Meaning and transaction use
SEC staff guidance states that excluding normal recurring cash operating costs can make a non-GAAP measure misleading. It also addresses inconsistent adjustments between periods, exclusion of charges without comparable gains, and unclear labels. These points concern the US disclosure framework. [S1]
Proposed review method: prepare one row per adjustment with its ledger reference, amount, date, rationale, recurrence history and decision. Keep management proposals and accepted adjustments distinguishable. For a covenant, attach the specific agreement provision; for a valuation, document the analytical rationale and counterparties' unresolved positions.
Worked example
Illustrative loan-analysis assumptions only. Starting EBITDA is USD 4 million. Management proposes USD 400,000 of transaction costs and USD 600,000 of future savings. Assume the reviewer accepts the costs for this calculation and excludes the savings pending support. Debt is USD 22 million. No other adjustments apply.
Scroll the table horizontally to view all columns.
| Measure | Calculation | Result |
|---|---|---|
| Management proposal | 4,000,000 + 400,000 + 600,000 | USD 5,000,000 |
| Reviewed measure | 4,000,000 + 400,000 | USD 4,400,000 |
| Leverage on proposal | 22,000,000 / 5,000,000 | 4.40x |
| Leverage on reviewed measure | 22,000,000 / 4,400,000 | 5.00x |
The assumed adjustment decision changes the calculated leverage by 0.60x. Acceptance of the USD 400,000 is an example assumption, not a conclusion about any actual agreement or public disclosure. Assess covenant compliance only against the executed definition and test date.
Proposed transaction review process
Set the calculation purpose
Record the period, entities and whether the measure supports a covenant, valuation or disclosure.
Build the reconciliation
Tie the starting measure to financial records and list each proposed adjustment separately.
Challenge the evidence
Review recurrence, implementation, timing, caps, offsets and double counting.
Document the decision
Record accepted, rejected and unresolved amounts with the rationale and approving reviewer.
Evidence checklist
Starting financials
Financial statements, trial balance and reconciliation of the initial EBITDA measure.
Adjustment support
Invoices, ledger entries, restructuring plans and evidence of actual implementation.
Governing definition
Credit-agreement wording, amendment history, caps, look-forward periods and reporting instructions.
Review trail
Management proposal, reviewer decisions, unresolved questions and period-to-period comparison.
Decision framework
| Situation | Proposed action |
|---|---|
| The same exceptional cost appears repeatedly | Review the recurrence evidence and the applicable treatment before accepting it. |
| Savings remain prospective | Identify execution dependencies and apply the actual timing and eligibility conditions. |
| Two adjustments cover the same cost | Reconcile their underlying entries and remove any duplicated amount from the proposed calculation. |
| A public presentation uses a covenant measure | Review the relevant disclosure obligations and labeling independently. |
Common errors to check
- Assuming every proposed adjustment is accepted by lenders or buyers.
- Adding a cost twice through different reconciliation lines.
- Ignoring required deductions or contractual caps.
- Presenting adjusted EBITDA without its definition and reconciliation.
Prepare an adjustment-by-adjustment review
Bring the financial reconciliation, proposed add-backs and relevant financing terms to a capital-structure discussion. Quantify disputed amounts and their effect on the financing analysis.
Discuss the transactionPrimary references and editorial scope
- SEC: Non-GAAP Financial Measures, Compliance and Disclosure Interpretations
Questions 100.01 through 100.05 on misleading adjustments, consistency, gains and labels. Reference checked 17 September 2026.
General transaction education with a US disclosure reference. Contractual EBITDA and public non-GAAP reporting require separate fact-specific review. Figures and acceptance decisions are illustrative; the workflow is proposed.
General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.
