The Securities and Exchange Commission’s new rules requiring reporting companies (including foreign private issuers) to provide quantitative reconciliation of non-GAAP financial disclosures to comparable GAAP information and to furnish earnings releases and similar announcements to the SEC on Form 8-K are now in effect.  New Regulation G requires GAAP reconciliation of all non-GAAP financial information disclosed on or after March 28, 2003 (with related revisions requiring further disclosures where non-GAAP financial information is included in reports filed with the SEC).  Regulation G also prohibits material misstatements or omissions that result in non-GAAP disclosures being misleading.  Regardless of whether they contain non-GAAP financial information, earnings releases or similar announcements made by U.S. reporting companies on or after March 28, 2003 must be furnished to the SEC on Form 8-K.  See SEC Release No. 33-8176, which you can access at http://www.sec.gov/rules/final/33-8176.htm.    

Because the necessary programming to add new Item 12 (“Disclosure of Results of Operations and Financial Condition”) of Form 8-K to the EDGAR system was not complete as of March 28, 2003, the SEC is directing U.S. reporting companies to furnish the information required by Item 12 under Item 9 (“Regulation FD Disclosure”) on an interim basis, with appropriate cross-references.  See SEC Release No. 33-8216, which you can access at http://www.sec.gov/rules/final/33-8216.htm.

Non-GAAP Financial Information

New Regulation G.  Regulation G applies to any entity required to file reports pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (other than a registered investment company) that discloses a “non-GAAP financial measure,” whether the disclosure is made in a press release, analyst call, SEC filing or other communication.  A company making such disclosure must:

  • present as part of the disclosure or release the most directly comparable financial measure calculated and presented in accordance with GAAP; and
  •  reconcile the differences between the non-GAAP financial measure and the “most directly” comparable GAAP measure.

If a non-GAAP financial measure is released orally, telephonically, by webcast, by broadcast or by similar means, the GAAP reconciliation may be provided by: (1) posting that information on the company’s web site; and (2) disclosing its location and availability during the presentation.

Effective March 28, 2003, the SEC also amended Regulations S-K and S-B to impose disclosure requirements regarding use of non-GAAP financial measures in SEC filings.  In addition to the disclosure required by Regulation G, a reporting company including non-GAAP financial information in a filing with the SEC must also disclose:

  • the reasons company management believes such non-GAAP financial measures provide useful information to investors; and
  • to the extent material, the additional purposes, if any, for which management uses the non-GAAP financial measures.

The new rules on SEC filings also prohibit giving non-GAAP financial measures more prominence than GAAP measures, using confusingly similar titles or descriptions for non-GAAP and GAAP measures and presenting non-GAAP measures on the face of GAAP financial statements or in the accompanying notes.  As amended, new S-K and S-B provisions also prohibit:

  • excluding charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures other than EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation and amortization); and
  • adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.

In addition to these specific disclosure requirements and prohibitions, Regulation G provides an overriding mandate that non-GAAP financial measures, taken together with accompanying disclosures, must not misstate a material fact or omit to state a material fact necessary to make the presentation of the non-GAAP financial measures not misleading.

Regulation G does not apply to non-GAAP financial measures relating to a proposed business combination transaction, the entity resulting from the business combination or an entity that is party to the business combination if contained in a communication subject to the SEC’s communications rules applicable to business combinations.

Definition of “Non-GAAP Financial Measure.”  A non-GAAP financial measure is defined as any numerical measure of a company’s historical or future financial performance, position or cash flow that either includes amounts that are excluded, or excludes amounts that are included, in the most directly comparable measure calculated and presented in accordance with U.S. GAAP in the income statement, balance sheet or statement of cash flows.

Examples of non-GAAP financial measures include a measure of operating income that excludes one or more “non-recurring” expense or revenue items, as well as EBITDA, which could be calculated using elements derived from GAAP financial presentations, but is not presented in accordance with GAAP.  Non-GAAP financial measures do not, however, include information that does not have GAAP derivation or equivalency, such as operating and statistical measures (e.g. unit sales, numbers of employees).  Ratios or statistical measures are also not non-GAAP measures if they are calculated using exclusively one or both of (1) financial measures calculated in accordance with GAAP, and (2) operating or other measures that are not non-GAAP financial measures.  An example of such a ratio would be a measure of operating margin calculated by dividing revenues into operating income, where both items are calculated in accordance with GAAP.  Additionally, non-GAAP financial measures exclude financial measures required to be disclosed by GAAP, SEC rules or an applicable system of regulation of a government, governmental authority or self-regulatory organization, such as measures of capital or reserves calculated for a regulatory purpose.

Applicability to Foreign Private Issuers.  Regulation G generally applies to disclosures made by foreign private issuers filing on Forms 20-F and 40-F.  However, a foreign private issuer is not be required to make Regulation G disclosures if (1) the securities of the company are listed outside of the United States, (2) the non-GAAP financial measure is not derived from or based on a measure calculated and presented in accordance with U.S. GAAP, and (3) the disclosure is made by the company outside the United States or is included in a written communication that is released outside the United States.  The exception continues to apply to a written communication released in the United States so long as it is released in the United States no earlier than outside the United States and it is not otherwise targeted at persons located in the United States.

The rules on non-GAAP disclosures in SEC filings apply to foreign issuers filing on Form 20-F, except to the extent the non-GAAP measure is required or expressly permitted in the foreign private issuer’s home country and is included in its primary financial statements used in such country.  The SEC has not amended Form 40-F, but Regulation G applies to disclosures made on a Form 40-F report.

Form 8-K Disclosure of Financial Results
New Item 12 of Form 8-K.  Amended Form 8-K requires U.S. reporting companies to furnish material non-public information regarding results of operations or financial condition for a completed annual or quarterly fiscal period within five business days after any public announcement or release of such information.  Item 12 requires the registrant to identify briefly the announcement or release and include the announcement or release as an exhibit to the Form 8-K.  The SEC continues to consider previous proposals that would reduce the five-business-day period to two business days.

The new Item 12 requirement applies only to material non-public information regarding a completed fiscal year or quarter.  As a result, a new Form 8-K report is not required each time a company refers to previously released financial information.  Also, public disclosure of earnings estimates for current or future fiscal periods will not trigger a Form 8-K reporting requirement.  The SEC is not mandating earnings announcements in advance of quarterly or annual reports.  The requirement to furnish a Form 8-K under Item 12 does not apply to issuers that make earnings disclosures only in their quarterly reports on Form 10-Q or annual reports on Form 10-K.

As noted above, Regulation G applies to earnings releases that include non-GAAP financial measures.  The Form 8-K must include the enhanced disclosure required by Regulations S-K and S-B regarding management’s reasons for presenting the non-GAAP financial measure, unless such reasons were previously disclosed in the most recent Form 10-K and updated to the extent necessary to keep such information current.  Otherwise, the enhanced disclosure requirements may be satisfied either by including the disclosure in the Form 8-K or in the release that is included as an exhibit.

As adopted, Item 12 contains an exception that eliminates the need to file an additional Form 8-K containing a transcript of any material non-public earnings information presented orally, telephonically or by webcast, broadcast or similar means, if (1) the presentation occurs within 48 hours of a related written release or announcement that is furnished on Form 8-K pursuant to Item 12, (2) the presentation was announced by a widely disseminated press release (including instructions as to when and how to access the presentation and the location of the company’s website) and is broadly accessible to the public and (3) the financial and statistical information contained in the presentation is posted on the company’s website, together with any information that would be required under Regulation G.  Thus, despite the five-business-day deadline, this exception would be available only if the Form 8-K containing the earnings release is furnished to the SEC in advance of the presentation.

Relationship with Regulation FD.  Earnings releases and announcements disclosing material non-public information are also subject to Regulation FD.  While earnings releases will automatically trigger the furnishing of a Form 8-K under Item 12, the requirements of Regulation FD can be satisfied by public disclosure other than through the furnishing of a Form 8-K under Item 9.  A Form 8-K meeting the requirements of Item 12 and furnished to the SEC within the time frames required by Regulation FD, however, could be used to satisfy both obligations (and the Form 8-K submitted to the SEC in that case should indicate that it is being furnished under both Item 9 and Item 12).

Filing versus Furnishing.  As originally proposed, Item 12 would have required registrants to “file” a Form 8-K (as opposed to Item 9 of Form 8-K which permits companies to “furnish” information submitted to comply with Regulation FD).  Information that is “furnished” to the SEC is not subject to Section 18 of the Exchange Act and is not incorporated by reference into other documents filed with the SEC unless otherwise directed by the registrant.  In response to comments expressing concern that enhanced liability might preclude companies from making earnings releases, Item 12 of Form 8-K as adopted requires earnings releases to be furnished rather than filed.

Conclusion
Companies subject to Exchange Act reporting obligations must now carefully review all financial disclosures, whether contained in reports filed with the SEC, written press releases or oral presentations, for any non-GAAP financial measures, and either include a quantitative reconciliation to GAAP or choose not to disclose the non-GAAP measure.  Additionally, as a result of the new disclosure and filing requirements, greater care must be taken with respect to both the content and timing of earnings releases.  Since many companies use analyst conference calls in conjunction with earnings releases, it will be important to furnish the earnings release on Form 8-K within 48 hours prior to the conference call, as well as provide all information required by Regulation G that will be discussed in the conference call on the company’s website.