The "STPWRD" Approach: 6 Things to Remember When Presenting Non-GAAP Measures
My real estate background doesn't make me an expert, but its fair to say I'm no stranger to non-GAAP measures. In fact not too long ago, you'll recall there was quite a bit of media and public scrutiny over issuers' use (or misuse) of such metrics. This week I want to share with you a quick method that helped guide me in the right direction with these hyper-sensitive disclosures.
Its called the "STPWRD" approach (pronounced 'stop-word'). Its an acronym I made up that represents six words to help me quickly remember the basics. This will be a refresher for most, but here's what I mean.
A reporting issuer should try to present only those non-GAAP measures that are significant to explaining their business performance. You can quickly make this determination by polling the rest of your management team. If you're not shy, even try asking some external stakeholders, such as analysts, lenders or rating agencies that cover you. These folks are usually happy that you care enough to ask and will gladly share their opinion. Then get rid of the non-GAAP measures that are insignificant because in this game, less is more.
Make sure that the non-GAAP measures your company is presenting are common for that industry. Peer benchmarking is an excellent way to gather some research in this area. If you're the only one disclosing a particular metric, ask yourself why that might be. This may be okay but chances are your company is less comparable. And reduced comparability in the reporting world is never a good thing.
This one is so important that its more of a rule than a guideline. GAAP measures should be presented with equal or greater prominence than their non-GAAP counterparts. Headlining, leading with or presenting a one-sided discussion of non-GAAP results can be a risky venture that likely increases your odds of being on the receiving end of a security regulator's comment letter. Why take that chance? Which leads me to my fourth guideline.
Management should provide a clear explanation of why they are disclosing the non-GAAP measure and explain how it provides useful information to investors. This is where you'll want to be more specific and avoid boiler plate language.
A clear numerical reconciliation must be provided between the non-GAAP measure and the most directly comparable GAAP measure for all periods presented. Not surprisingly, most issuers I've seen are on top of this because let's face it, accountants love to reconcile.
Lastly, each non-GAAP measure should be clearly and consistently defined. While its important to use plain and simple language when developing definitions, be sure to include a sufficient description about the types of adjustments the company is making in computing each non-GAAP measure. Try to avoid using industry jargon or cross-referencing other non-GAAP measures because this can make things confusing and circular.
These guidelines are by no means meant as an exhaustive list. Companies should refer to the revised CSA Staff Notice 52-306 Non-GAAP Financial Measures (Revised) that was published in January 2016 for complete guidance and information.
With year end just around the corner, this would be a good time to take a closer look at some of these disclosures. Read through them carefully using my "STPWRD" approach and you might see them through a different lens. Remember when it comes to non-GAAP, you never think you have a problem until you actually do.