When a filer discloses a non-GAAP financial measure, SEC rules require it to present the most comparable GAAP measure with equal or greater prominence and to provide a quantitative reconciliation between the two.

Non-GAAP measures—adjusted EBITDA, non-GAAP operating margin, free cash flow, adjusted earnings per share—are everywhere in technology-company earnings, and they are not lawless. The Securities and Exchange Commission regulates how they may be presented in Commission filings through Regulation S-K Item 10(e), codified at 17 CFR 229.10(e). The rule does not ban non-GAAP measures or dictate which adjustments are allowed; it governs disclosure mechanics so that investors can always trace an adjusted number back to its GAAP starting point.

The core of the rule is a four-part requirement triggered whenever a non-GAAP measure appears in a filing. The filer must present the most directly comparable GAAP measure with equal or greater prominence, provide a reconciliation of the differences, state the reasons management believes the measure is useful, and disclose any additional management uses. The regulation’s text is explicit about the reconciliation obligation.

"A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP."— 17 CFR 229.10(e), Regulation S-K Item 10(e), source

Equal prominence and the reconciliation

The "equal or greater prominence" requirement is the part most often tested by SEC staff comment letters. It means a headline cannot lead with an adjusted figure while burying the GAAP equivalent in a footnote or omitting it entirely. The reconciliation must be quantitative for historical measures, bridging each adjustment line from the GAAP number to the non-GAAP number so a reader can see exactly what was added back—stock-based compensation, amortization of acquired intangibles, restructuring charges, and the like.

Item 10(e) also contains explicit prohibitions. A filer may not exclude charges or liabilities that required, or will require, cash settlement from a non-GAAP liquidity measure (other than EBIT and EBITDA), may not present a non-GAAP measure on the face of the GAAP financial statements, and may not use titles or descriptions that are the same as, or confusingly similar to, GAAP measures. The SEC has supplemented the rule with Compliance and Disclosure Interpretations that address individually tailored recognition methods and misleading adjustments.

For readers, the practical value of Item 10(e) is that it makes adjusted numbers auditable. Every non-GAAP figure in a compliant filing comes with a bridge back to GAAP, so the question is never whether to trust the adjusted number in isolation but what each reconciling item represents and whether it is recurring. The rule converts marketing-flavored metrics into something a reader can dismantle line by line—which is exactly its purpose.

Performance measures versus liquidity measures

Item 10(e) draws a line between non-GAAP performance measures and non-GAAP liquidity measures, and the distinction changes what is permitted. For performance measures—adjusted operating income, adjusted EPS—the comparable GAAP figure is generally net income or the relevant income-statement line. For liquidity measures such as free cash flow, the comparable GAAP figure is cash flow from operations, and the rule specifically bars excluding charges that required or will require cash settlement, with a narrow carve-out for EBIT and EBITDA. A filer that mislabels a liquidity measure as a performance measure, or vice versa, is a recurring subject of SEC staff comment letters.

The Commission’s Compliance and Disclosure Interpretations add a layer of detail the rule text does not. They address "individually tailored accounting principles"—adjustments that effectively substitute the filer’s own recognition method for GAAP, such as accelerating subscription revenue to a point in time—and treat them as potentially misleading. They also flag non-GAAP measures that exclude normal, recurring cash operating expenses, and presentations that give the non-GAAP figure undue prominence in headlines, captions, or the order of presentation. These interpretations are where most enforcement-adjacent disputes over non-GAAP disclosure actually get resolved.

The throughline is investor protection through traceability rather than prohibition. The SEC has repeatedly said companies may tell their story with non-GAAP measures; what it requires is that the GAAP anchor always be visible and the path between the two always be shown. For a reader, the disclosure regime means the right posture toward any adjusted number is neither acceptance nor dismissal but inspection: read the reconciliation, identify each add-back, and decide for yourself whether the excluded items are genuinely non-recurring or simply unflattering recurring costs dressed as one-offs.

There is a related but separate rule for non-GAAP measures released outside formal filings—earnings press releases furnished under Form 8-K Item 2.02—found in Regulation G, which imposes a parallel reconciliation-and-comparable-GAAP obligation and a general anti-fraud standard that a non-GAAP measure not be misleading. Item 10(e) governs measures inside Commission filings such as the 10-K and 10-Q; Regulation G governs public disclosures more broadly. Together they mean there is essentially no public channel through which a U.S. issuer can present an adjusted number without an accompanying GAAP reconciliation. For anyone reading earnings materials, that is the practical takeaway: the reconciliation table is not optional boilerplate but a regulatory requirement, and it is the first place to look when an adjusted headline number diverges sharply from the GAAP result. Investors who internalize that discipline read non-GAAP measures the way the rules intend them to be read: as a supplement to the GAAP figures that the filer must always present beside them, never as a replacement, and always with the bridge between the two open for inspection.