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SEC Adopts Rules Governing the Use of Non-GAAP Financial Measures
Washington, DC, February 11, 2003 - The SEC recently adopted new rules and amendments—as mandated by the Sarbanes-Oxley Act of 2002—addressing public companies’ disclosure of financial information that is derived using methods other than the Generally Accepted Accounting Principals (GAAP). The new rules, which are intended to improve the quality and transparency of issuer disclosures, become effective on March 28, 2003.
Consistent with Institute recommendations, the SEC will require reporting companies that release earnings announcements to file such information with the SEC on Form 8-K, and if such announcements include pro forma or non-standardized earnings information, a reconciliation to GAAP-basis earnings is required in the Form 8-K. The SEC amended Form 8-K to add new Item 12, “Disclosure of Results of Operations and Financial Condition,” which requires registrants that release earnings announcements to file Form 8-K with the SEC within five business days of any public announcement or release disclosing material non-public information regarding a registrant’s results of operations or financial condition for an annual or quarterly fiscal period that has ended.
The SEC also adopted Regulation G, which applies to any registrant that is required to file reports pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, other than a registered investment company. Under Regulation G, whenever a registrant, or a person acting on its behalf, publicly discloses or releases material information that includes a non-GAAP financial measure, it must provide, in that disclosure a presentation of the most directly comparable GAAP financial measure, and a quantitative reconciliation of the differences between the GAAP and non-GAAP financial measures.
The SEC notes that if a non-GAAP financial measure is released orally, telephonically, by webcast, broadcast, or similar means, the registrant may provide the accompanying information required by Regulation G by posting that information on the registrant’s website, and disclosing the location and availability of the required accompanying information during its presentation.
The SEC also adopted amendments to Regulation S-K to provide additional guidance regarding the use of non-GAAP financial measures in SEC filings. Specifically, the amendments, which do not apply to registered investment companies, require registrants that use non-GAAP financial measures in SEC filings to provide the following:
- a presentation, with equal or greater prominence, of the most directly comparable GAAP financial measure;
- a quantitative reconciliation of the differences between the GAAP and non-GAAP financial measures;
- 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
- if material, a statement disclosing the additional purposes, if any, for which the registrant’s management uses the non-GAAP financial measure that are not otherwise disclosed.