SECURITIES COMMISSION Office of the Chief Accountant Staff Position; Release No. 12-OCA-1 [42 Pa.B. 1021]
[Saturday, February 18, 2012]Date of Release
January 25, 2012Commission Guidelines Regarding the Use of Non-GAAP Financial Measures and to which Staff must Apply Analysis and Review Pursuant to § 609(c) of the 1972 Act for Registration Statements Filed under § 205 and § 206 of the 1972 Act and in Offerings Exempt from Registration under § 202(a), § 203(d), § 203(p), or 203(o).
Background
The Pennsylvania Securities Commission seeks to ensure that prospective investors receive honest, full and fair disclosure of all material information concerning investments through the review of registration and exemption offering material filed with the Division of Corporation Finance and the Office of the Chief Accountant. The Office of the Chief Accountant Staff (staff) has noted the proliferation of financial information and informal financial statements within the materials filed with the Commission that are not in accordance with generally accepted accounting principles (GAAP) and are represented by issuers as comprising their financial position, financial performance or cash flow performance. The SEC has recently promulgated regulations and issued guidelines related to the use of non-GAAP financial measures. Accordingly, the purpose of this Release is to present the views of the staff of the Commission with respect to the use of non-GAAP financial measures, consistent with the position of the SEC.
Staff Position
Use of non-GAAP Financial Measures in Commission filings under sections 202(a), 203(d), 203(p), 203(o), 205, or 206.
Whenever one or more non-GAAP financial measures are included in a filing with the Commission:
(1) The filer must include the following in the filing:
(i) A presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP);
(ii) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (1)(i) of this position;
(iii) A statement disclosing the reasons why the registrant's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant's financial condition and results of operations; and
(iv) To the extent material, a statement disclosing the additional purposes, if any, for which the registrant's management uses the non-GAAP financial measure that are not disclosed pursuant to paragraph (1)(iii) of this position.
Notes to Section (1):
1. If a non-GAAP financial measure is made public orally, telephonically, by webcast, by broadcast, or by similar means, the requirements of sections (1)(i) and (1)(ii) of this section will be satisfied if:
(i) The required information in those paragraphs is provided on the filer's web site at the time the non-GAAP financial measure is made public; and
(ii) The location of the web site is made public in the same presentation in which the non-GAAP financial measure is made public.
2. In order to overcome the burden of demonstrating the usefulness of non-GAAP financial measures, included in section (1)(iii), a company must be able to demonstrate that it utilizes the non-GAAP financial measure to internally evaluate performance. If the company is able to overcome this hurdle, and the non-GAAP measure does not violate any of the other prohibitions, the information, in order to not be misleading, should include the following disclosures:
(i) The manner in which management uses the non-GAAP measure to conduct or evaluate its business;
(ii) The economic substance behind management's decision to use such a measure;
(iii) Material limitations associated with the use of the non-GAAP financial measure as compared to the use of the most comparable GAAP financial measure;
(iv) The manner in which management compensates for these limitations when using the non-GAAP financial measure; and
(v) The substantive reasons why management believes the non-GAAP financial measure provides useful information to investors.
(2) A filer must not:
(i) Exclude charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures, other than the measures earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA);
(ii) Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;
(iii) Present non-GAAP financial measures on the face of the registrant's financial statements prepared in accordance with GAAP or in the accompanying notes;
(iv) Present non-GAAP financial measures on the face of any pro forma or prospective financial statements or information required to be disclosed under Commission Regulation § 609.010; or
(v) Use titles or descriptions of non-GAAP financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures.
(3) A filer, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading.
(4) For purposes of this position, a non-GAAP financial measure is a numerical measure of a filer's historical or future financial performance, financial position or cash flows that:
(i) Excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or
(ii) Includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.
(5) For purposes of this position, GAAP refers to generally accepted accounting principles in the United States, except that:
(i) in the case of foreign private issuers whose primary financial statements are prepared in accordance with non-U.S. generally accepted accounting principles, GAAP refers to the principles under which those primary financial statements are prepared; and
(ii) in the case of foreign private issuers that include a non-GAAP financial measure derived from or based on a measure calculated in accordance with U.S. generally accepted accounting principles, GAAP refers to U.S. generally accepted accounting principles for purposes of the application of the requirements of this position to the disclosure of that measure.
(6) For purposes of this position, non-GAAP financial measures exclude:
(i) operating and other statistical measures; and
(ii) ratios or statistical measures calculated using exclusively one or both of:
(A) Financial measures calculated in accordance with GAAP; and
(B) Operating measures or other measures that are not non-GAAP financial measures.
(iii) Non-GAAP financial measures do not include operating or other statistics that are not financial in nature. They also do not include measures that are based on GAAP information. The following are examples, although not all inclusive, of items that do not meet the definition of a non-GAAP financial measure:
• Numbers of employees, subscribers, advertisers, stores or customers;
• Return on sales or gross margin computed using GAAP amounts;
• Debt repayments that have been planned, but are not yet made;
• Estimated revenues or expenses of a new product line when the estimates are based on GAAP;
• Measures of profit or loss and total assets for each segment that are disclosed in accordance with GAAP (i.e., Topic 280, Segment Reporting);
• Sales per square foot or sales per employee (assuming the sales figures were calculated in accordance with GAAP);
• Same store sales (again assuming the sales figures for the stores were calculated in accordance with GAAP);
• Operating margin calculated by dividing GAAP revenue into GAAP operating income; and
• Any financial measure required by GAAP, SEC or other system of regulation (e.g., regulatory measures of capital or reserves).
(7) For purposes of this position, non-GAAP financial measures exclude financial measures required to be disclosed by GAAP or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the filer. However, the financial measure should be presented outside of the financial statements unless the financial measure is required or expressly permitted by the standard-setter that is responsible for establishing the GAAP used in such financial statements.
(8) The requirements of this position shall not apply to investment companies registered under Section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).
JEANNE S. PARSONS,
Secretary[Pa.B. Doc. No. 12-323. Filed for public inspection February 17, 2012, 9:00 a.m.]
