Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Advisory Panel Calls for More Information on Non-GAAP Measures

Members of the FASB’s main advisory group stopped short of asking the FASB to begin a standard-setting project to define common non-GAAP measurements, but several members said requiring more information about how companies arrive at the metrics would be helpful. The discussion comes at a time when the SEC is paying close attention to the proliferation of non-GAAP measures in company financial statements.

Members of the FASB’s main advisory panel had mixed responses to the question of whether the accounting board should try to require uniformity in the non-GAAP measures that increasingly dot companies’ financial statements.

But several members of the FASB’S Financial Accounting Standards Advisory Council (FASAC) said during a December 15, 2015, meeting that requiring companies to provide greater detail about how they arrive at non-standard earnings measures would be helpful to investors and analysts.

FASB Chairman Russell Golden asked the advisory panel for input, offering some potential paths forward: standardizing commonly used non-GAAP metrics, defining commonly used non-GAAP measures but not requiring companies to produce them, or requiring companies to only produce information that is promulgated by the FASB.

Most FASAC members dismissed the idea of allowing only measurements that conform to U.S. GAAP in financial statements.

Patrick Hopkins, an accounting professor at the Kelly School of Business at Indiana University, said some non-GAAP measures let businesses report industry-specific information that is not captured in accounting standards. Investors and securities analysts could more easily understand the information if the FASB or SEC required more transparency about how the measures are defined.

“Ultimately, what you’d like to do is, in some structured way, give information so people might be able to do their own calculations, but within what we’d consider the overall umbrella of financial reporting information,” he said.

Douglas Oare, managing director at investment giant BlackRock Inc., made similar comments advocating more transparency.

“At a minimum, there should be some requirement if you’re going to disclose some metric, that there should be granularity or some description of how you got to it,” Oare said.

There seemed to be little appetite among panel members about the FASB taking up a project to define something like EBITDA (earnings before interest, taxes, depreciation, and amortization), a commonly used metric that many companies say provides a clearer picture of their finances. Some companies also use “adjusted EBITDA” or “adjusted earnings,” which critics say can be used to present their earnings in a more favorable light.

Some market professionals joke that EBITDA means “earnings before the bad stuff.”

“The FASB has got enough on its plate to manage its current mandate without leaking into non-GAAP,” PricewaterhouseCoopers LLP partner Paul Kepple said. “As long as there’s transparency and accuracy in the descriptions, I don’t think it’s a challenge, necessarily, for folks to understand what’s in them.”

Keith Higgins, director of the SEC’s Division of Corporation Finance, attended the meeting as a special observer. He said the SEC pays close attention to companies’ use of non-GAAP measures and issues comment letters when needed.

“It’s disturbing when you see press reports and analyst reports conflating non-GAAP and GAAP,” Higgins said. “Beating companies up, except where they should be beaten up, is probably not the highest and best use of our time as long as the information is transparent and not misleading.”

The SEC’s Regulation G says companies that use non-GAAP financial measures must provide a presentation with equal or greater prominence of the most directly comparable financial measure from U.S. GAAP. Companies must also reconcile the differences between the non-GAAP financial measurement with the most directly comparable GAAP financial measurement. The companies must also disclose why they believe that the non-GAAP measures provide useful information to investors about their financial condition and results of operations.

Dan Mahoney, director of research at the analytical and advisory firm CFRA Research, said he did not believe the FASB could or should define how non-GAAP items are measured.

“Enforcement of the people that are sort of bending the rules is more important than trying to define each individual thing,” Mahoney said. “I think it’s impossible.”

Colleen Conrad, executive vice president and chief operating officer of the National Association of State Boards of Accountancy (NASBA), was one of the few FASAC members who advocated for definitive action by the FASB. She said it would inspire more confidence in financial reporting and make it easier for analysts to compare companies’ bottom lines.

“I personally prefer some standardization,” Conrad said. “There’s confidence in knowing some comparable measures are bring brought about by independent standard-setters as opposed to different professional groups popping up. I have more confidence in some amount of uniformity.”

The FASAC discussion came less than a week after SEC Chair Mary Jo White’s remarks about non-GAAP measures at a conference in Washington on December 9. During her keynote speech, White said companies’ use of non-GAAP measures “deserves close attention.”

“Non-GAAP measures are allowed in order to convey information to investors that the issuer believes is relevant and useful in understanding its performance. By some indications, such as analyst coverage and press commentary, non-GAAP measures are used extensively and, in some instances, may be a source of confusion,” White said at the AICPA Conference on Current SEC and PCAOB Developments.

Tagged with →