Wednesday, October 9, 2019
U.S. firms with Sales in China through 2018.

Wednesday, October 9, 2019
Tracking  Pension Data in Calcbench

Friday, October 4, 2019
In Depth: Leasing Costs in Retail Sector

Thursday, September 19, 2019
Alibaba and Cloud Computing

Monday, September 16, 2019
Introducing Critical Audit Matters

Wednesday, September 11, 2019
Our Fireside Chat on Goodwill Assets

Friday, September 6, 2019
Pulling Forward Share Buybacks

Saturday, August 31, 2019
A Quick Catch-Up on VMWare

Friday, August 23, 2019
By the Numbers: Restructuring Costs Over Time

Wednesday, August 21, 2019
WeWork Liabilities, Part II

Tuesday, August 20, 2019
WeWork’s Liabilities in Perspective

Wednesday, August 14, 2019
Comparing LinkedIn, Twitter Revenue

Wednesday, August 7, 2019
Leasing’s Effect on Retail Balance Sheets

Thursday, August 1, 2019
Using Calcbench to Find China Exposure

Tuesday, July 30, 2019
Leasing Details: The Comcast Example

Monday, July 29, 2019
Easy Fundamental Equity Analysis in Python

Monday, July 22, 2019
Calcbench Data and Tax Reform Insight

Wednesday, July 17, 2019
Downshifting in the Trucking World

Tuesday, July 16, 2019
New Report: Adoption of New Lease Accounting Standard

Friday, July 5, 2019
More Consequences of Lease Accounting

Archive  |  Search:
A Reminder on Non-GAAP Reporting Rules
Thursday, December 27, 2018

Here’s something you don’t see often: the Securities and Exchange Commission rapping a company on the financial knuckles for violations of non-GAAP reporting.

The agency hit ADT (yes, the home security people) with a $100,000 fine for poor disclosure relating to ADT’s financial statements for fourth-quarter and full-year 2017, plus first-quarter 2018. Specifically, ADT “did not afford equal or greater prominence to comparable GAAP financial measures” — which violates federal securities rules.

What exactly did ADT ($ADT) do? According to the SEC’s administrative order, ADT’s non-GAAP metrics it reported in 2017 included adjusted EBITDA, adjusted net income, and free cash flow before special items. None of those measures are improper unto themselves, if a company also reports the closest comparable GAAP measure with equal prominence. That equal prominence part is what ADT didn’t do.

For example, in the headline of ADT’s FY 2017 earnings release, the company proudly said that adjusted EBITDA was up 8 percent year-over-year (yay!) but omitted the detail that net income (the closest GAAP metric to adjusted EBITDA) was actually down for the same period. ADT did the same with the headline of its Q1 2018 earnings release.

ADT had a second non-GAAP indiscretion in its Q1 2018 earnings release, too. Aside from the headline issue, ADT then listed “FIRST QUARTER 2018 HIGHLIGHTS” on the first page of the earnings release, followed by nine bullet points. Three of those bullet points reported non-GAAP metrics: adjusted EBITDA, adjusted net income, and adjusted net income per share.

ADT did not, however, also include the closest comparable GAAP metrics right there in the bullet points (or, “the HIGHLIGHTS section,” as the SEC said in its settlement order). Only further down in the second and sixth full paragraphs did ADT report that its net loss grew from $141 million in Q4 2017 to $157 million in Q1 2018.

Earnings Releases and Calcbench

Calcbench does track earnings releases from SEC registrants. Subscribers can find earnings releases in our Interactive Disclosures database, by selecting the Earnings Release choice from our pull-down menu of disclosures on the left-hand side of the screen.

We pulled up ADT’s Q1 2018 earnings release to take a look. The offending headline and bullet points (also known as “HIGHLIGHTS”) are in Figure 1, below.

To the untrained and uncynical eye, those HIGHLIGHTS do look good. Only in the second paragraph, as the SEC noted, do we see the statement that net income was actually a net loss, and the net loss was getting larger.

Worry about the proliferation of non-GAAP was all the rage in 2016, and on this blog we’ve chronicled several non-GAAP enforcement actions by the SEC since then. Still, non-GAAP reporting is permissible under SEC rules, and is widespread among the S&P 500. The three crucial reporting principles are that a company: (a) explain why it believes its non-GAAP metric is worth including; (b) also reconcile that non-GAAP metric to the closest GAAP metric; and © give both GAAP and non-GAAP disclosures equal prominence in the earnings release.

For those of you who want to geek out on our prior non-GAAP discussions, feast on this:

FREE Calcbench Premium
Two Week Trial

Research Financial & Accounting Data Like Never Before. More features and try our Excel add-in. Sign up now to try the Premium Suite.