It should come as no surprise to readers of our blog that public companies often expend significant resources each year on managing litigation matters. As a result, perhaps it is natural that some companies might want to convey financial results that exclude (or adjust out) these litigation expenses from their GAAP results as they arguably do not relate to the core performance of the company’s business.
When considering whether to include an adjustment for litigation expenses in non-GAAP measures, companies should be mindful of how they identify and disclose such expenses (e.g., outside of the ordinary course of business (non-recurring)). In monitoring recent Securities and Exchange Commission (SEC) comment letters, we found a letter exchange that we believe demonstrates the principal disclosure considerations at issue.
As background, Item 10(e) of Regulation S-K provides that a registrant must not “adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.” (Emphasis added.)