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SEC Keeping Eye On Non-GAAP Financial Disclosures

By Kirsten Ulzheimer
March 01, 2024

Financial statements are one mechanism in which to provide insight into a company's financial health. However, management may not be satisfied that this information clearly reflects their business, including how it is run. Therefore, to supplement financial statements, management may provide another view of their company by disclosing alternative financial measures. This alternative information cannot be used to distort reality and must be presented in accordance with specific rules and guidelines.

All publicly traded companies are required to prepare their financial statements in accordance with generally accepted accounting principles (GAAP), standardized principles created by the Financial Accounting Standards Board and governed by the U.S. Securities and Exchange Commission (SEC). There may be instances when the information presented in a public company's GAAP-based financial statements and footnotes to the financials are not deemed by management to represent a complete picture of the company's business and financial performance. Therefore, non-GAAP measures complement what is disclosed in a company's GAAP-based financial statements.

These non-GAAP financial measures are defined by federal regulation as numerical measures of a company's historical or future performance, financial position, or cash flow that exclude or include amounts or are subject to adjustments that have the effect of excluding or including amounts from the most directly comparable measure calculated in accordance with GAAP. Non-GAAP measures often enable management to communicate to stakeholders its perspective on the company's financial performance or business strategy. More specifically, it can value the company, determine executive compensation, and assist in peer comparisons. One commonly used financial metric is earnings before interest, taxes, depreciation, and amortization (EBITDA), which reflects a company's operating profitability and can be used instead of net income. Other frequently used non-GAAP financial measures include adjusted earnings, adjusted earnings per share, adjusted revenues, core earnings, funds from operations and free cash flows.

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