The Securities and Exchange Commission recently weighed in on non-U.S. generally accepted accounting principles financial measures.

1. our roots rundeepTM
MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM
A publication of the Professional Standards Group
MHMMessenger
© 2 0 1 6 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
TM
2. If the non-GAAP measure is presented
inconsistently between periods: The SEC clarified
that if adjustments are made to charges or gains
in one period, they should also be made to prior
periods and if not made, the reasons should be
disclosed and explained. It may also be necessary
to recast prior measures to conform to the current
presentation if the changes are significant.
3. If the non-GAAP measure excludes charges but
does not exclude any gains: Companies should
also be careful that they are not “cherry-picking”
which adjustments to reflect in the non-GAAP
measure such that it becomes misleading. For
example, if the measure excludes non-recurring
charges but does not exclude other non-recurring
gains that occurred during the same period,
the non-GAAP measure could be considered
misleading.
In the new guidance, the SEC indicates that it is
inappropriate for companies to provide non-GAAP
measures,intheirfilingstotheSECorontheircompany
websites for individually tailored revenue recognition
and measurement methods as a substitute for the
GAAP measures, as those non-GAAP measures
could violate Regulation G. An example would be a
non-GAAP measure that accelerated the recognition
of revenue that is normally recorded ratably under
GAAP as though the revenue were earned when the
customer was billed. This also applies to financial
statement line items other than revenue recognition.
The Securities and Exchange Commission (SEC)
recently weighed in on non-U.S. generally accepted
accounting principles (GAAP) financial measures. In
its Compliance & Disclosure Interpretations (C&DI),
the SEC made several updates to its previous
guidance in May 2016.
The SEC provided a Q&A with regard to situations
in which non-GAAP measures could be considered
misleading in addition to addressing a number of
questions that have arisen with regard to non-GAAP
presentations. This summary covers certain of the
questions answered by the SEC in its C&DI.
In particular, the SEC identified the following areas
where non-GAAP measures could be considered
misleading:
1. If the non-GAAP measure includes certain
adjustments: The SEC clarified that certain non-
GAAP adjustments, while not prohibited outright,
could be misleading to shareholders. These
include presenting performance measures that
leave out adjustments for normal, recurring and/or
cash operating expenses.
July 2016
SEC Updates Guidance on Non-GAAP Financial Measures

2. © 2 0 1 6 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
MHMMessenger
2
Business Combinations
The SEC also clarified that the exemption from
Regulation G and Item 10(e) of Regulation S-K
for non-GAAP financial measures disclosed in
communications relating to a business combination
transaction does not extend to the same non-
GAAP financial measures disclosed in registration
statements, proxy statements and tender offer
materials.
The guidance also clarified that if a reconciliation of a
non-GAAP financial measure is required and the most
directly comparable measure is a pro-forma amount
that is prepared and presented in accordance with
Article 11 of Regulation S-X, it is acceptable to use
the pro-forma measure in the reconciliation instead of
a GAAP measure.
Regulation S-K
Clarifications were made to better define what is
meant by “funds from operations” (“FFO”) and the
presentation of a non-GAAP measure that depicts
“funds from operations on a per share basis.” The
SEC indicated that it accepts the definition used by
the National Association of Real Estate Investment
Trusts (NAREIT) and clarifies that it is a performance
measure that can be presented on a per-share basis.
SEC registrants can also present FFO on a basis
different from NAREIT so long as the presentation
complies with Item 10(e) of Regulation S-K and
Rule 100(b) of Regulation G. Companies should
be cautious of any adjustments made to FFO that,
depending on the nature of the adjustments, could
trigger the inability to present such information on a
per share basis.
Further updates also clarified that the prohibition in
Item 10(e) of Regulation S-K against adjusting non-
GAAP financial performance measures to eliminate
or smooth items that are described as non-recurring,
infrequent or unusual is inappropriate if it is reasonably
likely to occur again within the next two years or it had
previously occurred in the last two years.
The SEC also clarified that it is acceptable to present
certain non-GAAP performance measures on a per-
share basis; however, non-GAAP liquidity measures
that measure cash generated should not be presented
on a per-share basis in documents filed or furnished
with the SEC. In addition, the SEC indicated that while
there is no prohibition against a company presenting a
non-GAAP measure for what is typically described as
“free cash flow” due to the lack of consistent definition
of how this amount is calculated, companies should
provide disclosure of how this measure is calculated
as well as a reconciliation to the most comparable
GAAP measure. Companies should also take care
to ensure that the usefulness of this measure is not
inappropriately described. In certain instances, it
may not be appropriate to describe “free cash flow”
as the residual amount of cash available to cover
discretionary expenditures. Further, because “free
cash flow” is a liquidity measure, it must not be shown
on a per-share basis.
Regulation S-K still requires a reconciliation of non-
GAAP financial measures to their most comparable
GAAP measures and that the GAAP measures should
presented with equal or more prominence than the
non-GAAP measure. To assist registrants in making
this determination, the SEC provided some examples
of disclosures that they believe illustrate situations
where the non-GAAP measure is more prominent
than the GAAP measure.

3. © 2 0 1 6 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved.
MHMMessenger
3
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
Income Tax Effects on non-GAAP Measures
In some instances, using non-GAAP measures could
have income tax effects with regard to the adjustments
made to arrive at the non-GAAP measure. A
registrant should provide income tax effects on its
non-GAAP measures depending on the nature of
the measures. If a measure is a liquidity measure
that includes income taxes, it might be acceptable
to adjust GAAP taxes to show taxes paid in cash. If
a measure is a performance measure, the registrant
should include current and deferred income tax
expense commensurate with the non-GAAP measure
of profitability. Lastly, adjustments to arrive at a non-
GAAP measure should not be presented “net of tax.”
Rather, income taxes should be shown as a separate
adjustment and clearly explained.
EBIT and EBITDA
Entities that present their earnings before interest
and taxes (EBIT) or earnings before interest, taxes,
depreciation and amortization as performance
measures should reconcile these non-GAAP
measures to net income as stated in the statement
of operations presented on a GAAP basis. Operating
income would not be considered the most comparable
GAAP measure to use. In addition, EBIT and EBITDA
must not be presented on a per-share basis. If other
adjustments are made to EBIT or EBITDA, the titles
of these non-GAAP measures should be changed to
avoid confusion.
For More Information
If you have specific questions, comments or concerns
about this issue, please contact Rich Howard of
MHM’s Professional Standards Group. Rich can be
reached at rhoward@cbiz.com or 949.450.4402.