Question

Many companies incurred costs related to Covid-19 in the second quarter of 2020. In their 2nd quarter earnings announcements, many of them reported non-GAAP earnings that exclude costs related to Covid-19. Which of the following is more likely to be true?

a). Firms can disclose non-GAAP earnings that exclude costs related to Covid-19 from GAAP-based earnings as long as they provide reconciliation between non-GAAP earnings and GAAP earnings

b). The SEC does not allow firms to disclose non-GAAP earnings that exclude costs related to Covid-19 from GAAP-based earnings

c). Non-GAAP earnings that excludes costs related to Covid-19 from GAAP-based earnings always unfaithfully represent the true economic performance of a firm because costs related to Covid-19 are most likely recurring

d). Non-GAAP earnings that excludes costs related to Covid-19 from GAAP-based earnings always provide relevant information to financial statement users because costs related to Covid-19 are most likely one-time

Answer 1

When you take a defined GAAP measure and either exclude items that are components or include items that aren’t components, the result is a non-GAAP financial measure. SEC rules and guidance urge that you keep top of mind the following key requirements when making COVID-19-related adjustments to non-GAAP measures in your SEC filings (e.g., registration statements, periodic reports, current reports, and proxy statements) and press releases.

Regardless of whether you choose to reflect the business impact of COVID-19 by redefining an existing adjustment to a non-GAAP financial measure (e.g., “other income” now includes costs incurred to prevent the spread of the virus) or by creating a new COVID-19-related line-item adjustment, your description of the adjustment must not be misleading. Also, when determining whether a COVID-19-related adjustment is even appropriate in a non-GAAP measure, ask yourself whether the adjustment is (1) directly related to COVID-19 or the resulting economic fallout, (2) expected to become part of the new normal, and (3) objectively quantifiable.

Some points that you should keep in mind are :

1. Avoid mischaracterizing recurring adjustments as non-recurring.

2. Avoid individually tailored revenue-recognition principles.

3. Avoid cherry-picking adjustments.

4. Avoid inconsistencies between periods.

5. Avoid vague or confusing titles and descriptions.

After studying the GAAP guidelines , we come to the conclusion that may be the option D is true .