SEC Updates to the Financial Reporting Manual, Extending Edgar Filing Hours, and Compliance and Disclosure Interpretations

FINANCIAL REPORTING MANUAL

The SEC’s Division of Corporation Finance (the division) published a revised financial reporting manual (FRM) in January 2023. The manual includes the following updates:

1. A new number to contact the division’s Office of the Chief Accountant (CF-OCA staff) to discuss questions about financial statement waiver requests (under Rule 3-13 of Regulation S-X) and a link to the new online submission form for the requests;
2. Confirmation of changes to certain sections in response to the amendments Rule 3-10 and 3-16 made to Regulation S-X;
3. An addition to Section 11400 to include guidance on implementing the provisions of FASB Accounting Standards update No. 2018-12; and
4. Removal of outdated guidance, such as on issues related to the adoption of ASC 606 on revenue recognition.

FINAL RULE EXTENDING EDGAR FILING HOURS FOR FORM 144

The SEC amended Regulation S-T to extend the filing deadline for Form 144 from 5:30 p.m. to 10 p.m. EST or EDT, effective from March 20, 2023.

Under the previous rule, if a Form 144 was submitted by direct transmission after 5:30 p.m. EST, it was deemed filed the next business day. However, per the recent amendment, a Form 144 filed after 5:30 p.m. but before 10 p.m. is deemed filed the same business day.

UPDATES TO THE COMPLIANCE AND DISCLOSURE INTERPRETATIONS RELATED TO NON-GAAP MEASURES

On December 13, 2022, the division updated the compliance and disclosure interpretations (C&DIs) regarding non-GAAP measures. Below is a summary of the changes:

C&DI 100.01 (UPDATED)

Per the amendment, certain adjustments, while not explicitly prohibited, are misleading depending on a company’s specific facts and circumstances. For example, according to the update, “Presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading.” The amendment considers certain factors when evaluating an adjustment (e.g., regulatory environment, industry, the entity’s operations, strategy, etc.). It also clarifies that “occasional” expenses that occur irregularly may constitute recurring expenses.

C&DI 100.04 (UPDATED)

The update substantially revamps the structure of this C&DI, which primarily focuses on individually tailored accounting principles. This C&DI originally cited adjustments that accelerate revenue as an example of individually tailored accounting principles, and also stated that adjustments to line items other than revenue could give rise to individually tailored accounting principles. The update provides an expanded list of individually tailored accounting principles examples that the staff may consider being misleading, which includes but is not limited to:

• Changing the pattern of recognition, such as including an adjustment in a non-GAAP performance measure to accelerate revenue recognized ratably over time in accordance with GAAP as though revenue was earned when customers were billed;
• Presenting a non-GAAP measure of revenue that deducts transaction costs as if the company acted as an agent in the transaction when gross presentation as a principal is required by GAAP, or the inverse, presenting a measure of revenue on a gross basis when GAAP requires net presentation; and
• Changing the basis of accounting for revenue or expenses in a non-GAAP performance measure from an accrual basis in accordance with GAAP to a cash basis.

C&DI 100.05 (NEW)

This new C&DI states that “without an appropriate label and clear description, a non-GAAP measure and/or any adjustment made to arrive at that measure could be misleading to investors.” The C&DI provides the following list of examples that would violate Rule 100(b) Regulation G:

• Failure to identify and describe a measure as non-GAAP.
• Presenting a non-GAAP measure with a label that does not reflect the nature of the non-GAAP measure, such as a:
• Contribution margin that is calculated as GAAP revenue less certain expenses, labeled “net revenue”;
• Non-GAAP measure labeled the same as a GAAP line item or subtotal even though it is calculated differently than the similarly labeled GAAP measure, such as “Gross Profit” or “Sales”; and
• Non-GAAP measure labeled “pro forma” that is not calculated in a manner consistent with the pro forma requirements in Article 11 of Regulation S-X.

C&DI 100.06 (NEW)

This new guidance memorializes the staff’s view that extensive, detailed disclosures cannot cure misleading disclosures. The staff expect registrants to revise their non-GAAP presentation by removing the adjustment or measure) in the filing following a staff conclusion that the non-GAAP measure or adjustment is misleading.

C&DI 102.10 (AMENDED)

The update to C&DI 102.10 amends and expands the illustration of instances in which presenting a non-GAAP measure would violate the equal or greater prominence requirement. The updates are discussed in each new subsection of this C&DI:

C&DI 102.10(A)

The update clarifies that the equal or greater prominence requirement applies to both the presentation of a non-GAAP measure and any related discussion and analysis. Similar language about this being a facts and circumstances determination remains, but the list of illustrative examples was updated to include the following (many of which largely rearticulate and expand upon prior examples):

• Presenting an income statement of non-GAAP measures. See Question 102.10(c).
• Presenting a non-GAAP measure before the most directly comparable GAAP measure or omitting the comparable GAAP measure altogether, including in an earnings release headline or caption that includes a non-GAAP measure.
• Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence.
• Presenting charts, tables, or graphs of non-GAAP financial measures without presenting charts, tables, or graphs of the comparable GAAP measures with equal or greater prominence or omitting the comparable GAAP measures altogether.

C&DI 102.10(B)

The update provides examples of non-GAAP disclosures that are more prominent than the presentation of comparable GAAP measures:

• Starting the reconciliation with a non-GAAP measure.
• Presenting a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures. See Question 102.10(c).
• When presenting a forward-looking non-GAAP measure, a measure would be considered more prominent than the comparable GAAP measure if it is presented without disclosing reliance upon the exception that allows the exclusion of a quantitative reconciliation for forward-looking measures, identifying the unavailable information and its probable significance in a location of equal or greater prominence.

C&DI 102.10(C)

• Related to the prohibition on presenting a non-GAAP income statement, the update explained that the “staff considers a non-GAAP income statement to be comprised of non-GAAP measures and includes all or most of the line items and subtotals found in a GAAP income statement.”
• Considering the updated C&DI guidance, companies should look at their presentation of non-GAAP measures — particularly as the year-end reporting season approaches.

REFERENCES

• https://www.sec.gov/corpfin/non-gaap-financial-measures
• https://www.bdo.com/insights/assurance/sec-updates-compliance-and-disclosure-interpretations-on-non-gaap-financial-measures
• https://www.wilmerhale.com/en/insights/blogs/Focus-on-Audit-Committees-Accounting-and-the-Law/20221214-sec-updates-non-gaap-compliance-and-disclosure-interpretations