SEC issued “Cautionary Advice,” alerting companies and their advisors that a NGFM, “under certain circumstances, can mislead investors if it obscures GAAP results,”[3] and in January 2002, the SEC brought its first enforcement action based on a misleading use of NGFMs.[4]  After the Enron scandal and the dot-com market crash, the Sarbanes-Oxley Act of 2002 directed the SEC to adopt rules on NGFMs, and in January 2003 it adopted Regulation G and Item 10(e) of Regulation S-K requiring companies to satisfy certain conditions in connection with the use of NGFMs.[5]  The cumulative effect of the Cautionary Advice, the new rules and the related FAQs published in June 2003, and SEC comments on company filings, generally chilled the use of NGFMs for the better part of a decade.

Then in 2010, the SEC seemed to acknowledge that the pendulum had swung too far against NGFMs.  The SEC staff published new Compliance and Disclosure Interpretations (“C&DIs”) in January 2010 that reflected a policy change to allow more liberal use of NGFMs by companies in public disclosures.[6]  For example, the SEC staff made it clear in the C&DIs that adjustments reflected in a NGFM would be permissible, subject to Regulation G and Item 10(e) of Regulation S-K, even if such adjustments are not “non-recurring, infrequent or unusual.”[7]  Companies embraced this new guidance by steadily increasing their use of NGFMs in SEC filings and earnings reports ever since – perhaps a little too enthusiastically.

Not long after publishing the C&DIs, the SEC staff exhibited signs of regret.  In December 2011, at an AICPA national conference, then-Director of the SEC’s Division of Corporation Finance Meredith Cross warned companies against abusing NGFMs under the new guidance (telling them to “knock it off”), and Deputy Chief Accountant Craig Olinger reminded the audience that although NGFMs can be helpful to investors, “non-GAAP measures that are misleading are not allowed anywhere.”[8]  In the same year, SEC comments on Groupon’s IPO registration statement led to the removal of a NGFM called “Adjusted Consolidated Segment Operating Income,” because the  exclusion of online marketing expenses (which the SEC viewed as a “normal, recurring operating cash expenditure”) from the company’s results of operations was potentially misleading to investors.[9]  In 2013, David Woodcock, Chairman of the SEC’s newly created Financial Reporting and Audit Task Force, said in a speech that the task force was scrutinizing companies’ use of NGFMs.[10]  Highly publicized news reports about the use of NGFMs by companies whose shares are under-performing, such as Valeant (see here) or Twitter (see here), added to the perception that NGFMs were being used by certain companies to mischaracterize their performance.

Renewed SEC Focus

Now it looks like the swing toward discouraging NGFMs is gathering momentum.  The recent speeches by Chair White and Mr. Schnurr mentioned above indicate that the short-lived era of the SEC’s relaxed attitude toward NGFMs is over and there is now a renewed effort by the SEC to scrutinize the use of NGFMs.  In her speech, Chair White noted that the use of NGFMs “deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices,” and recommended that companies’ finance and legal teams, along with audit committees, carefully consider the reasons for using NGFMs and whether such NGFMs are useful to investors.[11]  Mr. Schnurr confirmed that the SEC staff will “continue to be vigilant in their review of the use of [NGFMs] for compliance with the rules,” but believed that company management and the audit committee should go beyond mere compliance and ask “probing questions on why” certain NGFMs are appropriate and provide useful information to investors compared to GAAP financial measures.

After these speeches, we expect the SEC to continue to carefully scrutinize the use of NGFMs in company filings, earnings releases and other public disclosures, and to ramp up its efforts to enforce full compliance with the existing rules.  Even when a company is in technical compliance with the rules, if the SEC is not satisfied with the purported usefulness of the NGFM or finds the NGFM to be misleading to investors, the SEC may issue comment letters requesting that the company either revise the disclosure or discontinue using the NGFM in question.[12]

What Does the SEC Expect Companies to Do?

The SEC has begun to give some indication of how it expects companies to act through speeches and comment letters.  So what should a company do?

  • Management and the audit committee should re-examine the company’s use of NGFMs in SEC filings and other public disclosures, particularly regarding the number of NGFMs it uses, the complexity of the NGFMs and whether it has substantive justification for using each of the NGFMs.
  • Give equal or greater prominence to the directly comparable GAAP measure, particularly when a NGFM is used in headings or bullet points.
  • Avoid asymmetrical exclusion of expense items without similarly excluding revenue or gain items.
  • Use a specific, substantive explanation for making an adjustment to a GAAP measure instead of relying on adjectives like “non-recurring” or “one-time” if the excluded item is of a type that has occurred in the past or is likely to recur in the future.
  • Be careful about changing the definition of NGFMs from period to period. If a change is necessary, the company should be transparent about the reasons for the change and discuss comparability with prior periods.
  • Use customary cautionary statements, such as those advising that the company’s NGFMs may not be comparable to similarly titled NGFMs used by other companies and that a NGFM is merely a supplement to, and not a replacement of, a GAAP financial measure.
  • Provide the directly comparable GAAP measure and reconciliation for any forward-looking NGFM (g., forecast, guidance or projection) unless it requires “unreasonable efforts” (in which case, the company must disclose that fact, identify information that is unavailable and disclose its probable significance).
  • Include the reconciliation in the same disclosure as the NGFMs, except that a link or reference to a website containing the required information may be provided if the NGFM is disclosed orally, telephonically, by webcast, by broadcast or by similar means.
  • Ensure that earnings releases comply with the affirmative requirements under Item 10(e)[13] of Regulation S-K, even when they are “furnished” under Item 2.02 of Form 8-K. This trap for the unwary catches many companies, so review earnings releases as carefully as any SEC filed document.  And, even though the SEC has not required compliance with certain other provisions of Item 10(e) (eg., avoid using titles or descriptions of NGFMs that are the same as or confusingly similar to GAAP financial measures), companies should generally try to comply with those provisions as well.
  • Although in many cases foreign private issuers (“FPIs”) are exempt from the rules regarding NGFMs, disclosures by FPIs in the U.S. press or in the U.S. edition of a foreign newspaper highlighting their financial results may be viewed as targeting persons in the United States. In such case, FPIs should ensure that any NGFMs used in the disclosure comply with the rules.[14]

[1] Chairman Arthur Levitt, The “Numbers Game,” Remarks at NYU Center for Law and Business (Sept. 28, 1998), available at

[2] Chief Accountant Lynn E. Turner, Remarks to the 39th Annual Corporate Counsel Institute (Oct. 12, 2000), available at

[3] Securities and Exchanges Commission, Cautionary Advice Regarding the Use of “Pro Forma” Financial Information in Earnings Release (Dec. 4, 2001), available at

[4] In re: Trump Hotels & Casino Resorts, Inc., Securities and Exchange Commission Administrative Proceeding

File No. 3-10680  (Jan. 16, 2002), available at

[5] Generally, and subject to certain exceptions, Regulation G applies to all public disclosures of NGFMs made by SEC reporting companies and Item 10(e) of Regulation S-K applies to NGFMs that are used in “filings” with the SEC (except earnings releases that are “furnished” under Item 2.02 of Form 8-K are subject to Item 10(e)(1)(i) of Regulation S-K (i.e., just the “affirmative” requirements under Item 10(e)(1)(i)).  Fundamentally, the rules  require that, each time a NGFM is used, the disclosure must also present the most directly comparable GAAP financial measure (for Item 10(e) of Regulation S-K, with “equal or greater prominence”) and provide a reconciliation of the NGFM to such GAAP measure.  For more in-depth discussions of the technical requirements under these rules, please see our memo, “SEC Relaxes Guidance on Non-GAAP Financial Measures” (Jan 15, 2010) and the related memos attached to it, available at

[6] Securities and Exchange Commission, Compliance and Disclosure Interpretations—Non-GAAP Measures, available at

[7] Id., Question 102.03.

[8] Emily Chasan, SEC: ‘Knock It Off’ on Bogus Non-GAAP Measures, The Wall Street Journal (Dec. 5, 2011), available at

[9] See Groupon, Inc., Response Letter to the SEC (Aug. 10, 2011), available at

[10] Michael Rapoport, SEC Task Force Probes Use of Non-GAAP Metrics, The Wall Street Journal (Dec. 10, 2013), available at

[11] Although Chair White asked in her speech “whether [current rules] are sufficiently robust in light of current market practices,” it is unclear when, or whether, the SEC will propose new rules on NGFMs, particularly insofar as the SEC wishes to address the use of NGFMs it believes may be inherently misleading even though literally accurate.  See Dave Michaels and Michael Rapoport, SEC Signals It Could Curb Use of Adjusted Earnings Figures, The Wall Street Journal (Mar. 16, 2016), available at, which points out that “Ms. White is likely to leave the commission sometime before the end of the Obama administration, meaning rule changes likely aren’t imminent.”

[12] A recent SEC comment to ConocoPhillips is illustrative.  In its 2014 10-K, ConocoPhillips used a “price normalized” NGFM that applied 2013 commodity prices across different time periods.  The company’s explanation for normalizing commodity prices to a base year was to show its underlying performance across time periods based primarily on factors that the management could control.  Although the 10-K disclosure was compliant with all of the requirements of Item 10(e) of Regulation S-K, the SEC objected to the company’s approach and asked the company to stop using the NGFM and the company agreed to do so.  See ConocoPhillips, Response Letter to the SEC (June 8, 2015), available at

[13] See supra note 5.

[14] There may also be local regulatory requirements regarding use of NGFMs to which FPIs are subject.  In an effort to harmonize the rules governing NGFMs across different jurisdictions, in September 2014, the Board of the International Organization of Securities Commission published a proposed Statement on Non-GAAP Financial Measures seeking public comment (available at A final version of the statement has not been released yet.