Square Inc. makes changes to its financial statements after receiving a letter of comment from the Securities and Exchange Commission in a move that has implications for other US companies.
The payment company abandons its practice of providing an adjusted revenue number, a calculation that does not comply with Generally Accepted Accounting Principles, or GAAP, the US Standard, and which the Securities and Exchange Commission does not allow, as MarketWatch has reported recently.
San Francisco-based square
SQ, + 4.99%
said that the last third quarter would be the last time it included adjusted earnings in a quarterly report, after receiving a comment letter from the Securities and Exchange Commission and follow-up communication on the exercise.
In a FAQ on the change, the company explained that it began using the calculation in November 201
It will now" discontinue the use of the adjusted revenue measure based on the SEC's performance in relation to non-GAAP benefit measures, "the FAQ said.
Also Read: Square Provides Brighter Revenue Forecast After Caviar Sales, But Revenue Prospects Are Light
SEC allows companies to supplement reporting with certain non-GAAP information, but adjusted earnings are only allowed in very discrete circumstances.
In a speech at Baruch College in May 2016, just after the SEC released updated guidelines for non-GAAP metrics, former SEC Vice President Wesley Bricker pointed out special concerns: "If you presents adjusted earnings, "he told the audience," you will probably get a comment; moreover, you can expect employees to look carefully and skeptically at the explanation as to why revenue adjustment is appropriate. "
Square's use of adjusted earnings was actually one that The SEC might have allowed, as it initially sought to "clearly and proactively prepare investors well in advance for the elimination of the impact of Starbucks revenues and expenses," as MarketWatch reported. Square's payment processing agreement with Starbucks was about to expire in 2015, and the company knew it would not be renewed.
Since this contract was a major part of the company's revenue, the loss would mean a major adjustment ng of income development. However, the company continued to use the adjusted earnings, even after the loss of Starbucks revenue no longer presented a problem of comparability.
It used the calculation to adjust gross income to the net by deducting transaction-based costs and bitcoin costs, and also to add back deferred income that had been permanently amortized after an acquisition. As a result, adjusted sales were typically lower than GAAP total net revenue. (The SEC letter is not yet available on the SEC's public view website, and Square refused to provide a copy before the regulator publishes it.)
The news has implications for other companies, including Web security software manufacturers BlackBerry Ltd.
and Symantec, recently renamed NortonLifeLock Inc.
NLOK, + 1.42% ,
and propulsion software
PRGS, + 1.51%
who also uses adjusted revenue metrics.
At the end of 2018, Symantec stock dropped dramatically as it unveiled an investigation related to “the company's public disclosures including comments on historical financial performance, it reported on certain non-GAAP measures, including measures that may affect executive compensation programs, certain forward-looking statements. , stock trading plans and retaliation. "
Symantec, BlackBerry, and Progress Software did the same; adding revenue write-downs to GAAP revenue figures that made the number look better.
The three companies did not respond to email requests for comment.  Read more: BlackBerry violates SEC rules using non-standard values
See also: Companies including Symantec use "ghost revenue" to calculate bonuses  Symantec defends now a class action lawsuit concerning these allegations and recently received several SEC letters about the disclosures SEC's investigation into the company continues.
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Square shares increased by 5.8% on Thursday, and have gained about 16% in 2019, while S&P
SPX, + 0.28%
achieving 23% and Dow Jones industrial average
DJIA, + 0.67%
has received about 16%.
Additional reporting by Emily Bary in New York
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