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During our recent “Non-GAAP Developments: Enhancing Your Policies and Procedures” webcast, our panelists reinforced one of the themes Dave wrote about in the March-April issue of The Corporate Counsel newsletter:

We often compare the Staff’s approach to non-GAAP financial measures to a swinging pendulum — over the years there have been times when the Staff is more accommodating to companies when they present non-GAAP financial measures in their SEC filings and other communications, but then there are times when the Staff expresses significant concern with the presentation of non-GAAP financial measures through the comment process, enforcement actions and Staff guidance. Today, the pendulum has definitely swung toward the latter end of that spectrum, with a fresh round of more rigid interpretive updates and a new enforcement action being brought against a company for misleading non-GAAP financial measures and inadequate disclosure controls.

Our panelists also shared what the Staff hopes companies will do following new or updated guidance — that is, read it and take a fresh look at their disclosures to make any necessary tweaks. With that in mind, the Staff may provide a window for companies to self-correct following new guidance and then issue comment letters with clean-up comments. Since we’re over six months from the December 2022 CDI updates, this MyLogIQ survey of non-GAAP comment letters from January 2022 to May 2023 caught my eye. The survey focused on topics that were both frequently the subject of a comment letter and addressed in the CDI updates and found that:

– Equal or greater prominence was the top non-GAAP issue triggering a comment letter
– The top three comment letter issues were all addressed in the December 2022 CDI updates — the next two being recurring expenses and individually tailored measures

The survey also provides examples of comments on each topic addressed in the updated CDIs. In multiple sample questions on recurring expenses, the SEC took issue with “pre-opening costs.” Here’s one of the sample comments:

We note the following in regards to your presentation and reconciliation of your Non-GAAP measures adjusted EBITDA and adjusted net income:Your reconciliation excludes “Pre-opening costs” which appears to be a normal, recurring cash operating expense. Please tell us your consideration of Question 100.01 of the staff’s Compliance and Disclosure Interpretation on Non-GAAP Financial Measures, or revise accordingly.

– Meredith Ervine