ERTS Electronic Arts Inc. (MM)

Companies play down nonstandard metrics designed to flatter after SEC cracks whip

By Tatyana Shumsky 

More companies are giving investors the bad news first, in response to heavier regulatory scrutiny of their financial reporting.

More than a quarter of the companies in the S&P 500 index have shifted results that conform with Generally Accepted Accounting Principles to the top of news releases outlining their most recent financial performance.

Among the S&P 500 companies reporting results since the start of July, 81% have given prominence to GAAP figures, an increase from the 52% that did so when reporting first-quarter results, according to an Audit Analytics analysis conducted for The Wall Street Journal.

Companies that have made the transition include Halliburton Co., Walgreens Boots Alliance Inc. and videogame maker Electronic Arts Inc.

The uptick comes in response to new guidance issued by the Securities and Exchange Commission in May that requires companies to give GAAP figures greater weight. It reflects concerns that adjusted or non-GAAP figures make companies look healthier.

The SEC's timing offered some breathing room, giving companies a chance to comply with the guidance for subsequent reporting periods, officials said.

The guidance, however, leaves little room for flexibility. If a paragraph or table contains standard and adjusted figures, companies must make sure sentences or columns with the standard, or GAAP, information precedes everything else.

Numbers must be also be presented in the same style, meaning customized metrics can't be bolded or printed in a larger-size font, nor can they be described as "record" or "exceptional" unless GAAP results are characterized in a similar way.

"There's little appetite at the SEC for companies who don't assess the guidance and self-correct," said Paula Hamric, a partner in accounting firm BDO USA's national SEC practice.

Halliburton highlighted $64 million in "income from continuing operations excluding special items" in its first-quarter press release. But when reconciled to standard accounting principles, the company had a loss of $2.4 billion.

By contrast, the Houston oil-field services company led its second-quarter earnings release with a standard-accounting loss of $3.73 per share, or $3.2 billion.

A Halliburton spokeswoman confirmed that the change was made to comply with the SEC's new instructions.

Over the past two quarters, drugstore operator Walgreens has switched around the sentences atop its earnings press release. The company led its fiscal second-quarter earnings release with an 11% increase in "adjusted net earnings," adding that standard per-share results had plunged 56%. The following quarter, Walgreens put standard results first, reporting a 14% drop in per-share earnings.

"We did make some small changes to our most recent quarterly earnings announcement based on the new SEC guidance and to further enhance our disclosure to investors," said a spokesman for Walgreens.

Some companies haven't yet made the shift. Software provider Ellie Mae Inc. said in its second-quarter earnings release in July that it hadn't yet modified "adjusted net income" to reflect certain tax impacts -- a change now required by the SEC.

In a statement recently, Ellie Mae said it plans to comply with SEC guidelines and modify the "adjusted" benchmark, but is currently considering timing of the change. "Our measured approach to transitioning the reporting of this financial metric will balance our investors' expectations with the concerns of the SEC staff," the company said.

Companies that don't make the necessary changes run the risk of additional regulatory scrutiny in the form of letters and forced revisions. in letters made public through Aug. 5, the SEC questioned 166 companies this year regarding their use of non-GAAP figures, up 13% from a year earlier, according to Audit Analytics.

The SEC makes such written exchanges public 20 days after the matter is resolved. The letters that have become public so far concern financial reports from before the new guidance was announced.

Accountants expect such correspondence to surge as the SEC evaluates how companies handle the new requirement.

"It's an evolutionary process," said Jeffrey Jones, a partner in KPMG's SEC practice. "The preparer community, the audit community, the legal community as well as the SEC will be learning over the next couple of months where the lines are."

Corporate chief financial officers may face a steep learning curve. The SEC's new guidelines banned a number of metrics previously considered acceptable. Regulators said that adjusting results inconsistently or for recurring expenses could be misleading.

Complying with the new parameters is more challenging and time consuming than simply putting GAAP results at the front of the press release. CFOs must re-evaluate whether the numbers they have been reporting for years could be considered misleading in light of the new guidance.

"You have investors and analysts that are used to seeing certain metrics, so in order to change the presentation, [CFOs] have to rethink what's meaningful going forward," said BDO USA's Ms. Hamric.

In July, Electronic Arts Inc. became the first of three videogame makers to announce it would drop non-GAAP information from its reporting to comply with the guidance. Rivals Activision Blizzard Inc. and Take-Two Interactive Software Inc. followed suit.

"We're trying to do exactly what we have been asked to do by the SEC, and we feel like we're doing that in a very proactive way," CFO Blake Jorgensen said in advance of EA's Aug. 2 earnings report, which said revenue rose 6% during the fiscal first quarter.

Visa Inc., which typically reports GAAP results first, made more nuanced changes. The company included more adjusted figures to show investors how the business would have fared without a recent acquisition. The goal was for investors to "make up their own minds about our performance," said James Hoffmeister, the company's chief accounting officer.

"It's not like we were afraid the SEC was going to come back and slap us on the wrist and tell us we were not doing a good job," he said. "We looked at it as more of an opportunity."

--Michael Rapoport contributed to this article.

(END) Dow Jones Newswires

August 30, 2016 02:48 ET (06:48 GMT)

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