Called to Account: SEC is once again ‘guiding’ companies on their use of non-GAAP numbers

The Securities and Exchange Commission published a lengthy update Tuesday to its May 2016 guidelines for non-standard accounting metrics, the supplemental numbers companies use to explain their results that can confuse and mislead investors.

The update goes from the general, covering presentation and consistency—form, in other words—all the way to the very specific, including items such as funds from operations or FFO, free cash flow or FCF, and forecasts provided to advisers during a merger or acquisition.

Read: The company that makes Jack Daniel’s is skirting accounting rules, experts say

Also read: SEC tells companies to be careful how they talk about free cash flow

The update comes after the SEC last year upped the ante for companies who use unaudited numbers to present rosier results and potentially make it more difficult to analyze financial reporting across sectors. The SEC issued the initial set of guidelines because of its concern that more and more companies were using such numbers in varied ways and were ending up misleading their own shareholders.

See: From a wrist slap to jail time: how the SEC deals with dodgy accounting

See also: SEC fines marketing company for perks, non-GAAP metric disclosure issues

Along with the guidance on these non-GAAP metrics, or those not prepared using Generally Accepted Accounting Principles, the SEC created a task force to ensure that companies complied. That group has since sent letters to hundreds of publicly traded companies, including well-known, widely held ones, demanding explanations for items in earnings releases and on conference calls as well as other filings that violated the rules or were unclear.

Don’t miss: Here’s how investors are duped each earnings season

Also: Wal-Mart accounting for e-commerce, overseas asset sales draws SEC scrutiny

Read: Target revises reporting, after SEC calls out non-GAAP gross margin

Since then, some companies like Microsoft Corp.

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 and Facebook Inc.

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as well as Google parent Alphabet Inc.

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 ,

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 have moved away from non-GAAP metrics. However, that’s not because they’ve suddenly come around to the value of plain vanilla standard accounting, but rather because of mandated accounting changes that eliminate the advantage of stripping out stock-based compensation and tax effects to present healthier profit numbers. Tech companies tend to have more of their compensation in the form of equity-based awards.

Don’t miss: The tax hit that made Google miss on earnings, and the big change that will keep it from happening again

The SEC has had to repeat several warnings about some of the most frequent, and basic, mistakes companies are making even though more than a year has passed since its original alert.

These include:

• Emphasizing the discussions and analyses of non-GAAP metrics over the comparable GAAP numbers.

• Presenting full non-GAAP income statements

• Putting only non-GAAP numbers in an earnings release headline or caption or putting the non-GAAP numbers first before the comparable standard numbers

• Presenting the non-GAAP numbers with a bolder or larger font

• Using expressions like “record performance” or “exceptional” to describe non-GAAP results

In these updated guidelines, the SEC even has to define “earnings” because of the proliferation of non-GAAP terms such as EBITDA.

“Earnings”, the SEC says, means net income as presented in the statement of operations under GAAP. If the company calculates EBIT and EBITDA in way other than “earnings before interest and taxes” and “earnings before interest, taxes, depreciation and amortization” it should call it something else, like “adjusted EBITDA, said the SEC.

See also: SEC tells companies to be careful how they talk about free cash flow

The S&P 500

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 has gained 14.5% in 2017, while the Dow Jones Industrial

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 as gained 17%.