Business Law Blog

For over a decade, Canadian securities regulators have been concerned about the significant variance in disclosure practices surrounding non-GAAP financial measures and the potential to mislead investors. To address these concerns, on August 25, 2021, National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure (“NI 52-112”) and its Companion Policy came into force replacing the Canadian Securities Administrators (the “CSA”) Staff Notice 52-306 – Non-GAAP Financial Measures.

The CSA first announced a proposed national instrument (the “Original Proposed Instrument”) to regulate the disclosure of non-GAAP and other financial measures in 2018. In 2020, following the CSA’s review of feedback from stakeholders on the Original Proposed Instrument, it published a second notice and request for comment on a revised version of the Original Proposed Instrument (the “Revised Proposed Instrument”). For background and an overview of the Original Proposed Instrument and the Revised Proposed Instrument please see our September 2018 blog post and our February 2020 blog post.

As a national instrument, compliance with NI 52-112 is mandatory, and Canadian securities regulators have more authority to regulate disclosure and impose penalties for failure to comply. For reporting issuers, NI 52-112 applies to disclosure documents filed for a financial year ending on or after October 15, 2021. For non-reporting issuers, NI 52-112 applies to disclosure documents filed on or after January 1, 2022.

NI 52-112 regulates the disclosure of five categories of “specified financial measures”:

1. Non-GAAP financial measures – financial measures (other than ratios, fractions, percentages or other similar representation) that (a) depict the historical or expected future performance, financial position or cash flow of an entity, (b) are not disclosed in the financial statements of the entity, and (c) exclude an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure in the primary financial statements^[1] of the entity. This definition is generally consistent with current practices for classifying non-GAAP financial measures. Examples of commonly disclosed non-GAAP financial measures include “adjusted earnings,” “adjusted EBITDA,” “free cash flow” and “adjusted funds from operations.”
2. Non-GAAP ratios – financial measures in the form of a ratio, fraction, percentage or other similar representation that have a non-GAAP financial measure as one or more of their components and are not disclosed in the financial statements of the entity. Examples of commonly disclosed non-GAAP ratios include, “adjusted EBITDA per share” and “free cash flow per ounce.”
3. Total of segments measures – financial measures that are a subtotal or total of two or more reportable segments of an entity that are disclosed in the notes to the financial statements of the entity, but not disclosed in, or a component of a line item disclosed in, the primary financial statements of the entity.
4. Capital management measures – financial measures that are intended to enable a person to evaluate an entity’s objectives, policies and processes for managing the entity’s capital that are disclosed in the notes to the financial statements of the entity but not disclosed in, or a component of a line item disclosed in, the primary financial statements of the entity.
5. Supplementary financial measures – financial measures that are, or are intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of an entity that are not disclosed in the financial statements of the entity and that are not non-GAAP financial measures or non-GAAP ratios. Examples of supplementary financial measures include “same-store sales,” “debt-to-equity ratios” and “revenue per user.”

NI 52-112 prescribes the manner in which specified financial measures may be disclosed and, depending on the category of specified financial measure, additional disclosure that must accompany such disclosure. These requirements include:

1. Labelling – Non-GAAP financial measures, non-GAAP ratios and supplementary financial measures must be labelled with a term that, based on the composition of the measure or ratio, accurately describes the measure or ratio and distinguishes it from financial measures disclosed in the primary financial statements of the entity. Forward-looking non-GAAP financial measures must be labelled using the same label used for the equivalent historical non-GAAP financial measure. If an issuer changes the label for a historical non-GAAP financial measure or a non-GAAP ratio from what was previously disclosed, an explanation of the reason for the change must be included proximate to the first instance where such measure or ratio is disclosed in the document.
2. Comparable Financial Measures – The most directly comparable financial measure from the entity’s primary financial statements must be included in the document for any historical non-GAAP financial measures and total of segments measures disclosed.
3. Prominence – Non-GAAP financial measures, non-GAAP ratios, total of segments measures and capital management measures must be presented with no more prominence in the document than, in the case of (i) historical non-GAAP financial measures and total of segments measures, the most directly comparable financial measure from the entity’s primary financial statements, (ii) forward-looking non-GAAP financial measures, the equivalent historical non-GAAP financial measure and (iii) non-GAAP ratios and capital management measures, similar financial measures disclosed in the entity’s primary financial statements.
4. Required Disclosure Proximate to the First Instance Where a Specified Financial Measure is Disclosed – Proximate to the first instance in a document where a specified financial measure is disclosed, the document must include:
   1. Explanation – If disclosing a (i) historical non-GAAP financial measure or non-GAAP ratio, an explanation that the financial measure or ratio is not a standardized financial measure or ratio under the financial framework used to prepare the entity’s financial statements and might not be comparable to similar financial measures or ratios disclosed by other issuers, and (ii) historical non-GAAP financial measure, non-GAAP ratio or capital management measure, an explanation of how the financial measure or ratio provides useful information to an investor, and explains the additional purpose, if any, for which management uses the financial measure or ratio.
   2. Composition - If disclosing a (i) historical non-GAAP financial measure, non-GAAP ratio, supplementary financial measure or capital management measure that is a ratio, fraction or percentage, an explanation of the composition of the measure or ratio, (ii) non-GAAP ratio or capital management measure (if the capital management measure was calculated using one or more non-GAAP financial measures), the non-GAAP financial measures that are components of the ratio or measure, and (iii) forward-looking non-GAAP financial measure, a description of any significant differences between the measure and the equivalent historical non-GAAP financial measure. If an issuer changes the composition of a historical non-GAAP measure or a non-GAAP ratio from what was previously disclosed, the issuer must include an explanation of the reason for the change.
   3. Quantitative Reconciliation – For historical non-GAAP financial measures, total of segments measures and capital management measures that are not disclosed as a ratio, fraction or percentage, a quantitative reconciliation of the measure to the most directly comparable financial measure from the entity’s primary financial statements.
5. Specific Additional Disclosure for Non-GAAP Financial Measures – Historical non-GAAP financial measures must be identified as a non-GAAP financial measure. Additionally, non-GAAP financial measures that are forward-looking information may only be disclosed if the equivalent historical non-GAAP financial measure is also disclosed.
6. MD&A and Earnings Release Disclosure – Subject to certain exceptions, if an issuer discloses historical non-GAAP financial measures, non-GAAP ratios that are not forward-looking information, total of segments measures or capital management measures in its MD&A or an earning release, the applicable measure or ratio for a comparative period, using the same composition or means of calculation, must also be disclosed.

Incorporation by Reference

NI 52-112 provides that certain information required to be provided in connection with the disclosure of specified financial measures may be incorporated by reference into the relevant document if the reference is to the issuer’s MD&A and the issuer includes the following information in the document:

1. a statement indicating that the information is incorporated by reference;
2. a statement that specifies the location of the information in the MD&A; and
3. a statement that the MD&A is available on SEDAR at sedar.com.

The following are notable limitations on an issuer’s ability to incorporate the required disclosure by reference:

1. an issuer is not allowed to incorporate by reference the required disclosure into an MD&A, which will result in issuers having to provide all the relevant disclosure in every MD&A; and
2. an issuer is not allowed to incorporate by reference into an earnings release the required quantitative reconciliations.

Application

Subject to the exceptions discussed below, NI 52-112 applies to all reporting issuers in respect of disclosure of a specified financial measure in a document or other written communication that is intended to be, or reasonably likely to be, made available to the public. This means it applies not only to all documents filed on SEDAR, but also to information included on an issuer’s website or posted on social media. NI 52-112 also applies to issuers that are not reporting issuers in certain limited circumstances, such as certain offerings or transaction documents. NI 52-112 does not apply to investment funds, designated foreign issuers or SEC foreign issuers.

NI 52-112 provides a number of exceptions for specific disclosure, including (A) disclosure required pursuant to: (i) National Instrument 43-101 Standards of Disclosure for Mineral Projects; (ii) section 5.4 of Form 51-102F2 Annual Information Form, which prescribes certain disclosure for issuers with mineral projects; (iii) National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (other than section 5.14 of this instrument which addresses disclosure of certain oil and gas metrics); and (iv) law or the policies of an self-regulatory organization, (B) disclosure of a specified financial measure if the calculation of such measure is derived from a financial covenant in a written agreement and (C) disclosure included in a report prepared by a person or company other than the issuer.

To discuss the requirements imposed by NI 52-112 on the disclosure of specified financial measures, please contact any member of our Corporate Finance and Securities Group.

_{[1] Primary financial statements are an entity’s statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows.}