Business Law Blog

The Canadian Securities Administrators (the “CSA”) have released a CSA notice and request for comment on proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (the “Proposed Instrument”). The Proposed Instrument prescribes disclosure requirements for non-GAAP and other financial measures and, if adopted, will replace the latest revised version of CSA Staff Notice 52-306 Non-GAAP Financial Measures (the “Current Staff Notice”). The CSA is accepting comments on the Proposed Instrument until December 5, 2018.

The Current Staff Notice was initially issued in 2003 and was intended to provide guidance and best practices for the disclosure of non-GAAP financial measures. Despite several updates and the publication of other guidance, the CSA continues to find significant variance in the disclosure practices surrounding non-GAAP financial measures. Additionally, financial measures have continued to evolve, resulting in some financial measures falling outside the scope of the current definition of “non-GAAP financial measure” despite raising the same concerns for regulators. The Proposed Instrument is intended to provide issuers with clear and formalized mandatory requirements, as opposed to guidance, regarding the disclosure of non-GAAP and other financial measures.

The Proposed Instrument will apply to all issuers (except SEC foreign issuers) and will regulate the disclosure of non-GAAP financial measures, the definition of which has been updated from the Current Staff Notice, and three additional types of financial measure not captured by that definition, described below, in all publicly available documents (whether or not filed under securities legislation), with some limited exceptions.[1] The Proposed Instrument prescribes different disclosure requirements for each type of financial measure.

• Non-GAAP Financial Measures: A non-GAAP financial measure is (a) a financial measure of financial performance, financial position or cash flow that is not disclosed or presented in the financial statements and that is not a disaggregation, calculated in accordance with the accounting policies used to prepare the financial statements, of a line item presented in the primary financial statements, or (b) a financial outlook for which no equivalent financial measure is presented in the primary financial statements. This definition is more targeted than the definition in the Current Staff Notice and reflects the guidance that evolved through its various revisions. Commonly disclosed non-GAAP financial measures vary across industries and are generally intended to assist investors in understanding an issuer’s performance. They include “adjusted earnings”, “adjusted EBITDA”, “free cash flow”, “cash operating costs” and “all-in sustaining costs”.
• Segment Measures: A segment measure is a financial measure of segment profit or loss, revenue, expenses, assets, or liabilities that is disclosed in the notes to the financial statements. The Proposed Instrument would apply where a total of segment measures that is not presented in the issuer’s primary financial statements, which might include adjusted EBITDA for the reportable segments of an issuer’s business, appears in a document other than the financial statements.
• Capital Management Measures: A capital management measure is a financial measure that is disclosed in the notes to the financial statements to enable users of financial statements to evaluate the issuer’s objectives, policies and processes for managing capital. A capital management measure might include a debt-to-equity ratio that is calculated in accordance with the provisions of a credit agreement.
• Supplementary Financial Measures: A supplementary financial measure is a financial measure that is not disclosed or presented in the financial statements and that (a) is a disaggregation, calculated in accordance with the accounting policies used to prepare the financial statements, of a line item presented in the primary financial statements, and (b) is, or is intended to be, disclosed on a periodic basis to present an aspect of financial performance, financial position or cash flow. A supplementary financial measure might include an issuer’s EBITDA, so long as it does not include any non-GAAP adjustments.

The disclosure requirements for non-GAAP financial measures are largely consistent with those in the Current Staff Notice, including with respect to (a) labeling the measure so as to distinguish it from GAAP measures, (b) ensuring that it is no more prominent than the disclosure of the comparable GAAP measure, and (c) providing a quantitative reconciliation, as well as a statement explaining why the measure is useful and that it does not have a standardized meaning and may not be comparable to the disclosure of other issuers. However, the draft companion policy to the Proposed Instrument provides significantly more commentary and guidance than the Current Staff Notice on how these disclosure requirements are to be interpreted and implemented. The disclosure requirements for the other types of financial measure are variations on the same theme, with a focus on proper labeling, prominence and quantitative reconciliation, with the exception of supplementary financial measures, which as disaggregations of GAAP measures do not need to be explicitly reconciled.

The publication of the Proposed Instrument reflects a heightened focus of securities regulators across Canada on current disclosure practices surrounding non-GAAP financial measures and follows recent efforts taken by the SEC to strengthen its ability to regulate the disclosure of these measures. While the Current Staff Notice provides non-binding guidance, the Proposed Instrument, if adopted, will establish prescribed, mandatory disclosure requirements.

To discuss the implications of the Proposed Instrument or current best practices regarding disclosure of non-GAAP financial measures, please contact any member of our Corporate Finance and Securities Group.

[1] The Proposed Instrument includes an exception for material contracts, constating documents, securityholder or voting trust agreements, securityholders’ rights plan and any contract of an issuer, a subsidiary of the issuer or a mutual fund that creates or can reasonably be regarded as materially affecting the rights or obligations of its securityholders that are disclosed by an issuer.