Understanding SEC Regulation of Non-GAAP Measures

Background

For the year ended June 30, 2025, one of the most common SEC comment letter topics was non-GAAP measures. This is not a new issue, as non-GAAP measures have consistently ranked as the number one or two topic addressed in SEC comment letters for at least the past nine years.¹

In fact, the SEC’s regulation and attention to non-GAAP measures dates back to the early 2000s. SEC Release 33-8176, issued in 2003, resulted in Regulation G and Regulation S-K Item 10(e), which are the relevant regulations for the disclosure of non-GAAP measures in public filings. Since2003, the SEC has issued multiple rounds of Compliance and DisclosureInterpretations (C&DIs), an additional SEC release providing guidance on all types of metrics included in Management Discussion and Analysis (MD&A), and hundreds of comment letters targeting the incorrect usage of non-GAAP measures.

This article discusses each of the following:

what non-GAAP measures are;
why non-GAAP measures are important to companies, investors, and the SEC;
the applicable SEC regulations for non-GAAP measures; and
examples of SEC comment letters enforcing non-GAAP measure regulations.

What Is a Non-GAAP Measure?

SEC Release 33-8176, which created Regulation G, defines non-GAAP measures as those that either:

include items normally excluded from the most comparable GAAP measure; or
exclude items normally included in the most comparable GAAP measure.

The SEC also clarified that non-GAAP measures include the following:

performance measures that differ “from that presented in the financial statements…as calculated in accordance with GAAP; or”
liquidity measures that differ “from cash flow or cash flow from operations computed in accordance with GAAP.”²

Essentially, taking a GAAP line-item and removing any of itsGAAP components creates a non-GAAP measure. For example, EBITDA takes the GAAP measure of net income and removes interest, taxes, depreciation, and amortization. The original measure (net income) is calculated in accordance with GAAP, and each of its subcomponents (interest, taxes, depreciation, and amortization) are also calculated in accordance with GAAP, but the resulting measure is non-GAAP. Other common examples of non-GAAP measures include:

Performance Measures

Adjusted EBITDA (often excludes items such as stock-based compensation, restructuring charges, or acquisition costs)
Adjusted Net Income (net income adjusted to exclude unusual or non-cash items)
Core/Underlying Earnings (company-defined, often excluding “non-recurring” items)
Adjusted EPS (earnings per share excluding certain charges/gains)

Liquidity Measures

Free Cash Flow (FCF) = Operating Cash Flow –Capital Expenditures
Adjusted Free Cash Flow (further adjusted for items such as restructuring payments or litigation settlements)
Cash Earnings (net income adjusted to approximate cash flow)

See the dropdown below for an example of how one company includes non-GAAP measures within the MD&A section of its public filings.

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Non-GAAP Measures in A.K.A Brands’ Q1 2025 Filing³

Finally, the SEC narrows the definition of a non-GAAP measure by clarifying that it does not include metrics and ratios that only include non-financial operating measures and/or GAAP measures. For example, the operating metric “same store sales” calculated using GAAP revenues would not be a non-GAAP measure. Likewise, the financial metric “operating margin”calculated using only GAAP revenues and GAAP operating income would not be anon-GAAP measure.⁴

Why Are Non-GAAP Measures Important?

Public entities that strictly follow GAAP in their financial statements might include non-GAAP measures in their MD&A for multiple reasons. One is that a company might consider non-GAAP measures to be informative for investors by providing additional context around GAAP measures. For example, a company might want to show investors how one-time restructuring charges significantly affected GAAP net income by presenting an adjusted form of net income that excludes those charges.

Another reason could be that a company’s management uses a non-GAAP measure internally to measure the performance of the business. If such information is material to investors, the SEC mandates that it be included in the MD&A section of the company’s public filings (see SEC Release 33-10751 and this article on KPIs and Other Metrics).

Non-GAAP measures are also important to the SEC, as shown by the significant number of comment letters the agency issues on the topic each year. Non-GAAP measures have the potential to provide helpful and material information about how management evaluates business performance, but those measures can also be misleading if provided for the wrong reasons or without the proper disclosures. The SEC focuses on ensuring that companies do not disclose misleading information to investors, which could include non-GAAP measures in MD&A that are intentionally adjusted to put the company in a positive light or that overshadow GAAP measures. Thus, the SEC’s Regulation Gand Item 10(e) of Regulation S-K require companies to disclose specific information about any non-GAAP measures they decide to include in public filings.

Regulation G and Regulation S-K Item 10(e)

Regulation G sets baseline rules for any public disclosure of non-GAAP measures, including earnings calls, press releases, and SEC filings.It specifies that companies presenting non-GAAP measures must do each of the following:

Disclose the most comparable GAAP measure with the non-GAAP measure.
Provide a quantitative reconciliation between the GAAP and non-GAAP figures.

It also prohibits companies from disclosing a non-GAAP measure if it is misleading within its context.

Item 10(e) of Regulation S-K applies specifically to non-GAAP measures presented in formal SEC filings such as 10-Ks and 10-Qs. It requires that companies do the following:

Ensure that the most comparable GAAP measure is presented at least as prominently as the non-GAAP measure.
Provide a quantitative reconciliation between the GAAP and non-GAAP measures.
Explain why management believes the non-GAAP measure is useful to investors.
Include any other purposes for which management uses the non-GAAP measure.

It also explicitly prohibits the following:

Excluding cash-settled liabilities or expenses from non-GAAP liquidity measures.
Removing non-recurring items to smooth out the measure if those items have occurred in the past two years or might occur in the next two years.
Including non-GAAP measures in the company’s GAAP financial statements or footnotes (see dropdown below for an exception to this).
Disclosing non-GAAP measures in pro-forma financial data required for an IPO.
Giving non-GAAP measures the same or similar names as GAAP measures.

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Segment Reporting Exception to Non-GAAP Restrictions⁵

The SEC’s overarching purpose in requiring the above information is to protect investors from being misled by non-GAAP measures that companies publicly disclose. The disclosures are especially rigorous for official SEC filings because investors look to those filings to understand the financial performance of a company.

SEC Interpretations

In addition to Regulation G and Regulation S-K item 10(e),the SEC’s Division of Corporate Finance provides Compliance and DisclosureInterpretations (CD&Is). The CD&Is focus on what the SEC considers misleading or not when disclosing non-GAAP measures across various areas such as EBIT and EBITDA, business combination transactions, segment information, and others.⁸ The following table provides a high-level outline of section 100 of the currently available CD&Is, which covers general non-GAAP measure issues:

Section 100 Questions⁹	Summarized SEC Response	Main Idea
100.01: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?	Yes – excluding normal, recurring, cash operating expenses can be misleading, even if not explicitly prohibited.	Do not attempt to make earnings look better by removing normal costs needed to run the business.
100.02: Can a non-GAAP measure be misleading if it is presented inconsistently between periods?	Yes – if a non-GAAP measure is changed, the adjustments should be disclosed and prior period figures possibly recast for appropriate consistency and context.	Be consistent in presenting non-GAAP measures and ensure any changes are properly disclosed.
100.03: Can a non-GAAP measure be misleading if the measure excludes charges, but does not exclude any gains?	Yes – non-GAAP measures should not exclude non-recurring expenses while including non-recurring gains.	Treat gains and losses consistently in non-GAAP measures.
100.04: Can a non-GAAP measure violate Rule 100(b) of Regulation G if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP?	Yes – non-GAAP measures are simply GAAP measures that exclude/include certain amounts. They should not be “individually tailored” by changing the recognition and measurement principles away from GAAP.	Use GAAP recognition and measurement even when producing a non-GAAP measure; do not accelerate revenue recognition or use cash basis instead of accrual basis.
100.05: Can a non-GAAP measure be misleading if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly described?	Yes – non-GAAP measures need to be identified as non-GAAP and labeled appropriately so they are not misleading.	Label and describe non-GAAP measures accurately.
100.06: Can a non-GAAP measure be misleading, and violate Rule 100(b) of Regulation G, even if it is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure?	Yes – some non-GAAP measures can be misleading no matter what disclosures are made.	Avoid using non-GAAP measures that could be highly confusing or misleading to investors.

Comment Letter Examples

Example 1: Equal or More Prominent Disclosure (Sysco)

In a 2025 comment letter to Sysco, the SEC noted that the company was disclosing the year-over-year change in the non-GAAP measure EBITDA without also disclosing the change in the most comparable GAAP measure with equal prominence.

In response, Sysco committed to adjust its future filings so that the change in net earnings would be displayed before the change in EBITDA, giving net earnings at least equal prominence as EBITDA for investors.

In this example, the SEC demonstrated its commitment to ensuring GAAP takes precedence. If a company chooses to publicly disclose non-GAAP measures, it should pay careful attention to how and where it discloses them in relation to the most comparable GAAP measures.

Click here to read Sysco’s correspondence with the SEC

Example 2: Naming and Describing Non-GAAP Measures (Valvoline)

In 2024, the SEC reached out to Valvoline seeking an explanation of its non-GAAP measure “discretionary free cash flow.” The SEC pointed out that the measure does not subtract certain non-discretionary cashflows such as debt repayments. Accordingly, the SEC requested an explanation from the company of how including “discretionary” in the label fits the measure’s description and is not misleading.

Valvoline recognized it could not sufficiently defend the appropriateness of the label and decided to rename the measure “free cash flow excluding growth capital expenditures.” The company also explained its definition of growth capital expenditures at the SEC’s request.

This example demonstrates the SEC’s attentiveness to the labels and descriptions registrants use when disclosing non-GAAP measures. Public entities should appropriately name and describe each non-GAAP measure they disclose with enough detail to help investors understand exactly what the measure includes, excludes, and depicts.

Click here to read Valvoline’s correspondence with the SEC

Example 3: Excluding Recurring Cash Operating Costs (Freshpet)

In a 2022 comment exchange, the SEC rejected Freshpet’s non-GAAP adjustments. The company had excluded “launch” expenses from adjusted EBITDA in a recent filing. Its launch expenses included non-capitalized costs for replacing or upgrading pet food fridges and marketing newly installed fridges. Freshpet argued these were growth-related costs and should not be considered normal operating expenditures yet because the company’s distribution network was not fully mature.¹⁰

The SEC disagreed, concluding that launch expenses are recurring cash operating expenses necessary to operate the business and that removing them is misleading (see C&DI100.01). As a result, Freshpet agreed to stop excluding these costs from adjustedEBITDA and to recast prior periods.

This situation reinforces the SEC’s view that excluding normal, recurring, cash operating expenses from non-GAAP measures is misleading. Accordingly, registrants should avoid removing costs required for growing and operating the business, even if management believes those expenditures do not represent the company’s future, mature operations.

Click here to read Freshpet’s correspondence with the SEC

Conclusion

The history of SEC enforcement related to non-GAAP measures is extensive, and these measures continue to be one of the top issues discussed in SEC comment letters. Non-GAAP measures can provide useful information to investors that does not otherwise appear in financial statements. However, companies must pay close attention to the regulations in place to avoid disclosing misleading non-GAAP measures and experiencing the inevitable SEC action that follows.