Are you preparing an annual report and hesitating if the non-GAAP information to be included is presented and calculated meaningfully? The CAQ has issued a new publication advising on how to best handle the process preparation and approvals of the non-GAAP measures for US public companies and their audit committees.
The general principles may, however, be found relevant and meaningful to any public company. While the GAAP information provides a reliable basis for investors and other readers of the financial statements in respect to the company’s performance, the non-GAAP financial measures are also becoming more and more important and valuable to the users.
Examples of such non-GAAP financial information may be
- EBITDA,
- adjusted operating income, adjusted EPS,
- FFO (Funds from Operations) used in real estate industry and many others.
For the US public companies the non-GAAP measures are defined by the SEC (US Securities and Exchange Commission). Published non-GAAP measures are key to users if prepared in a balanced and comparable way.
The Center for Audit Quality (CAQ) which is an autonomous, nonprofit public policy advocacy organization based in Washington, DC affiliated with the American Institute of CPAs, issued a Roadmap for Audit Committees in the area of non-GAAP measures in order to provide audit committees with suggestions, considerations and best practices to follow when assessing the non-GAAP information to be disclosed in order to get a balanced picture of the company. The Roadmap can be found on the CAQ’s webpage here.
Key considerations pointed out by the CAQ are among others:
Suggest to try:
- “Putting itself in the investor’s shoes..”
- “Asking management whether it has an internal policy …”
- “Discussing with management how the company makes changes to non-GAAP measures it presents….”
- “Asking the company to compare or benchmark ….. to the peers”
- “Finding out what disclosure controls…. are in place…”
- “Consulting with external auditors on their responsibilities in the area, on their prospective and their views of the company’s performance if consistent with the auditor’s understanding and knowledge of the company”.
Companies may as well consider involving external advisors and auditors to support them when implementing processes and policies related to preparation and review of non-GAAP measures.
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