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Staff Answers Questions on Non-GAAP Measures

The staff of the SEC's Corporation Finance division issued advice on Regulation G concerning the use of non-GAAP financial measures. The advice, issued in the form of 33 frequently asked questions, deals with several topics including transition issues, business combination transactions, segment information, foreign private issuers and voluntary filers.

Transition Issues

With regard to transition issues, the staff discussed a case in which a report was filed with the Commission before the rule's effective date of March 28, 2003, and then was incorporated by reference into a registration statement that was filed after March 28, 2003. According to the staff, the registration statement must comply with Regulation G with respect to any non-GAAP financial measures.

With regard to any non-GAAP material incorporated by reference, the staff advised that companies may provide the required reconciliation by 1) amending the previously filed report, 2) including a section in the registration statement that identifies the non-GAAP financial measures contained in the incorporated reports and provides the required reconciliations or 3) filing a current report on Form 8-K or a periodic report that identifies the non-GAAP financial measures in the incorporated reports and provides the required reconciliations. The staff, in order to ease the transition to the new requirements, will not, however, object if a registration statement on Form S-8 filed after March 28, 2003, does not include the required reconciliation of non-GAAP financial measures included in a document filed before that date and incorporated by reference.

In addition, the staff addressed the question of whether a company that posted a document containing non-GAAP financial measures on its Web site prior to March 28, 2003, would be required to remove that document after that date if it did not contain the Regulation G reconciliation. According to the staff, the company would not be required to remove the document. If, however, any non-GAAP financial measure subject to Regulation G was added, amended, revised or updated on the Web site after that date, the company would have to include the Regulation G-required reconciliation of the measure at that time.

Business Combination Transactions

The staff questioned whether the exemption from Regulation G and Item 10(e) of Regulation S-K for disclosure of non-GAAP financial measures made in connection with a business combination transaction extended to non-GAAP financial measures contained in registration statements, proxy statements, and tender offer materials. The staff noted that disclosures of non-GAAP financial measures made in communications subject to Securities Act Rule 425 or Exchange Act Rules 14a-12 or 14d-2(b)(2) are exempt from Regulation G and Item 10(e) of Regulation S-K. According to the staff, this exemption also was intended to apply to communications subject to Rule 14d-9(a)(2). This exemption does not extend beyond communications that are subject to those rules. Accordingly, advised the staff, if the same non-GAAP financial measure that was included in a communication filed under one of those rules was also disclosed in a Securities Act registration statement or an Exchange Act proxy statement or tender offer statement, the exemption would be inapplicable to that disclosure.

Disclosures subject to Item 1015 of Regulation M-A are also exempt from Regulation G and Item 10(e) of Regulation S-K. This exemption, stated the staff, is not limited to pre-commencement communications and, accordingly, the exemption would also be available for Item 1015 disclosure found in registration statements, proxy statements and tender offer statements. In addition, where reconciliation of a non-GAAP financial measure is required and the most directly comparable measure is a pro forma measure prepared and presented in accordance with Article 11 of Regulation S-X, the staff stated that companies may use that measure for reconciliation purposes instead of a GAAP financial measure.

Segment Information

In an example concerning segment reporting, the staff cited a company that presented a table illustrating a breakdown of revenues by product. The staff advised that if the aggregate revenues presented for each product equaled the revenue amounts presented in the company's financial statements, the table would not be considered a non-GAAP financial measure. The presentation would, however, be considered a non-GAAP financial measure under Regulation G and Item 10(e) of Regulation S-K if the revenue was adjusted in any manner.

The staff cited another example of a company that included a table illustrating a breakdown of revenues by geographic location. In this table, the company adjusted its GAAP revenue measure for its international operations to exclude the effects of changes in foreign exchange rates associated with the current fiscal period. The table also presented the related foreign currency effect for the period. The company presented revenue in this manner to show changes in revenue derived from increases in sales volumes, prices and exchange rates from period to period as part of its MD&A discussion. In this case, if the aggregate revenues presented for each geographic location equaled the revenue amounts presented in the company's financial statements, the table would not be considered a non-GAAP financial measure. However, if the company presented the foreign exchange adjusted measure by itself, this would be deemed a non-GAAP financial measure under Regulation G.

Foreign Private Issuers

The staff pointed out that the note to Item 10(e) of Regulation S-K permits a foreign private issuer to include in its filings a non-GAAP financial measure that otherwise would be prohibited if, among other things, the non-GAAP financial measure is required or expressly permitted by the standard setter that is responsible for establishing the GAAP used in the company's primary financial statements included in its filing with the Commission. In response to the question of what "expressly permitted" means, the staff advised that a measure would be considered "expressly permitted" if the particular measure "is clearly and specifically identified as an acceptable measure by the standard setter that is responsible for establishing the GAAP used in the company's primary financial statements included in its filing with the Commission."

For example, the staff stated that some non-US GAAP standard setters specify a minimum level of caption detail for financial statement presentation but require or permit additional caption detail. In some cases, the standard setter does not specify the particular additional captions to be presented. The staff stated that the "additional detail of the components of the financial statements determined in conformity with the GAAP used in the primary financial statements will generally be useful to U.S. investors and the 'expressly permitted' condition is not intended to prohibit the inclusion of those captions."

Additionally, some non-U.S. GAAP standard setters permit or require subtotals in financial statements that are not calculated consistently with those permitted or required by U.S. GAAP. Provided that the subtotal is clearly derived from the appropriately classified financial statement captions that precede it, the staff advised that the "expressly permitted" condition was not intended to prohibit inclusion of those subtotals.

In another example, the staff discussed a foreign private issuer that furnished a press release on a Form 6-K. This release included a section with non-GAAP financial measures. The staff questioned whether the issuer could incorporate by reference into a Securities Act registration statement only those portions of the press release that did not include the non-GAAP financial measures.

In response, the staff noted that reports on Form 6-K are not incorporated by reference automatically into Securities Act registration statements. In order to incorporate a Form 6-K, a foreign private issuer would be required to specifically provide for such incorporation by reference in the registration statement and in any subsequently filed Form 6-K. If the issuer wished to incorporate by reference a portion of the press release, the staff advised that the issuer should either 1) specify in the Form 6-K those portions of the press release to be incorporated by reference or 2) furnish two Form 6-K reports. One report would contain the full press release and the other would contain the portions that would be incorporated by reference. The staff concluded that "we believe that the second method, using two reports on Form 6-K, may provide more clarity for investors in most circumstances, and added that a company must also consider whether its disclosure is rendered misleading if it incorporates only a portion of a press release."

¨ Release No. 34-47226 is reported at ¶86,927 .