The basics on non-GAAP financial measures and KPIs

What are non-GAAP financial measures?

Non-GAAP financial measures are numerical measures of a company’s historical or future financial performance, financial position, or cash flows that adjust GAAP amounts in some fashion and are intended to supplement the company’s GAAP disclosures. Common non-GAAP financial measures used by S&P 500 companies in earning releases for the first calendar year quarter of 2020 include:

Adjusted earnings used by 77 percent of S&P 500 companies

Adjusted EPS (earnings per share) used by 77 percent of S&P 500 companies

EBITDA or Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) used by 29 percent of S&P 500 companies

Free cash flow used by 28 percent of S&P 500 companies

What are KPIs?

KPIs can be data points such as number of stores, number of customers, or measures calculated using a GAAP amount and a data point (e.g., sales per square foot). KPIs may include metrics that are company or industry specific, are related to macro-economic matters, or are a combination of external and internal information. The distinctions among GAAP measures, non-GAAP financial measures, and KPIs are important because each is subject to differing regulatory requirements and guidance.

Why does management present non-GAAP financial measures and KPIs?

Non-GAAP financial measures are often used by management as tools to help internally evaluate company performance. By disclosing these measures, as a supplement to GAAP results, companies can portray other elements of their unique story. Requests from investment analysts are another reason company management may choose to present a non-GAAP financial measure. Investment analysts may use these measures to better understand the company’s underlying business performance or forecast the company’s long-term value in their proprietary models. In some cases, non-GAAP financial measures may be an input into how employees are compensated for company performance.

KPIs allow management to share with investors and other stakeholders the key measurements used to set and achieve goals. They can provide insight into the tools the company deems important to monitor the overall health of the company.


S&P 500 companies did not present a non-GAAP financial measure in their Q1 2020 earnings release.
Source: S&P 500 non-GAAP financial measures statistics were calculated by the CAQ based on data provided by Audit Analytics

Where is this information presented and what are the requirements?

A company has some flexibility in where it reports its non-GAAP financial measures. Typically, companies present non-GAAP financial measures in SEC filings outside of the financial statements, in sections such as Management Discussion and Analysis (MD&A), or in other public disclosures such as press releases or earnings calls, or on the company website. KPIs should be disclosed within the MD&A if they are used by the company to manage the business and would be material to investors in accordance with SEC Guidance on Management’s Discussions and Analysis of Financial Condition and Results of Operations. Management may elect to include these KPIs or additional KPIs in other public disclosures, such as press releases or on their company website. As further discussed below, disclosure requirements vary for non-GAAP financial measures and KPIs depending on where the disclosure is made.

Non-GAAP financial measures are governed by Regulation G, Regulation S-K Item 10 (e), and Item 2.02 of Form 8-K. The location where the non-GAAP financial measure is reported or communicated dictates which set of rules the disclosure must comply with, as summarized in the table below:

*While Regulation S-K Item 10(e) in its entirety does not apply to press releases, per the instructions of Item 2.02 Results of Operations and Financial Condition, the requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K apply to disclosures under 2.02.


All non-GAAP financial measures disclosed to the public orally, or in writing, are required to comply with Regulation G, which, among other requirements, states the following:

  • The non-GAAP financial measure must not be misleading.
  • The GAAP measure that is most directly comparable to the non-GAAP financial measure must also be presented.
  • A reconciliation between the non-GAAP and most directly comparable GAAP measure must be presented.


Non-GAAP financial measures presented in annual or quarterly press releases furnished to the SEC must comply with Item 2.02 of Form 8-K in addition to Regulation G. Item 2.02, Form 8-K includes additional requirements that can be summarized as follows:

  • The most directly comparable GAAP measure also must be presented with equal or greater prominence.
  • The disclosure must include a statement on why management believes the non-GAAP financial measure provides useful information to the investor.
  • The disclosure should include the additional purposes, if any, for which management uses the non-GAAP financial measure, to the extent material.


Non-GAAP financial measures included in an SEC filing must comply with Regulation S-K Item 10(e), which includes the requirements in Regulation G and Item 2.02 of Form 8-K and the following notable incremental requirements:

  • Charges or liabilities that require or will require cash settlement cannot be excluded from non-GAAP liquidity measures.
  • Adjustments that have occurred, or are likely to reoccur within two years, cannot be labeled as nonrecurring, infrequent, or unusual.
  • Non-GAAP financial measures should not be presented on the face of the financial statements prepared in accordance with GAAP, in the accompanying notes, or on the face of any pro forma financial information required under Article 11 of Regulation S-X.
  • The title or description of the non-GAAP financial measure cannot be the same as or confusingly similar to the GAAP measure.

In addition to the guidance summarized above, over the years, the SEC has issued Compliance and Disclosure Interpretations to communicate information about the use of non-GAAP financial measures and to answer frequently asked questions regarding the presentation of non-GAAP financial measures.

The SEC issued guidance on KPIs presented in MD&A in February 2020. The SEC indicated that a registrant should consider the need to disclose KPIs or metrics that it uses to manage its business in MD&A because this information may be material to investors and necessary in the evaluation of the company’s performance. While such disclosures may be required in MD&A, it also may be appropriate for companies to disclose KPIs or metrics in other areas in the company’s quarterly or annual SEC filings, such as the business section. Companies may also present these amounts in earning releases that are furnished to the SEC or on their website. In addition, the guidance states that the following disclosures are generally expected to accompany the KPI or metric:

  • a clear definition of the KPI or metric and how it is calculated,
  • a statement indicating the reasons why the KPI or metric provides useful information to investors, and
  • a statement indicating how management uses the KPI or metric in managing or monitoring the performance of the business.

The SEC guidance also states, “The company should also consider whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading.”

Internal control considerations

The preparation of non-GAAP financial measures and KPIs generally does not fall under a company’s system of internal control over financial reporting (ICFR). ICFR focuses on controls related to the reliability of financial reporting and the preparation of financial statements in accordance with GAAP, which would not include adjustments that result in non-GAAP financial measures or KPIs. Disclosure controls and procedures (DCPs) are more broadly defined by the SEC and pertain to all information required to be disclosed by a company. In speeches, SEC officials have indicated that companies should consider how their DCPs apply to the disclosure of non-GAAP financial measures. Additionally, the SEC guidance issued on KPIs highlights, “Effective controls and procedures are important when disclosing material key performance indicators.”

SEC comment letter trends related to non-GAAP financial measures

The SEC has been focused on non-GAAP financial measures in recent years. According to an EY publication, for the years ended June 30, 2018, and 2019, 35 percent of SEC comment letters issued had comments related to non-GAAP financial measures. The SEC has continued the trend in 2020, having issued many comments related to non-GAAP financial measures. Similar to prior years, the non-GAAP financial measure comments primarily related to the following:

  • The non-GAAP financial measure was presented without the most directly comparable GAAP amount.
  • There was not equal or greater prominence placed on the GAAP amount.
  • Either there was no reconciliation between the GAAP and non-GAAP financial measures, or the reconciliation did not start with the most directly comparable GAAP financial measure.
  • The non-GAAP financial measure included adjustments that were deemed to be misleading (e.g., adjustments for normal, recurring, cash operating expenses or measures that adjust an individually tailored accounting principle as a substitute for GAAP).

As companies have some flexibility in their presentation of non-GAAP financial measures, it is critical that these financial measures are presented in accordance with SEC rules to provide the users of this information with a clear understanding of them. Companies should remain cognizant of the pitfalls noted above as they prepare their non-GAAP financial measure adjustments and disclosures in order to avoid an unclear or misleading disclosure.


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