How Companies Should Think About Non-GAAP Reporting

Public companies often look for ways to help investors understand the true drivers of business performance. While Generally Accepted Accounting Principles (GAAP) provide a standardized framework for financial reporting, they do not always tell the entire story.

This is where non-GAAP reporting can provide value.

At its best, non-GAAP reporting gives investors additional insight into how management views the business, evaluates performance, and makes decisions. It allows companies to bridge reported financial results with operational realities and highlight the metrics leadership believes matter most.

However, non-GAAP reporting also carries significant responsibility. Companies must reconcile non-GAAP measures to the most directly comparable GAAP measures, and these disclosures continue to receive a high level of scrutiny from the Securities and Exchange Commission (SEC), as evidenced by the fact that non-GAAP measures are consistently among the areas that the SEC staff comments on the most. Because non-GAAP metrics can influence investor perception, regulators closely review whether these measures enhance transparency or potentially obscure performance.

The most effective non-GAAP reporting helps investors better understand a business without losing sight of the underlying GAAP results.

Why Companies Use Non-GAAP Metrics

Non-GAAP measures can serve as a valuable complement to traditional financial reporting by helping management communicate a more complete picture of company performance.

In many cases, GAAP results include items that management believes do not fully reflect ongoing operations. Non-GAAP measures can help stakeholders understand underlying performance trends by adjusting for certain events, transactions, or circumstances that may not be indicative of the company’s core business activities.

Common objectives of non-GAAP reporting include:

• Bridging GAAP results to management’s view of operational reality
• Highlighting operational metrics such as Adjusted EBITDA
• Supporting the broader narrative management is communicating to the market
• Aligning external reporting with the key performance indicators management uses to run the business

Perhaps most importantly, appropriately and consistently communicated non-GAAP measures can provide investors with a window into management’s thinking. They show which metrics leadership believes are most relevant when evaluating performance, allocating resources, and assessing long-term value creation.

How Non-GAAP Reporting Can Help Investors

Investors and analysts are not simply evaluating historical financial results. They are trying to understand future performance potential.

Thoughtfully designed and compliant non-GAAP measures can provide additional context that helps buy-side analysts and institutional investors assess profitability trends, cash generation, operating efficiency, and valuation considerations. When used appropriately, these metrics can help analysts develop a more informed view of the business and the factors that drive enterprise value.

This does not mean non-GAAP measures can replace GAAP results. Instead, they should supplement them by helping investors understand how management evaluates performance internally and why certain metrics are important to the business.

Common Non-GAAP Reporting Risks

While non-GAAP reporting can be highly effective, it can also create confusion or compliance concerns when not carefully managed.

Misleading Adjustments

One of the more significant risks is the use of adjustments that create a potentially misleading view of performance. The SEC’s non-GAAP rules were initially enacted via Exchange Act Release No. 47226 (2003), which was codified into SEC Regulation G and Item 10(e) of Regulation S-K. The SEC has provided additional Corporation Finance Interpretations (“CFIs,” formerly named Compliance and Disclosure Interpretations, or C&DIs) on its website to help registrants interpret the guidance.

Companies should carefully evaluate whether adjustments are reasonable, supportable, and aligned with regulatory guidance. Excluding recurring operating expenses or selectively removing unfavorable items can undermine credibility and attract regulatory scrutiny. Additionally, companies are prohibited from creating “custom GAAP,” an example of which would be to adjust revenue to present it on a cash basis.

Inconsistent Application

Consistency is critical to maintaining investor confidence.

If companies modify definitions or adjust metrics differently from one period to the next, stakeholders may struggle to compare results and evaluate performance trends. Consistent application is required by the SEC and allows investors to track performance and understand changes over time. Consistent application of non-GAAP adjustments also discourages registrants from “cherry-picking” only favorable adjustments.

Additionally, every non-GAAP measure should have a clear and easily understood definition. Companies should explain exactly how metrics are calculated, which adjustments are included, and why those adjustments are appropriate. Transparent definitions reduce confusion and improve comparability.

Missing or Incomplete Reconciliations

SEC regulations also requires companies to provide clear reconciliations between non-GAAP measures and the most directly comparable GAAP measures.

Incomplete, difficult-to-follow, or missing reconciliations can reduce transparency and increase the likelihood of SEC comments.

Giving Non-GAAP More Prominence Than GAAP

Another common issue occurs when non-GAAP measures overshadow GAAP results.

GAAP remains the foundation of financial reporting and reconciliations between GAAP and non-GAAP measures must first present the most directly comparable GAAP measure, which on occasion can be a complex determination. Non-GAAP disclosures should provide additional context, not become the primary focus of a company’s financial communications.

Best Practices for Effective Non-GAAP Reporting

To make non-GAAP reporting more useful and defensible, companies should focus on practices that improve clarity, consistency, and alignment with the broader financial reporting story.

Align Non-GAAP Metrics with Segment Disclosures

Non-GAAP measures should support and complement the broader financial reporting framework, including segment disclosures. ASU 2023-07, which was effective for calendar year companies for the 2024 annual period, amended several aspects of segment reporting rules, such as requiring companies to disclose the measure that is reported to the Chief Operating Decision Maker for purposes of making decisions about allocating resources to the segment and assessing its performance in the company’s financial statements. An interesting consequence of this is that companies may be required to report a non-GAAP measure in their GAAP financial statements.

In its CFI, question 104.1, the SEC has said, “because ASC 280 requires or expressly permits the footnotes to the company’s consolidated financial statements to include specific additional financial information for each segment, that information also would be excluded from the definition of non-GAAP financial measures.” However, this scenario — in which non-GAAP effectively becomes GAAP — is strictly limited to the primary segment measure of profit or loss required to be disclosed. If a company chooses to disclose an additional measure of segment profitability, it must be treated as any other non-GAAP measure.

Maintain Consistency Across Reporting Channels

Companies often communicate financial performance through earnings releases, investor presentations, SEC filings, conference presentations, and other channels.

Non-GAAP measures should be presented consistently across all communications. A unified reporting approach helps strengthen credibility and reduces the risk of conflicting messages.

Explain Why Management Uses Each Metric

Investors benefit from understanding not only how a measure is calculated but also why it matters. Companies must explain how management uses each metric to evaluate performance, allocate resources, monitor operational results, or make strategic decisions. This context helps stakeholders understand the role these measures play within the organization. While non-GAAP measures reported frequently mirror internal management reporting, CFI question 102.04 clarifies, “There is no prohibition against disclosing a non-GAAP financial measure that is not used by management in managing its business.”

Focus on the Metrics That Matter

The most effective non-GAAP reporting focuses on metrics that matter.

When thoughtfully designed, compliant with the SEC’s rules and regulations and consistently applied, non-GAAP measures can provide valuable insight into how management views the business, evaluates performance, and communicates value to investors. They can also help buy-side analysts develop a clearer understanding of the company’s operating trends and valuation drivers.

The challenge is finding the right balance between transparency, compliance, and meaningful communication.

CBIZ Financial Accounting & Advisory Services (FAAS) helps public companies balance the strategic value of non-GAAP measures with SEC reporting requirements. Contact CBIZ to develop clear, compliant disclosures that better communicate your performance story.