Earnings release: non-GAAP audit
Three rules overlap here and they are not the same rule. Which of them bite depends entirely on where the measure appears — so that is the first question.
Where does the measure appear?
This decides whether the prominence requirement applies and whether Item 10(e)’s five prohibitions bind as rules. Every answer below changes meaning with it.
Applies wherever the measure is made public
Four things you can check by looking
The most commented-on non-GAAP issue, and it is judged on the document as a reader meets it. A yes to any of these is a fact someone can point at.
Why it is useful, and what else you use it for
Prohibited in a filing — and still worth answering here
Instruction 2 to Item 2.02 imports paragraph (e)(1)(i) only, so these do not bind a furnished release as rules. They still matter: Regulation G forbids a misleading presentation, and incorporation into a filing brings them all with it.
The call, the exhibit, and what happens next
A structured read of the rule text against your document. It has not seen your release; it asks the questions in the form the rules ask them and tells you which rules actually apply to your venue.
Three rules, not one, and they apply to different documents
Non-GAAP compliance is usually taught as a single body of rules, and that is where the trouble begins, because it is three. Regulation G reaches any public disclosure of material information containing a non-GAAP measure — a press release, a slide, a remark on a call — and requires the most directly comparable GAAP measure and a reconciliation, and forbids a presentation that is misleading. It says nothing about prominence. Item 10(e) of Regulation S-K reaches filings, and adds equal-or-greater prominence, a statement of why management believes the measure is useful, and a statement of what else management uses it for. Then, separately, it prohibits five specific things.
Item 2.02 of Form 8-K joins the two, and the way it joins them repays a second reading. Its Instruction 2 imports the requirements of paragraph (e)(1)(i) — the affirmative ones, prominence included. It does not import paragraph (e)(1)(ii), the prohibitions. That asymmetry sits in the text, and it catches people in both directions. A furnished release does not escape the prominence requirement, which is the mistake that draws comment letters. And the five prohibitions do not bind a furnished release as rules, which is the mistake in the other direction — though it matters less than it sounds, because Regulation G forbids a misleading presentation regardless, and the reasoning behind most of those prohibitions is a misleadingness reasoning.
What “furnished, not filed” actually buys is Section 18 liability, and close to nothing else. It does not touch Rule 10b-5. It does not reduce the imported content requirements. And it evaporates for any part of the release later incorporated by reference into a filing, at which point the full set of prohibitions applies to that text. A release drafted to the looser standard and then incorporated is a recurring own goal, and avoiding it is a drafting choice that costs nothing.
Two details are worth carrying around. The non-recurring prohibition contains an actual test — reasonably likely to recur within two years, or a similar charge or gain within the prior two — which makes it one of the few places in this area where an answer can be checked rather than argued. And the definition excludes more than people assume: a ratio computed exclusively from GAAP measures and operating measures is not a non-GAAP measure at all, so a good deal of quarter-end reconciliation work is spent on metrics that never needed it.
What this tool does not do
It has not read your release. It asks the questions in the form the three rules ask them, and it is precise about which of the three actually bite on the venue you chose - including the point that Instruction 2 to Item 2.02 imports Item 10(e)(1)(i) and not (e)(1)(ii), which cuts both ways. Where a prohibition does not bind as a rule the tool says so rather than over-claiming, and says why the same adjustment can still be a problem under Regulation G. The prominence questions are layout facts you can check by looking; the rest depend on your own reading of your own document.
- Reading your release, your slides, your script or your reconciliation schedules
- Whether a particular adjustment is appropriate, which is the substantive question and turns on your facts
- Whether a measure is a performance measure or a liquidity measure, which turns on how you present and discuss it
- The SEC staff's Compliance and Disclosure Interpretations on non-GAAP measures, which this tool has not fetched and does not quote
- Segment measures under ASC 280 and the different treatment they get, or measures required by GAAP or another regulator
- Guidance and forward-looking measures beyond the reconciliation point - including whether your safe harbour language works
- Regulation FD, selective disclosure, and who was on the call
- Whether the underlying numbers are right, which is what your close process and your auditor are for
Frequently asked questions
Our release is furnished, not filed. Do the non-GAAP rules still apply?
Yes, and more of them than most people expect. Instruction 2 to Item 2.02 of Form 8-K imports the requirements of Item 10(e)(1)(i) of Regulation S-K expressly — so the release owes the comparable GAAP measure with equal or greater prominence, the reconciliation, and the statements about why management uses the measure. What 'furnished' buys is Section 18 liability protection. It buys nothing on the content of the non-GAAP presentation.
Do the five Item 10(e) prohibitions apply to an earnings release?
Not by force of Item 2.02, and this tool will not pretend otherwise. Instruction 2 imports paragraph (e)(1)(i) and stops there; (e)(1)(ii) — the bans on excluding cash-settled charges from liquidity measures, on smoothing recurring items, on non-GAAP on the face of the statements, and on confusingly similar titles — is not imported. But two things follow. Regulation G still prohibits a misleading presentation, and the reasoning behind most of those prohibitions is a misleadingness reasoning. And the moment the release is incorporated by reference into a filing, (e)(1)(ii) applies to it in full.
How is prominence actually judged?
On the document as a reader meets it, not on whether the GAAP number appears somewhere in it. Four facts do most of the work and each is checkable by looking: does the headline carry only the adjusted figure; does the non-GAAP discussion come first; is there a summary table without the GAAP equivalents beside them; is the non-GAAP figure bolder or larger. The fix is layout and costs nothing.
When is an item genuinely non-recurring?
The rule contains an unusually specific test. You may not adjust a performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when the nature of the charge or gain is reasonably likely to recur within two years, or there was a similar charge or gain within the prior two years. Two years back and two years forward, and similar in nature rather than identical — a facility closure two years ago is similar to a different facility closure now.
Is free cash flow a liquidity measure or a performance measure?
It turns on how you present and discuss it, not on what you call it. A measure you frame in terms of cash available to service debt or fund the business is a liquidity measure however it is titled — and a liquidity measure other than EBIT or EBITDA may not exclude charges that required or will require cash settlement. Excluding cash restructuring costs or a cash litigation settlement from such a measure is the classic version of this problem.
Do we have to reconcile every metric in the release?
No, and over-reconciling is a real symptom. A ratio or statistical measure calculated exclusively from GAAP measures and operating measures is not a non-GAAP financial measure at all — revenue per subscriber, from GAAP revenue and a subscriber count, is outside these rules entirely. Worth settling once which of your recurring metrics are in which bucket, rather than deciding each quarter under time pressure.