Response to SEC Focus on Non-GAAP Measures


Oct. 4, 2016

By Mark C. Shannon, CPA and Bert C. Bonhard, CPA


The U.S. Securities and Exchange Commission (SEC) is very focused on the use of non-GAAP measures, a term defined in Item 10(e) of Regulation S-K. Beginning in late 2015 and continuing in 2016, the chair of the SEC and various SEC staff members, including the chief accountant, the then-deputy chief accountant, and the chief accountant of the Division of Corporation Finance (Corp Fin), have remarked in various forums on the use of non-GAAP measures in SEC filings. Following are examples of relevant speeches:



Forum and Link

Chair Mary Jo White

Dec. 9, 2015

2015 AICPA National Conference on Current SEC and PCAOB Developments

Chair Mary Jo White

March 16, 2016

2016 Capital Markets Summit

Chief Accountant James Schnurr

March 22, 2016

12th Annual Life Sciences Accounting and Reporting Congress

Deputy Chief Accountant Wesley Bricker

May 5, 2016

2016 Baruch College Financial Reporting Conference

Chair Mary Jo White

June 27, 2016

2016 International Corporate Governance Network Annual Conference

The remarks have addressed various issues including: 1) increased use of non-GAAP measures; 2) the nature of the adjustments made; 3) the prominence of non-GAAP measures; 4) the disparity between GAAP and non-GAAP results; 5) explanations about why an entity uses non-GAAP measures; and 6) internal controls over non-GAAP measures.

On May 17, 2016, in response to the increased focus on non-GAAP measures, Corp Fin issued an update to its C&DIs related to non-GAAP measures. While they are not rules or regulations, the Compliance and Disclosure Interpretations (C&DIs) issued by the staff of Corp Fin can help registrants understand how the staff might respond to a particular question on the application of SEC rules or regulations.

Corp Fin released the new C&DIs on non-GAAP measures after the substantial majority of registrants furnished their first-quarter press releases and filed their Form 10-Qs with the SEC. Now that filings for the quarter ended June 30 are complete, we wanted to know if and how practice evolved in response to the new C&DIs. We selected a cross section of registrants in the banking industry to identify the types of disclosure changes registrants made.

Profile of Registrants Studied

We reviewed a random sample of 74 registrants in the banking industry that filed an earnings release, a Form 10-Q, or both for the quarter ended June 30, 2016. The demographics of the registrants are as follows:

  • Filing Status
    • 34 large accelerated filers
    • 33 accelerated filers
    • 7 nonaccelerated filers or smaller reporting entities
  • Asset Size
    • 7 with assets greater than $50 billion
    • 15 with assets between $10 billion and $50 billion
    • 45 with assets between $1 billion and $10 billion
    • 7 with assets less than $1 billion
  • Average Number of Non-GAAP Measures Presented by Filing Status: The average number of non-GAAP measures presented in second-quarter filings for the sample was 5.3. The average number of non-GAAP measures by filing status and asset size were:
    • By Filing Status
      • 6.8 for large accelerated filers
      • 4.1 for accelerated filers
      • 2.7 for nonaccelerated filers or smaller reporting entities
    • By Asset Size
      • 8.4 for filers with assets greater than $50 billion
      • 6.0 for filers with assets between $10 billion and $50 billion
      • 4.8 for filers with assets between $1 billion and $10 billion
      • 2.2 for filers with assets less than $1 billion

We noted that the following non-GAAP measures were most frequently used in the filings reviewed:

  • Fully tax equivalent (FTE) net interest margin or net interest income
  • Tangible equity, tangible assets, and ratios derived from tangible equity or assets (such as tangible book value per share and tangible equity to tangible assets)
  • Efficiency ratios, though frequently not labeled non-GAAP
  • Measures that excluded merger-related or other similar expenses

Crowe Observations

Those familiar with the banking industry will not be surprised by these figures. Registrants and investors should be aware, however, that calculations of individual non-GAAP measures might differ between registrants, even though the non-GAAP measure has exactly the same or a similar name.

We noted that there is some diversity in whether measures were labeled as non-GAAP between registrants, even when the measure was calculated in the same way. For example:

  • FTE net interest income was not labeled as a non-GAAP measure by all registrants in the sample.
  • Other FTE measures and ratios involving tangible assets or equity were not consistently labeled non-GAAP.
  • Efficiency ratios, which represented the largest level of diversity noted, frequently were not labeled non-GAAP.

Registrants would be wise to revisit Item 10(e) of Regulation S-K to determine if the measures they present meet the definition of a non-GAAP financial measure.

Revisions to Non-GAAP Measures in June 30 Quarterly Filings

Of the 74 financial services entities reviewed, 23, or 31 percent, revised their non-GAAP disclosures in some capacity in their June 30 quarterly filings. The 23 financial services entities all were either large accelerated filers (12) or accelerated filers (11). When disaggregated by asset size, three of the financial services entities that made revisions had $50 billion or greater in assets, four had assets between $10 billion and $50 billion, and 16 had assets between $1 billion and $10 billion. None of the financial services entities that made revisions to their non-GAAP measures had assets of less than $1 billion.

The most frequent disclosure revisions observed in second-quarter filings included:

  • Additional disclosure about why management presents non-GAAP measures
  • Enhancements to increase the transparency of non-GAAP reconciliations or add reconciliations
  • Labeling revisions to include “non-GAAP” in the name of the measure or drop words like “core” from the name of the measure

Crowe Observations

Non-GAAP measures can be useful tools to supplement the presentation of GAAP measures when they are provided in the appropriate context with transparent disclosure. The revisions to non-GAAP disclosures are a step in the right direction, but we believe registrants could make additional enhancements to their non-GAAP measures. For example, registrants might want to consider:

  • Providing more entity-specific and measurement-specific disclosure of the reasons why management believes a non-GAAP measure is useful or enhancing disclosure about why a particular line item is excluded from the non-GAAP measure
  • Whether a tabular reconciliation is more transparent for investors than a narrative reconciliation
  • Whether the labeling of non-GAAP measures could be more clear and transparent
  • Whether the chosen label is an appropriate description of the items excluded from the non-GAAP measure

SEC Comment Letters

In addition to reviewing the SEC filings for each of the 74 financial services entities in our sample, we also reviewed whether the SEC publicly released a comment letter during the first or second quarter of 2016 regarding the registrant’s disclosure of non-GAAP financial measures. Of the 74 financial services entities reviewed, five, or 7 percent, had a publicly released comment letter. Of the five financial services entities with publicly released comment letters, four made changes to disclosures in response to SEC comments. All five registrants with publicly released comment letters were large accelerated filers.

Crowe Observations

In light of the timing of the new C&DIs, there likely are a number of current SEC comment letters on non-GAAP measures in the banking industry that have yet to be released. We expect the SEC to remain focused on non-GAAP measures, and all registrants should continuously review their non-GAAP disclosures to ensure management is communicating the intended message to investors. In the study, some registrants dropped certain non-GAAP measures from their second-quarter filings. This action likely is an indication that the registrant reviewed its disclosures and felt that the non-GAAP measure no longer was meaningful to investors.

Want to Know More About Crowe’s Perspectives on Non-GAAP Measures?

Refer to our article “Non-GAAP Measures: What’s All the Fuss About?” published in June 2016.

Austen Krejca is with Crowe and contributed to this article.