Companies are free to report "adjusted" earnings alongside their official results, but the freedom is narrower than earnings-season headlines suggest. SEC Regulation G requires a reconciliation to the nearest GAAP figure for every non-GAAP number a company discloses publicly, and the agency's Division of Corporation Finance last revised its interpretive guidance on the practice on December 13, 2022 — evidence that the gray areas are still being drawn, two decades after the rule took effect.
The premise of adjusted earnings is reasonable enough: a one-time restructuring charge or a non-cash stock-compensation expense can obscure the trend a management team believes matters most. The problem, on the SEC's own published interpretations, is not that companies adjust — it is how far the adjusting goes, how the result is displayed next to the GAAP number it replaces, and whether the adjustment quietly rewrites accounting principles rather than merely excluding an item.
What Does Regulation G Actually Require?
Regulation G, adopted in 2003, requires that any public non-GAAP disclosure be paired with the most directly comparable GAAP measure and a quantitative reconciliation between the two, and it bars any presentation that would make the non-GAAP figure misleading given the surrounding facts and circumstances.
The rule itself is short. Its reach comes from Item 10(e) of Regulation S-K, which extends Regulation G's terms to anything filed with the Commission — a 10-K, a 10-Q, an 8-K earnings release — and adds obligations the base rule does not. Filers must give the GAAP measure equal or greater visual prominence than its non-GAAP counterpart, explain why management believes the non-GAAP number is useful to investors, and disclose any additional purpose management has for using it internally, where that purpose is material. Item 10(e) separately restricts excluding cash-settlement items from a liquidity measure, adjusting for charges that are likely to recur, and giving a non-GAAP measure a title easily confused with a standard GAAP line item.
None of this bans adjusted earnings. It obligates a company to show its work, in roughly the same typeface, next to the number regulators consider the baseline.
Why Does This Rule Exist at All?
Regulation G is not a general accounting standard; it is a specific legislative response. Congress directed the SEC, in Section 401(b) of the Sarbanes-Oxley Act of 2002, to write rules ensuring that pro forma and other non-GAAP disclosures would not contain an untrue statement of a material fact and would be reconciled to the comparable GAAP figures, according to the SEC's own announcement of the rulemaking.
The mandate reflected a specific complaint from the years leading up to it: companies during the market downturn of the early 2000s had increasingly reported pro forma results that excluded items — some routine, some not — in ways that made losses look like profits or thin margins look comfortable. The Commission's response split into two tiers. Regulation G applies broadly to any material non-GAAP measure a company releases publicly, in a press release or otherwise, requiring the GAAP reconciliation and barring misleading presentations. Item 10 of Regulation S-K then layers additional, more granular requirements — prominence, purpose disclosure, the specific prohibitions discussed below — onto anything actually filed with the Commission, such as a 10-K or an 8-K earnings release.
That two-tier structure is why a company's slide deck for an earnings call and its 8-K filing of the same results can be held to different levels of specificity, even when the underlying non-GAAP number is identical in both.
What Counts as an "Individually Tailored" Accounting Principle?
The Division of Corporation Finance's staff guidance draws a line between ordinary add-backs and adjustments that, in substance, rewrite how GAAP recognizes revenue or expenses in the first place. The staff calls the second category an "individually tailored accounting principle," and treats it as improper regardless of how clearly it is disclosed.
Question 100.04 of the staff's Compliance and Disclosure Interpretations gives concrete examples: "changing the pattern of recognition, such as including an adjustment in a non-GAAP performance measure to accelerate revenue recognition," presenting revenue on a net basis when GAAP requires a gross presentation (or the reverse), and changing the basis of accounting for revenue or expenses from accrual to cash. Each swaps out a GAAP mechanic rather than simply removing a line item from an otherwise GAAP-consistent total.
The more familiar adjustments — stock-based compensation, restructuring charges, one-time gains or losses, and in some presentations depreciation and amortization — sit in a different category, according to an explainer from the investing publication the Motley Fool. Excluding those items does not alter how revenue or expenses were recognized under GAAP in the first place; it removes them after the fact. That distinction is precisely why the SEC's guidance treats the two practices differently, even though both produce a number that departs from the GAAP bottom line.
Why Does Prominence Matter as Much as the Number Itself?
A mathematically accurate non-GAAP figure can still violate SEC guidance if it receives more visual or narrative weight than the comparable GAAP number, according to the staff's Question 102.10(a), which lists several practices it considers problematic on their face.
Among them: presenting what amounts to a full non-GAAP income statement, placing the non-GAAP figure ahead of the GAAP figure or omitting the GAAP comparative altogether, using bold type, larger fonts, or repetition to emphasize the non-GAAP number over its GAAP counterpart, and discussing the non-GAAP result without giving similar discussion and analysis to the comparable GAAP measure. A companion interpretation, Question 102.10(b), extends the same logic to the reconciliation table itself: starting the reconciliation from the non-GAAP number, or presenting what is effectively a non-GAAP income statement inside the reconciliation, both draw staff scrutiny.
The pattern across both interpretations is consistent. The SEC is less concerned with whether a company calculates an adjusted figure than with whether the presentation nudges a reader toward the more flattering number before they encounter the one prepared under uniform rules.
Can Disclosure Alone Make a Misleading Measure Acceptable?
No. The staff's Question 100.06 states plainly that disclosing how a non-GAAP measure is calculated does not, by itself, cure a measure that is otherwise materially misleading — the calculation can be fully transparent and the measure can still fail Regulation G's prohibition.
The clearest example of what fails is spelled out in Question 100.01: excluding "normal, recurring, cash operating expenses necessary to operate a registrant's business" from a non-GAAP performance measure can render it misleading, independent of any specific rule barring that particular exclusion. In practice, that reaches adjustments that strip out costs — certain marketing spend, routine maintenance, recurring legal costs tied to the core business — that any ongoing operation would expect to keep incurring, as opposed to charges tied to a discrete, non-recurring event.
How Has the Guidance Kept Moving Since 2003?
Regulation G's text has not changed since it took effect in 2003. What has moved is the staff's interpretation of it, updated periodically through the Compliance and Disclosure Interpretations rather than through new rulemaking. The December 13, 2022 update revised Questions 100.01, 100.04 through 100.06, and 102.10(a) through (c) — the same questions that define individually tailored principles, prominence, and the limits of disclosure discussed above.
That structure matters for how the rules actually function day to day. A reconciliation table that complied with staff expectations several years ago can fall out of step with guidance that has since been sharpened, without Regulation G's underlying text having moved at all. Companies and the auditors reviewing their earnings releases are, in effect, tracking a moving interpretive target layered on top of a fixed rule.
The Bottom Line on the Filings
On the SEC's own published interpretations, adjusted earnings are not a loophole and not a violation by default — they are a disclosure with specific conditions attached, most of which concern presentation and mechanics rather than the underlying business judgment behind an adjustment. A reconciliation that is accurate but visually subordinate to the non-GAAP figure can still draw scrutiny. An adjustment that is fully disclosed can still be misleading if it excludes ordinary operating costs. And a measure that was defensible under one version of the staff's guidance is not guaranteed to remain so under the next.
None of that is a reason to disregard adjusted figures companies report each earnings season — only a reason to read them against the GAAP line sitting next to them, the way the rule intends.
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