Risk & Compliance

Square-Off: Are the SEC’s Non-GAAP Rules Too Strict?

There's an awful lot of gray area around the topic of what companies should or shouldn't do in their presentations of the unofficial metrics.
David McCannMay 18, 2017

Few would argue that public companies shouldn’t be allowed to present any performance metrics not provided for in generally accepted accounting principles (GAAP). Just as few would argue that public companies should have free reign to report any numbers they choose in any manner they choose.

But there’s vast middle ground along the spectrum of non-GAAP usage. It’s why the Securities and Exchange Commission last year released a series of compliance and disclosure interpretations offering guidance to help filers negotiate their way through the gray areas.

Still, it’s seemingly impossible to tie up everything companies should or shouldn’t do with regard to non-GAAP reporting into a tidy, air-tight package. For example, it’s common to offer a non-GAAP net income figure that excludes certain expenses that GAAP counts but can, as the SEC requires, still be reconciled to the official number. And yet, the numbers that best tell the story for the ever-expanding plethora of software-as-a-service (SaaS) companies are not remotely comparable to any GAAP metric.

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The purpose of GAAP is to provide comparability from company to company for users of financial statements. But can the financial picture of a SaaS company truly be compared to that of a manufacturing company?

A separate set of accounting standards for each industry surely would lead to chaos. But again, that simply represents one end of a spectrum. At the other end, GAAP would continue indefinitely to provide limited flexibility in what numbers are required and what constitutes reasonable reporting, given the nature of a company’s business.

This package of articles presents four takes on whether the SEC has gone too far with its rules for the use of non-GAAP metrics. One says yes, one says no, and two are in that gray area. Please do let us know what you think by commenting on the articles.