By Yuri Zwick
As fourth quarter earnings season comes to a close, the CAQ updated its analysis of non-GAAP financial measures that were directly adjusted for COVID-19 impacts. Our updated analysis included reviewing public company earnings releases filed in 2021 through early March for the S&P 100 and a sample of other Q4 calendar earnings releases. We also reviewed recent SEC comment letters issued to public companies related to COVID-19 and non-GAAP financial measures. Here are the three main takeaways from our updated analysis:
1. By and large, it appears that the S&P 100 continues to be mindful of the requirements and interpretations related to the use of COVID-19 related non-GAAP adjustments.
Within the S&P 100 more than 90% of companies had issued their calendar Q4 2020 earnings statements as of our analysis date and more than 90% of those companies that had released earnings did not make non-GAAP adjustments directly related to COVID-19.
The small number of S&P 100 companies that did make COVID-19 related non-GAAP adjustments, for a quarter and/or year to date period, generally seemed to be adjusting for similar items that we highlighted in our prior analysis (e.g., incremental employee compensation, personal protective equipment charges and/or incremental cleaning charges).
2. The SEC continues to monitor non-GAAP financial measures.
The SEC recently provided comment letters to a very small number of public companies related to COVID-19 non-GAAP adjustments.
The comments were specific to COVID-19 related expenses. In one case, the SEC asked the issuer how they were able to determine that such COVID-19 expenses were incremental to normal operations and were non-recurring.
3. There continues to be a range of detail in the COVID-19 non-GAAP adjustment disclosures.
Entities that provided more detail in their disclosure included a more comprehensive description of each component of its COVID-19 related non-GAAP adjustment.
While much less frequent, we did continue to observe companies with less extensive descriptions as to how the COVID-19 related non-GAAP adjustment was being defined, such as “COVID-19 incremental costs.” We also noted non-GAAP disclosures where the dollar amounts of the COVID-19 related adjustments were combined with other items such that it was unclear what portion of the non-GAAP adjustment related to COVID-19 specifically.
For companies that have not yet released fourth quarter earnings that are considering whether to make adjustments to their non-GAAP financial measures for COVID-19 they should consider all the applicable SEC rules and staff guidance. This report from the Center for Audit Quality, The Role of the Auditor in Non-GAAP Financial Measures and Key Performance Indicators: Present and Future here, may also help companies navigate the requirements for these disclosures.
Dennis McGowan of the CAQ contributed to this publication.
