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SEC now: Non-GAAP 2025 comment letter trends · PwC's accounting podcast

0:00
SPEAKER_00: Thought Leadership from PWC's national office.
0:05
SPEAKER_01: Hello, and welcome to PWC's Accounting Podcast.
0:09
SPEAKER_01: I'm Heather Horn.
0:10
SPEAKER_01: Today's episode continues our SEC series with a discussion of non-gap measures, the top comment letter area in 2025.
0:19
SPEAKER_01: Non-GAP measures are widely used by companies to supplement their financial statements and help investors better understand performance and financial condition.
0:29
SPEAKER_01: Given their prominence, it's no surprise non-GAP has been a consistent focus for the SEC staff in recent years.
0:36
SPEAKER_01: And we expect that to continue.
0:38
SPEAKER_01: In this episode, we cover the most common SEC comments related to non-GAP and offer advice to help prepare its day ahead.
0:46
SPEAKER_01: Joining us are Kevin Vaughn, a partner, and John Lee, a managing director in PWC's national office.
0:52
SPEAKER_01: They both sat down with today's guest host, Kyle Moffitt, PWC's professional practice leader.
0:58
SPEAKER_01: Kevin and Kyle both spent nearly two decades at the SEC, so they bring valuable insight from both sides to the table.
1:06
SPEAKER_01: With that, let's tune in to their conversation.
1:12
SPEAKER_04: Thank you both for joining me.
1:16
SPEAKER_04: John, I worked closely with you in the national office for a number of years.
1:21
SPEAKER_04: And I know in your role as managing director, you spent a lot of time, you know, obviously answering questions from clients, dealing a lot with comment letters specifically related to non-gap financial measures.
1:33
SPEAKER_04: Kevin, um great having you.
1:36
SPEAKER_04: You know, you spent a lot of time at the SEC, so you have a very unique perspective used to issue these comments while at the staff.
1:44
SPEAKER_04: Um I'm sure that some of our audience, our listeners, um have been on the receiving end of the comments that you've that you've issued to them with respect to non-gap measures.
1:52
SPEAKER_04: Um but um obviously you you tend to spend a lot of time with clients as well.
1:57
SPEAKER_04: Um I I I understand that that one of the clients, um, one of our clients has called you the non-gap sensei.
2:03
SPEAKER_04: Um, not sure non-gap sensei, non-gap ninja.
2:07
SPEAKER_04: I I like both.
2:08
SPEAKER_04: Um but I think it highlights, you know, both of you obviously have uh an incredible amount of of useful insights to share today with me.
2:17
SPEAKER_04: Um so John, as I think about just you know some of the work that that that we're doing, um the the the tracking of comment letters, we'll get to that um when I think it's it's very insightful to share that.
2:29
SPEAKER_04: Um but Kevin, I want you to kick things off just kind of a high level, um, talk a little bit about just what we're seeing with respect to non-gap.
2:37
SPEAKER_03: Yeah, so I mean, I think the biggest thing uh is it continues to be very much a focus point for companies.
2:44
SPEAKER_03: It's it's part of how they tell their story.
2:46
SPEAKER_03: And so uh we see it's over 95% uh of the largest companies of the S ⁇ P 500 will use some sort of non-gap measure, either in their in their quarterly reports, annual reports, earnings releases, et cetera.
2:58
SPEAKER_03: Uh so it it's it's a you know a good way for companies to communicate.
3:02
SPEAKER_03: Of course, we we love gap.
3:03
SPEAKER_03: Uh gap is great and and it provides a nice consistent framework for companies to use.
3:08
SPEAKER_03: Uh, but sometimes there can be more to the story.
3:10
SPEAKER_03: So I think companies look to use non-gap measures just to help them tell their story and and uh adjust out uh maybe items that that are not necessarily reflective of their of their core operations in a given period, uh, and and to supplement that that gap discussion.
3:28
SPEAKER_03: Uh so that's I think certainly why we see it, you know, over and over, uh companies always thinking about uh evolution of those measures as well.
3:36
SPEAKER_03: Uh and so it's certainly timely uh always uh to have these discussions.
3:41
SPEAKER_04: Yeah, yeah.
3:42
SPEAKER_04: Um, you know, yeah, as I think about kind of the the non-gap and just setting the stage, you know, obviously, like as you said, it is how management tells the story.
3:50
SPEAKER_04: And and and and I think years ago it used to be that you were presenting non-gap measures because, you know, hey, you had a one-time event, you want, you wanted to show period over period changes so an investor could understand, like, okay, here is here's you know what's happened this period versus last period.
4:07
SPEAKER_04: Um, and and oftentimes people would say, well, we're kind of normalizing it or we're we're adjusting it for the effect of of this one-time event.
4:15
SPEAKER_04: Obviously, it's evolved into um you know, standard practice for companies to to obviously share their story.
4:21
SPEAKER_04: Um, so so you know, what as I think about it, let's give the audience kind of John, have you talk a little bit about what is, what do we mean by non-gap measure?
4:32
SPEAKER_02: Right.
4:32
SPEAKER_02: Yep.
4:32
SPEAKER_02: So first of all, thanks thanks for having us.
4:35
SPEAKER_02: Um as Kevin was saying, uh non-gap measures are are very prominent, uh pun intended.
4:40
SPEAKER_02: So like you're saying, 95% of companies or more use that.
4:43
SPEAKER_02: And it's an important tool, as Kevin was saying, for management to describe the operations of the business, their core operations, right?
4:50
SPEAKER_02: So when we think about a non-gap measure, we start with a gap measure and you start adding and subtracting things from that gap measure that are also gap.
4:59
SPEAKER_02: And the more things you add to subtract, you get to eventually what what we call a non-gap measure, right?
5:04
SPEAKER_02: Um, that base gap measure is important, and we'll talk about that later.
5:08
SPEAKER_02: That's the directly comparable gap measure that eventually that non-gap measure needs to be reconciled to.
5:13
SPEAKER_02: And the non-gap measure, and and we'll talk a little bit about this later, is different than say a key performance indicator.
5:19
SPEAKER_02: Um, similar, similar rules, similar guidance, but it's a kind of different name for a KPI.
5:24
SPEAKER_02: I think like comparable store sales or things like that, which is not a non-gap measure.
5:28
SPEAKER_02: So we'll get into that a little bit.
5:30
SPEAKER_02: But um, when we think about non-gap measures in general, the staff really pays attention to that because they want to prevent those non-gap measures from being misleading.
5:39
SPEAKER_02: So again, the management is telling the story about their business, their company.
5:42
SPEAKER_02: They want to give a maybe a rosy picture about their company, but the staff wants to prevent a rosier picture than than maybe is uh is needed for that particular non-gap measure when they're when they're talking about their company, right?
5:53
SPEAKER_02: And there's not necessarily a definition when it comes to misleading, right?
5:57
SPEAKER_02: Yeah, yeah.
5:57
SPEAKER_02: Um that's in the eye of the beholder, really.
5:59
SPEAKER_02: Uh the staff.
6:00
SPEAKER_02: In the eye of the SEC.
6:01
SPEAKER_02: It's the eye of the SEC staff.
6:03
SPEAKER_02: Exactly.
6:04
SPEAKER_02: So we'll talk a little bit more why that's important, why the staff picks on that, right?
6:08
SPEAKER_02: Um, and the judgment that's involved with that.
6:11
SPEAKER_02: Um, but that's why uh the staff also has a lot of guidance out there as to what's in the fair way for what's an appropriate knowledge to measure the adjustments that you're making, right?
6:19
SPEAKER_04: Yeah, yeah.
6:20
SPEAKER_04: Well, I think that's a good segue then into kind of some of the numbers behind the the trends and and what we're seeing.
6:26
SPEAKER_04: And John, I know, you know, uh I I always would talk to you about what are we seeing, what are our trends, and um, you know, it's something that that you've always been monitoring the the the the comment letters um and certainly you know the length of time.
6:39
SPEAKER_04: I think what how long, six years in in an AC SEC service.
6:43
SPEAKER_04: There's the SEC and capital markets team.
6:44
SPEAKER_04: Um any changes to the overall trends in those figures and kind of that we're seeing from year to year?
6:49
SPEAKER_02: Yeah, so non-gap measures is consistently the top trend when we're taking a look at comment letter trends in general.
6:56
SPEAKER_02: Um it's across all sectors except for maybe one.
6:59
SPEAKER_02: I think health industries is number, it's number two.
7:01
SPEAKER_02: So the staff's obviously paying attention to that.
7:03
SPEAKER_02: When we are tracking numbers, and we've done it for a number of different years, right, Kyle, we're always taking a look at maybe um the 12 trailing months as of 9 30.
7:12
SPEAKER_02: So just to give some context for the audience.
7:14
SPEAKER_02: And we're only looking at comments for uh those non-gap measures that are in Q's and Ks.
7:19
SPEAKER_02: So obviously, non-GAP measures can be presented in a number of different filings beyond that, but just to give some context to the numbers that we're about to talk about.
7:26
SPEAKER_02: So if we take a look, maybe a couple years ago, we saw of the comments that were given, about 350 or so comments were related to non-GAP measures.
7:35
SPEAKER_02: That's declined over the last couple of years to around 220 or so non-GAP comments uh within within particular letters.
7:43
SPEAKER_02: So Kevin will speak to maybe some of the reasons why we we may be seeing those numbers come down a little bit.
7:49
SPEAKER_02: Um, but when we're taking a look at the specific types of comments that are being provided around non-GAP measures, we we bucket those into different categories as well so we can get a better understanding as to what the staff's focusing on.
8:00
SPEAKER_02: So the most uh common comment that we we see are when the staff's picking on or talking about what are the specific types of adjustments that a company is making within their non-gap measure.
8:12
SPEAKER_02: Um, second, we see the staff talking about how is a company labeling or if they're even identifying those non-gap measures within the filing appropriately, and because there's required disclosures that go around with that to make sure that the investor or the reader knows about that.
8:27
SPEAKER_02: Um, third bucket we uh we see most often is when uh a registrant may give give undue prominence to a non-gap measure as opposed to the directly comparable gap measure.
8:37
SPEAKER_02: And finally, kind of a more distant fourth is uh individually tailored accounting principles, right?
8:43
SPEAKER_02: So when we take a look at um the those particular buckets in general, generally, like I said, the specific adjustments within a non-gap measure is something the staff tends to focus on more often than not.
8:54
SPEAKER_02: We actually have seen that come down year over year.
8:57
SPEAKER_02: Last year it was about 40% of comments.
9:00
SPEAKER_02: This year we're seeing it about 30% of comments, and then it's an uptick um really on the labeling of a non-gap measure and identification, then also undue prominence.
9:08
SPEAKER_02: So still the same ordering, but a little bit of a shift in the makeup.
9:13
SPEAKER_03: Yeah.
9:13
SPEAKER_03: Yeah.
9:14
SPEAKER_03: And I think, you know, naturally, I think the question, as you alluded to, John, is is well, what's driving this, right?
9:19
SPEAKER_03: Obviously, we had to change in administration, but before we jump too much and say that it's it's that necessarily, because keep in mind that that uh as you mentioned, it's it's a trailing 12 months.
9:29
SPEAKER_03: So, and it's based on when the comment letters are released.
9:32
SPEAKER_03: And so we've kind of got a split, right?
9:34
SPEAKER_03: We've got a few months of the new administration and a few months of the old uh administration.
9:38
SPEAKER_03: And so maybe that's not the key driver as much as uh as I was thinking through some of the factors.
9:44
SPEAKER_03: Well, one of the biggest ones is 2022 was the last time.
9:48
SPEAKER_03: December of 22 is when we had the last update of the compliance and disclosure interpretations, which are kind of the staff's views and and where they how where they lay out kind of how they call balls and strikes on this.
9:59
SPEAKER_03: Um, and so that was December of 2022.
10:01
SPEAKER_03: And even when they released those, they kind of said, hey, these updates are based on our recent experience.
10:07
SPEAKER_03: So if you think of the timeline, the staff reviews every public company once every three years.
10:12
SPEAKER_03: So essentially, every coming into 2025, every public company, or or probably nearly every public company has has been through one review with with kind of those updates in mind, uh, either in the preceding months right before it or uh post those updates.
10:29
SPEAKER_03: Uh so you kind of have this this churn, right?
10:32
SPEAKER_03: We saw it after Sarbanes Oxley initially when companies were picked up, we'd see a lot of comments.
10:36
SPEAKER_03: And then just over time it declined because because the staff was was looking at it more frequently.
10:42
SPEAKER_03: Uh and and then I think, you know, also naturally when that happens, we've been doing this podcast for many years.
10:48
SPEAKER_03: We've got the publication that that John uh has played such a key role in as well, uh, where we talk about the non-gap measures.
10:55
SPEAKER_03: Uh, there's a lot of discussion in the marketplace about this.
10:58
SPEAKER_03: Um, as you mentioned, like we get phone calls all the time about okay, how do we think about the staff's guidance on this?
11:03
SPEAKER_03: Like, how do we think about these particular adjustments?
11:06
SPEAKER_03: Uh so I think companies are changing their behaviors as well, responding to the comments.
11:10
SPEAKER_03: Uh, and and um, and then maybe I think those are to me, I think those are probably the biggest reasons.
11:16
SPEAKER_03: Uh, there can be some timing things like associated with when they release comment letters.
11:20
SPEAKER_03: Uh, we did see kind of over the summer that there was maybe some that were taking a little bit longer to get released.
11:26
SPEAKER_03: Uh certainly as you led up to the shutdown, the staff may have been focused on other things uh preparing for the shutdown and so uh for the potential of a shutdown.
11:36
SPEAKER_03: And so maybe they weren't necessarily as focused on getting those comment letters out the last couple of weeks uh of September.
11:42
SPEAKER_03: Um, and obviously since September, you know, they've been shut down uh in October and and and into November here.
11:48
SPEAKER_03: Um so they haven't been releasing anything new uh anyway.
11:52
SPEAKER_03: So uh kind of all those things.
11:54
SPEAKER_03: We'll talk maybe a little bit more about the administration and and how that might change as well.
11:58
SPEAKER_03: And it may be starting to play a little bit of a role, but but I think those other factors might be the bigger drivers.
12:03
SPEAKER_04: Yeah, I get I guess one kind of observation/slash maybe question for for both of you on on that.
12:09
SPEAKER_04: We talk about this the staff's CDIs, right?
12:12
SPEAKER_04: The these are compliance and disclosure interpretations that are, you know, the staff's views or positions on on non-gap.
12:20
SPEAKER_04: And I think a lot of a lot of people, you know, in the past have said, well, they're they're interpretations or their staff positions.
12:27
SPEAKER_04: This, you know, they're not grounded in a rule.
12:30
SPEAKER_04: But I think, you know, I'd I'd say that look, you know, if if the staff has published um CDIs, it's positions they have taken, um, it's likely they're not going to back off of those positions um unless you see them, you know, you know, pull rescinding one of the CDIs.
12:48
SPEAKER_04: So I guess my question for you is have we seen the staff basically say, ah yeah, turned a blind eye to it if, you know, hey, look, it's just, you know, have have companies responded and said, well, this is just a staff interpretation.
13:00
SPEAKER_04: We don't need to comply with it.
13:02
SPEAKER_04: I mean, I think it in my experience has always been, look, the staff is is going to point to that and say, this is the guidance, this is our expectations, you know, fix it.
13:10
SPEAKER_04: But I guess is that the same experience you guys have had?
13:13
SPEAKER_03: Yeah, yeah.
13:14
SPEAKER_03: I I think so.
13:14
SPEAKER_03: I mean, I I will say like the staff approaches these.
13:17
SPEAKER_03: Each one uh is specific to the the company's specific facts and circumstances.
13:22
SPEAKER_03: So they're they're very um methodical, I would say, in terms of how they approach the issues.
13:26
SPEAKER_03: Uh and so uh they're always willing to listen to the perspectives of the company.
13:31
SPEAKER_03: And so there is no uh not necessarily like automatically, like if you're adjusting for this item, it's always prohibited.
13:38
SPEAKER_03: Um, but but they may go into it saying, hey, we've objected to this adjustment in other situations, you know.
13:45
SPEAKER_03: So maybe, maybe somewhat thinking about that, and and it would be a pretty high hurdle uh to overcome.
13:51
SPEAKER_03: Um but we don't see comments.
13:52
SPEAKER_03: Uh, we certainly don't see comments where the first round of the comment is, hey, you're adjusting for this, like we object to that, take it out.
13:59
SPEAKER_03: It's always, as we've talked about probably in the other podcasts on this too, like it's a it's a discussion, it's a dialogue that they're that they're the staff is entering into on that.
14:08
SPEAKER_04: So well that's that's I think kind of leads me to the next point.
14:12
SPEAKER_04: And and you kind of, you know, you mentioned this, Kevin, and and John, as you kind of you walking us through kind of the four categories um of of adjustments, or not adjustments, but comments, categories of comments that that we're seeing.
14:25
SPEAKER_04: And one of them that that stood out to me, and I I wanted to interrupt and ask questions, and then I realized, okay, I have questions later on to ask you about it.
14:32
SPEAKER_04: But it really is kind of the one that I always highlight, which is the first one is the specific adjustments um within a non-gap measure.
14:38
SPEAKER_04: I know that's an area that I always focused on.
14:41
SPEAKER_04: You see that a lot, and that's where cut you know companies can get sideways.
14:44
SPEAKER_04: So um, can you kind of talk through some of where those categories for us and and what what we mean by those uh when when you mention them?
14:51
SPEAKER_02: Yeah.
14:51
SPEAKER_02: So so the first category that we talked about, right, was to your point, the specific adjustments that are being made in a non-gap measure.
14:58
SPEAKER_02: Um, that one, as as Kevin mentioned a few years ago, the staff did issue new C and DIs.
15:03
SPEAKER_02: One was in specific regard to the types of adjustments, right?
15:07
SPEAKER_02: Um within that C and DI, the staff really focused on making sure that the adjustments that are being made by that by a company in their non-gap measure is reflective of non-recurring items within the context of what is a normal recurring expense for that company, right?
15:21
SPEAKER_02: Within the context of their revenue generating activities, what is their business plan, their growth plan, et cetera.
15:26
SPEAKER_02: So the reason why, and we'll talk a little bit about this in a little bit, but that one is a little bit more judgmental, right?
15:32
SPEAKER_02: The facts and circumstances for one company are definitely different than the fact pattern for maybe a different company within indices and whatnot.
15:38
SPEAKER_02: So the staff has more room to ask questions around that.
15:41
SPEAKER_02: To Kevin's point, the staff asking questions is maybe just probing and making sure they they better appreciate that and not necessarily objecting to that.
15:49
SPEAKER_02: Um, but again, from a from an adjustments perspective, the staff wants to make sure that the adjustments being made are not misleading, that you're not excluding something that actually is going to recur for that company going forward and you're not being biased within that particular non-gap measure, right?
16:03
SPEAKER_02: So the next category, you know, we talked about was the labeling and the identification of a non-gap measure.
16:09
SPEAKER_02: That's very simply, hey, if you have a non-GAP measure in your filing, have you appropriately identified it as such?
16:16
SPEAKER_02: And do you have the right disclosures around that, right?
16:18
SPEAKER_02: So anywhere from making sure management has discussed why it's important to them, um, providing the reconciliation, the basic tenets, right, of a non-GAP measure and the disclosures that go around that.
16:29
SPEAKER_02: And then specific labels around that non-gap measure, too.
16:32
SPEAKER_02: They want to make sure the label that you're using doesn't confuse a reader.
16:36
SPEAKER_02: So where they think that is actually a gap measure, it's distinct enough.
16:40
SPEAKER_02: They understand it's an adjusted measure and whatnot.
16:42
SPEAKER_02: So and making sure they they pay attention to that.
16:45
SPEAKER_02: The third item is the undue prominence.
16:47
SPEAKER_02: And that could show up in a couple different ways.
16:50
SPEAKER_02: Uh, the most common is maybe every time you present a non-gap measure, you want to make sure you disclose a directly comparable gap measure.
16:57
SPEAKER_02: Um, when you're doing your reconciliations between the two measures, you're making sure that you start with the gap measure.
17:03
SPEAKER_02: Um, overall, just making sure that a reader doesn't forget that the non-gap measure is an adjusted measure.
17:09
SPEAKER_02: There is a comparable gap measure and you're paying attention to that.
17:12
SPEAKER_02: And then also when you're talking about your business and MDNA or otherwise, that you're not giving, you're not talking to the non-gap measure more so than you would your gap measures and and what's required by gap, right?
17:23
SPEAKER_02: And then last, uh that fourth bucket that we were talking about is the individually tailored accounting principles.
17:29
SPEAKER_02: And that's very simply making sure that a reader obviously gap is out there.
17:33
SPEAKER_02: To Kevin's point, we we love gap, right?
17:35
SPEAKER_02: And we want to make sure that we represent that appropriately.
17:37
SPEAKER_04: Um this is the first time I've heard we love gap two times in a podcast, but no, I now you've heard it three times.
17:44
SPEAKER_03: I think we're gonna have bumper stickers.
17:47
SPEAKER_03: We love t-shirts.
17:48
SPEAKER_03: Yeah.
17:49
SPEAKER_02: Um but but making sure like obviously, you know, we're under accrual basis of counting for gap.
17:55
SPEAKER_02: You're not having a measure that's cash basis.
17:56
SPEAKER_02: Yeah.
17:57
SPEAKER_02: A very simple example, right?
17:58
SPEAKER_02: So paying attention to that as you're as you're doing certain adjustments.
18:00
SPEAKER_04: So no, I think those are those those are all good points.
18:03
SPEAKER_04: As I think about like, you know, the specific adjustments.
18:06
SPEAKER_04: In my mind, I do think of you know, things that that tend to get people in trouble are you know like internal payroll costs, right?
18:14
SPEAKER_04: That maybe it's presented in a line item in the income statement, like restructuring charges or some other line item, and then you just simply adjust that line item.
18:23
SPEAKER_04: Well, the staff is is wants to know what's in that line item.
18:27
SPEAKER_04: They want to peel it back and understand those expenses, and oftentimes may object to a particular expense within that that line item, uh financial statement line item, uh being adjusted out.
18:38
SPEAKER_04: So that's I think that's something to to keep in mind with respect to that.
18:41
SPEAKER_03: Um Yeah, I mean, I think a lot of times, right, like the starting point for the comment might just be like we don't know, you've got some general description of an item.
18:50
SPEAKER_03: And so we don't even know what's in there.
18:52
SPEAKER_03: So tell us what the first comment is just tell us what's in there, and then then you give that detail, right?
18:57
SPEAKER_03: So we'll get into tips to avoid comments, things like that.
19:00
SPEAKER_03: But but yeah, I mean, certainly we see we see a number of comments that that start that way and then go down that path of okay, well, now we're gonna break down each of those components and and want more detail of whether that's part of your recurring operating expenses.
19:13
SPEAKER_04: No, I think it's a great point.
19:14
SPEAKER_04: And you know, thinking about like the labeling, right?
19:17
SPEAKER_04: We've we've seen, you know, I've seen that quite often where it does.
19:20
SPEAKER_04: Like somebody might say, oh, this is some sort of cash flow, you know, operating cash flow measure, but then you take a closer look and you're like, well, this is actually free cash flows or adjusted free cash flows.
19:31
SPEAKER_04: Let's be clear about what it is, that it is it isn't the the non-it's not the gap, it's the non-gap.
19:38
SPEAKER_04: So the title needs to be reflective of that non-gap measure and not confused with anything else.
19:45
SPEAKER_04: I think billing, sales, those types of things, like, hey, don't call something revenue or sales if it truly is not the gap definition of revenue or sales.
19:54
SPEAKER_04: And and we've seen that um often as well.
19:57
SPEAKER_04: Um so so that kind of gets me to, you know, as I look to to to think about the data, wh why do do we think the buckets you noted, John, are are the most common?
20:09
SPEAKER_04: I mean, obviously the adjustment piece, but you know, provide some insights on that for me.
20:14
SPEAKER_02: Yeah, I think, and this is not, I don't think, unique to non-gap measures.
20:18
SPEAKER_02: I think any anytime you have an area where there is judgment or estimation involved, there's just leaves more room for the staff to ask more questions around that.
20:26
SPEAKER_02: To Kevin's point, part of it is making sure they understand how a company's approach that.
20:30
SPEAKER_02: Um, and because it's an estimate, you know, there's room to probe and ask questions around that.
20:35
SPEAKER_02: So, like we talked about earlier, the staff's goal is to make sure that a non-gap measure is not misleading.
20:41
SPEAKER_02: There's not a specific definition on that.
20:43
SPEAKER_02: There's maybe a fair way.
20:44
SPEAKER_02: And and to your point, Kyle, earlier, it's in the eye of the SEC as kind of what they what they do and do not think is misleading.
20:52
SPEAKER_02: But because of that, again, what could be acceptable for one company because of their facts and circumstances, their business plan, their revenue generating activities may not be the same for others.
21:01
SPEAKER_02: And that can be frustrating at times, maybe for companies.
21:04
SPEAKER_04: And and companies want to point to the other company and they you know frequently call them out and say, well, X company does this, and you guys let them do it.
21:12
SPEAKER_04: I I know you and I have heard that multiple times, and I'm sure you, John, have heard that on calls with companies as well.
21:18
SPEAKER_02: Yeah.
21:18
SPEAKER_02: Our our clients and our engagement teams that we work with can always find an example of something else.
21:23
SPEAKER_02: And we always have to remind them it could be a little bit different between company A and company B, right?
21:27
SPEAKER_02: So again, that just leaves room for the staff to ask more questions around that.
21:31
SPEAKER_03: But yeah, it and I think too, like sometimes what we see, and and maybe like as you think about this, like we've talked about some of the basic things like the labeling and the prominence, like making sure you have the disclosures.
21:45
SPEAKER_03: Uh you know, I I think when I have conversations sometimes, and and Kyle, you I don't know if you did this.
21:50
SPEAKER_03: Um I'll admit like this definitely happened when I was at the staff.
21:54
SPEAKER_04: If it was something stupid, then I never did it.
21:56
SPEAKER_03: Yeah.
21:57
SPEAKER_03: All right.
21:58
SPEAKER_03: Uh, but like you pick up the Filing and you might be like, uh, I'm I'm really on the fence about do I want to ask a question on this non-gap?
22:05
SPEAKER_03: Like, I kind of think I understand it.
22:07
SPEAKER_03: Like, maybe I don't want to, but then you keep flipping through and you see that they've like got uh you know a non-gap measure labeled as if it's you know a gap measure, right?
22:17
SPEAKER_03: Or or they just completely missed putting the reconciliation in there.
22:21
SPEAKER_03: And so then you kind of pick it up and you're like, okay, so I'm gonna issue the comment on those because those are kind of clear cut, like, hey, you've got to put this in there.
22:28
SPEAKER_03: And you know what?
22:29
SPEAKER_03: While I'm at it, I'm gonna go ahead and issue.
22:31
SPEAKER_03: I was on the fence, but now I'm gonna issue the comment asking more questions.
22:34
SPEAKER_03: Probably all of our former uh directors and deputy directors and and probably are cringing if they hear this, uh, you know, because it's maybe not the way that that that it was supposed to work, but it you know, certainly I think that that factors in.
22:46
SPEAKER_03: So I always tell companies like Kevin has a fan club.
22:48
SPEAKER_03: Get it.
22:49
SPEAKER_03: People are listening.
22:50
SPEAKER_03: He's got tons of fans up there.
22:52
SPEAKER_03: Yeah, I'm pretty sure they're not listening.
22:54
SPEAKER_03: But um yeah, making sure you get like those basic, you know, the basic requirements, uh get those right uh so that you don't open the door for those type of things.
23:05
SPEAKER_04: Yeah, yeah, those are great points.
23:07
SPEAKER_04: Um yeah, I mean, look, I I definitely am kind of in the same boat as you.
23:11
SPEAKER_04: I mean, definitely run into those and and you know, situations when I was the staff.
23:15
SPEAKER_04: And you know, obviously, you know, I think to your earlier point about what what will this new administration be focused on, right?
23:23
SPEAKER_04: Like, you know, it over the years, um, the pendulum certainly has swung and it does swing when when politics are involved and there's different leadership, right?
23:32
SPEAKER_04: We're we're we're in a in the Trump administration with with Chairman Paul Atkins as as the head of the agency, um, who's gonna be focused on a lot of different things um than maybe the previous administration.
23:43
SPEAKER_04: So I, you know, now that we are several months in, I mean, uh have we noticed any changes or do we expect to see changes?
23:51
SPEAKER_04: What what do you what do you think there?
23:54
SPEAKER_03: Yeah, I mean, I think I think so far, uh, I'm I'm reluctant to say that we've seen any notable changes or or to attribute any of those changes.
24:02
SPEAKER_03: Like we talked earlier about some of the other factors at play.
24:05
SPEAKER_03: Um, you know, I certainly we've both lived through it in terms of a change in administration.
24:10
SPEAKER_03: There is a period when you're on the staff and you're like, okay, well, I don't really know.
24:13
SPEAKER_03: And so before, like you had, you know, maybe under Gensler, you had a full charge of like issue these comments um and and and you know, you knew that you had the backing uh of the senior leadership of the of and the commission in terms of of uh issuing those comments.
24:28
SPEAKER_03: And so now there may be some uncertainty.
24:30
SPEAKER_03: So there may be some people that are, you know, hey, like let's just kind of like unless there's something egregious, maybe we're gonna pull back and and wait and see what happens.
24:39
SPEAKER_03: Um, but we do still see a number of comments coming through.
24:42
SPEAKER_03: So it's not, you know, I think John said 220, right?
24:45
SPEAKER_03: Like that's not a small number of comments.
24:46
SPEAKER_03: That's still a pretty, pretty significant number.
24:48
SPEAKER_03: Um, so we'll see.
24:49
SPEAKER_03: I mean, we haven't this has not been there's been other items that Atkins has talked a lot about.
24:54
SPEAKER_03: He hasn't necessarily talked about non-gap.
24:56
SPEAKER_03: Uh we do have the new Corp Fin director that's in there.
24:59
SPEAKER_03: Um, so we'll see kind of, you know, what what his focus is.
25:03
SPEAKER_03: Uh that's Gem Malone.
25:04
SPEAKER_03: And and so we'll see like what the priority there is.
25:08
SPEAKER_03: And and, you know, it could be that they just continue down the same path uh in terms of of how they issue, how they focus on it.
25:14
SPEAKER_03: Uh, we've talked about, you know, they could take a fresh look at some of the CNDIs uh and and make sure that those that they feel like those are still fit for purpose, that that that still represents uh the views that they want to do.
25:26
SPEAKER_03: Um, and then of course we could see a shift, you know, this was this came into the SEC's rules, you know, as part of Sarbane's Oxley, so it's over 20 years old.
25:36
SPEAKER_03: Um is there an opportunity to revisit some of that?
25:39
SPEAKER_03: Um certainly we've got on the agenda uh for the SEC this rationalization of disclosure practices, thinking about, you know, could there be something in there from a non-gap perspective?
25:49
SPEAKER_03: I think those are all kind of on the table.
25:51
SPEAKER_03: So that's probably like the that sets the table of of what there is.
25:56
SPEAKER_03: And and and then maybe if I go into a little bit of like my own personal prediction, um, you know, if if anybody's interested in that, uh, you know, go ahead.
26:05
SPEAKER_03: It is mine.
26:06
SPEAKER_03: Um uh you know, I think I I do think that they will probably uh revisit their approach on this.
26:12
SPEAKER_03: I think, I think, you know, a lot of the CNDIs that have come up over the years, right, they've talked about them, they've they talk about things that could be misleading.
26:20
SPEAKER_03: So I I think that they might um take a look at those and and maybe they could codify some aspects of that.
26:26
SPEAKER_03: Um, but also, you know, this this administration under Atkins, they've already kind of signaled um this perspective of of letting companies and investors figure some of these things out on their own and and not having the regulator step in.
26:40
SPEAKER_03: So so I could definitely see uh some sort of shift happening.
26:43
SPEAKER_03: I don't I don't know that I would say that that's happened yet.
26:45
SPEAKER_03: Um we'll see with, like I say, with the new core fan director coming in.
26:49
SPEAKER_04: Yeah, I I think as I think about that, like there's always two pieces to this um that that I always point out to to companies.
26:57
SPEAKER_04: The first of which is to your point, like when you're presenting non-gap, you'll you know, if there's something questionable, you run the risk of comment letter from the SEC and potentially having to change, and that can be sometimes painful if if you know the the analysts in the in the street are expecting to see a non-gap measure with an adjustment, and then you no longer are allowed to do it.
27:16
SPEAKER_04: You've got to make that change, and the messaging that can be challenging.
27:19
SPEAKER_04: The second piece is um as I, you know, as I think about the enforcement, right?
27:24
SPEAKER_04: And and we've seen some enforcement actions against the SEC, I mean the SEC's broad against companies, um, and there have been some, you know, a couple of them that have have settled.
27:34
SPEAKER_04: Um and I think those are as I think about the comments and then of course the enforcement actions, I think it's a good segue into all right, you know, assuming there's not a significant change um in in in their approach or that it's gonna take time.
27:50
SPEAKER_04: I I people should are gonna be thinking and should be preparing for this 10K season um as they're thinking about their their non-gap measures for year end files.
27:59
SPEAKER_04: So, so John, can you talk a little bit about you know any advice you have for the audience?
28:03
SPEAKER_02: Yeah, maybe not to oversimplify it, but part of it is is understanding what the what the rules are, right?
28:09
SPEAKER_02: And the interpretations that are put up put out there by the staff.
28:12
SPEAKER_02: You know, we talked a lot about the judgment areas when it comes to a non-gap measure, but Kevin spoke to some of the blocking and tackling when it comes to a non-gap measure as well, writing having the right disclosures, being thoughtful and fulsome in your disclosures to make sure that the reader, including the staff, has a really good understanding as to what's going into that non-gap measure.
28:31
SPEAKER_02: I think when there's ambiguity or less transparency, that's where there's room for questions.
28:36
SPEAKER_02: And not to say they disagree, but they're just trying to figure out, you know, what is in that adjustment or that non-gap measure to again make sure that it's not misleading.
28:44
SPEAKER_02: And that all stems from, I think, on the front end, a company really understanding their process, having the right controls and processes in place to make sure that um souped to nuts, they're they're being thoughtful and thinking through why am I making this adjustment?
28:59
SPEAKER_02: Do I have good legs to stand on when it comes from the interpretations that um if it does come under scrutiny, you know, I have a thoughtful explanation to whoever's asking the question.
29:09
SPEAKER_02: Um, and just making sure that from management all the way up to audit committees and others are on the same page as to what's going into that non-gap measure, right?
29:16
SPEAKER_04: So I'm gonna stick with you here.
29:19
SPEAKER_04: Okay, so you've laid out kind of the things to think about, right?
29:22
SPEAKER_04: Um what advice would you give to companies if if they need to respond to the staff, like some best practices?
29:30
SPEAKER_02: Sure.
29:30
SPEAKER_02: So yeah, we've hit on a couple of these different items, but one is don't assume the staff is objecting, right?
29:36
SPEAKER_02: Don't don't take offense to the question.
29:38
SPEAKER_02: When you're when you're responding, make sure you're responsive to the question, you're taking it seriously, you're being thoughtful, um, being foolsome in your response.
29:47
SPEAKER_02: And then um, it always helps if you provide a revised uh disclosure or say, hey, this is how I think I can help resolve uh the question, putting some additional disclosure in there, making this tweak, whatever it may be, um, just being responsive to the to the overall comment, I think.
30:03
SPEAKER_03: So yeah, and I would maybe layering in and piling on on that a little bit, like and and it seems basic, but but we've seen people not take this approach.
30:11
SPEAKER_03: Just take the comment seriously, right?
30:13
SPEAKER_03: Like we've seen companies that um when we look through comment letters and responses where you can kind of see like maybe it almost feels like maybe they didn't put their full and best effort into that first response.
30:25
SPEAKER_03: Um, and then that can that can send you uh down a path that may be more difficult.
30:30
SPEAKER_03: Um, so I mean that's advice, right, across all of these podcasts, I'm sure.
30:34
SPEAKER_03: But but um certainly and and and to the point about disclosures, think about if there's something that you can offer up, right?
30:41
SPEAKER_03: Like think about there's a reason the staff asked the question.
30:44
SPEAKER_03: Uh there was something about your disclosures that raised the question.
30:47
SPEAKER_03: So try to put yourself in their shoes and think about, okay, like, is there is there more clarity we can offer?
30:52
SPEAKER_03: Like the basic example where maybe the description of the adjustment just wasn't really clear.
30:58
SPEAKER_03: And so the staff had to ask, well, what is in here?
31:00
SPEAKER_03: Okay, well, we're gonna offer up to you that we're gonna revise these disclosures to add that clarity.
31:06
SPEAKER_03: Um, you know, the staff has said disclosures can't cure a misleading, can't overcome a misleading non-gap measure, but but in those types of situations, they've been very receptive to um to kind of working with companies and and thinking about how to enhance those disclosures.
31:21
SPEAKER_04: Yeah, no, I I think all great points.
31:23
SPEAKER_04: And and I'd say, you know, one of the things we talked about um as a collective before before was whether we would, you know, even approach the situation where the staff decides to object.
31:35
SPEAKER_04: And I know that we could spend five, 10 minutes talking about the what-ifs.
31:39
SPEAKER_04: If the staff objects, how do you think about what do you do?
31:42
SPEAKER_04: kind of thing.
31:42
SPEAKER_04: I think my best advice is you you definitely need to pull in all the right parties to have the conversation, right?
31:49
SPEAKER_04: And and that means you know, legal counsel, securities counsel, it means, you know, audit firms for for their insights, national office folks.
31:57
SPEAKER_04: Um, but then also even having a phone call with the staff to understand where where they want you to be um at the end of the day.
32:04
SPEAKER_03: Yeah.
32:05
SPEAKER_03: And that's that's been clear, right?
32:07
SPEAKER_03: Especially in my view, it's always been the case.
32:10
SPEAKER_03: You could always call the staff.
32:11
SPEAKER_03: Uh, they're always receptive to those conversations, but I think they've been very vocal about that in this administration, yeah, that openness to those conversations.
32:19
SPEAKER_03: Um and yeah, they're very very willing to talk through those things.
32:24
SPEAKER_04: So so earlier, John, you you had mentioned, you had mentioned a little bit of KPIs, and and you know, obviously the the big point there is that KPIs are not non-gap measures.
32:35
SPEAKER_04: Um but Kevin, sticking with you, any anything that our audience should be thinking about there with respect to KPIs, disclosure, you know, any considerations.
32:43
SPEAKER_03: Yeah, I mean, I think the key thing is like you've got to figure out what it is first.
32:48
SPEAKER_03: Uh so make sure when you're when you're thinking about something, you know, do the assessment, think about is it, is it adjusting, you know, adding or excluding items from a gap measure, right?
32:59
SPEAKER_03: Then you're gonna be in the non-gap territory.
33:01
SPEAKER_03: Uh key performance indicators, they may have like a financial aspect to them and there may be a gap component to it, right?
33:08
SPEAKER_03: Like comparable store sales as an example, right?
33:11
SPEAKER_03: You're taking uh, you know, a gap revenue type figure, but there's other, there's other factors at play.
33:16
SPEAKER_03: You're not like including excluding items uh as you would in a in a non-gap measure.
33:21
SPEAKER_03: Um so make sure you figure out the right framework you in because you're in, because that will dictate what your disclosures are.
33:27
SPEAKER_03: Um the disclosures for KPIs are are very similar in terms of some of the narrative.
33:33
SPEAKER_03: Uh explain how you calculate the the KPI, explain um why you think it's useful, how management uses um how management uses the measure, uh, et cetera.
33:44
SPEAKER_03: Uh and and there is commission guidance.
33:46
SPEAKER_03: Uh, you don't have to necessarily do the same reconciliations.
33:48
SPEAKER_03: You certainly can uh if it's if it's helpful, if it provides good context, just make sure you don't accidentally put a non-gap measure in there when you do that reconciliation.
33:57
SPEAKER_03: We've certainly seen that.
33:58
SPEAKER_03: Uh and so um, and and yeah, if you're looking for the specific guidance on that, I we I think we talk about this a lot because it doesn't actually say SEC's KPI guidance, it's actually um the SEC's guidance on um management's discussion analysis of financial condition and results of operations.
34:15
SPEAKER_03: So um, but it um I think if you do a Google search and say KPI SEC, it'll it should pop up somewhere in there.
34:22
SPEAKER_03: Um but it you know it it it was a commission release from a few years ago that kind of talks through yeah, you didn't worked on that um right before you left.
34:29
SPEAKER_03: Yep.
34:29
SPEAKER_04: A lot of great insights in there.
34:31
SPEAKER_03: It was it was beautiful.
34:32
SPEAKER_03: It was very quick, very concise.
34:35
SPEAKER_04: All right.
34:36
SPEAKER_04: Well, guys, any final thoughts before we close out?
34:40
SPEAKER_03: Yeah, no, I I the one last thing I kind of hinted to it as well.
34:43
SPEAKER_03: Obviously, you know, you know, we sit here on November 11th, uh as we're recording this, you know, the government shut down.
34:50
SPEAKER_03: Maybe there's hope that it's not going to be the case, but we do have the new Court Finn director in there.
34:55
SPEAKER_03: We've got, you know, we call it conference season coming up next month, the big AI CPA conference.
35:00
SPEAKER_03: Uh generally we expect uh there will be SEC staff members there uh as long as the shutdown isn't isn't still going on.
35:07
SPEAKER_03: Uh and and so it'll be really interesting to get some insights from them.
35:10
SPEAKER_03: I think that'll be that'll really be the first chance uh for the new leadership of Court Finn to share their insights and and and share how they think about things like non-gap.
35:20
SPEAKER_03: Uh and so pay attention there.
35:22
SPEAKER_03: I'll put in a plug.
35:23
SPEAKER_03: We always do a publication after that.
35:24
SPEAKER_03: Uh any any good insights uh on any of the comment letter topics, right?
35:29
SPEAKER_03: But but specifically non-gap, I think we'll be we'll be listening closely and make sure that we we put that out there as well.
35:35
SPEAKER_03: All right.
35:36
SPEAKER_04: Well, with that, I want to thank both of you for joining and uh looking forward to future podcasts with the two of you.
35:42
SPEAKER_04: Thank you.
35:43
SPEAKER_04: Thank you very much.
35:45
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35:47
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36:07
SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
36:11
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36:22
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