Between mid-September and mid-October of 2016, the Securities and Exchange Commi
ID: 2530504 • Letter: B
Question
Between mid-September and mid-October of 2016, the Securities and Exchange Commission (SEC) put Tesla Inc. under fire after the latter added back certain costs to revenue using non-GAAP earnings. While the use of non-GAAP earnings is allowed to some extent, Tesla violated the US GAAP. In four separate comment letters sent from the SEC to Tesla, the regulatory body inquired about “….a statement disclosing the reason why you believe that the presentation of a non-GAAP financial measure provides useful information to investors...not how your management uses the information”. What are the efforts made by the SEC subsequent to the infamous Tesla’s scenario? Do you think these efforts helped in curbing non-GAAP earnings by other firms and why?
Explanation / Answer
The International Financial Reporting Standards issued by the International Accounting Standards Board provide the guidelines and framework to be followed for efficient preparation and presentation of financial statements. These are the standards which are globally acceptable for presentation of financial statements. However, the US GAAP are still used by the organizations in US to present the financial statements. Efforts are in full swing to convert the financial reporting in US from GAAP orientation to IFRSs based. Thus, the presentation of non-GAAP financial reports are acceptable as long as the reports are in conformity with the IFRSs. Thus, the preparation and presentation of financial statements shall conform to the globally acceptable standards even if non-GAAP requirements.
Subsequent to the infamous Telsa’s scenario SEC made the following efforts:
It would not be correct to imply that the above efforts have resulted in curbing non-GAAP earnings by other firms as there have been increased amount of effort to implement IFRSs to prepare and present financial statements. There is no doubt that SEC took all possible decisions to curb the practice of using non-GAAP principles for preparation of financial statements. However, the result has not been encouraging as the firms have continued to use non-GAAP earnings by other firms.
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