Increased scrutiny of the prominence of non-GAAP values in company disclosures is, of course, intended to protect investors from misleading information, but are the SEC’s new methods proving effective in increasing clarity and transparency? The SEC’s Division of Corporation Finance has put a spotlight on the equal placement and prominence of non- GAAP financial metrics to GAAP metrics, leading many companies to make changes to their disclosures. Given that investor relations officers (IROs) are at the front line of communication with the investment community, the Financial Communications team at Edelman teamed up with Ipreo to launch a survey gauging IRO views on the new guidance and how effective these measures have been at increasing transparency.
From November 29 through December 20, we asked U.S. corporate IROs how the new guidance for non-GAAP reporting affected their companies’ quarterly earnings communications and the impact these changes, if any, have had on their investment narrative. Over 70 companies representing all sectors and market capitalization ranges participated in the online survey and our subsequent follow-up discussions.
Key takeaways indicate rapid corporate response to new guidelines:
- Of the 74 companies surveyed, 93 percent have reported some form of non-GAAP metric over the past two years;
- Following the SEC’s CD&I update, 80 percent of respondents adjusted the placement and prominence of non-GAAP metrics in their public documents;
- 86 percent made changes to the press release in some way, including 37 percent adjusting the earnings call script, while 22 percent made adjustments to their filed documents (including 10Q/K).
Despite rapid compliance, effectiveness was frequently questioned:
- More than three-quarters of respondents felt adjusting the placement and prominence did not make their investment story clearer;
- Only 8 percent of respondents have received requests from analysts or investors to adjust their reporting methodology;
- The majority of IROs (77 percent) believe the new non-GAAP guidance has complicated the earnings process and made the press release unnecessarily long and complex.
Our survey delved into the state of play for corporate IROs prior to the new SEC guidance release, and provides details about types of non-GAAP measures that have been changed, how companies have changed formatting of their filed documents and opinions from IROs regarding the changes.
Our survey showed that most corporate investor relations teams were ahead of the curve in adapting to the new guidance on non-GAAP disclosures, and companies have put significant effort into making sure they’re being both transparent and clear. That said, when it comes to clarity, many of the IROs we connected with don’t believe the changes necessarily had a positive impact on investor understanding.”
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