Photo of Joe BrennanBy Joe BrennanSeptember 07 2018
Business Law

CSA Proposes New Rule on Non-GAAP and Other Financial Measures Disclosure

The Canadian Securities Administrators (the “CSA”) have published for comment Proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (the “Proposed Instrument”). The Proposed Instrument sets out prescribed disclosure requirements for non-GAAP financial measures and other financial measures (i.e. segment measures, capital management measures, and supplementary financial measures). There is no indication of an intended effective date but the proposed instrument is substantively similar to, although quite a bit more exhaustive than, their current guidance on the matter contained CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (“SN 52-306”). Consequently, I speculate that it may become effective by the time issuers are required to file their annual disclosures for the year ended December 31, 2018. However, even if it takes longer to be effective as a National Instrument (i.e. law), in my opinion it provides significant guidance on the CSA’s expectations regarding required disclosure on these financial measures in order for them to not be misleading and therefore not contrary to existing securities laws..

Background

The Proposed Materials are intended to replace SN 52-306. SN 52-306 is a staff notice (i.e. not law but rather CSA opinion that gets treated as law) intended to provide guidance to issuers on the CSA’s expectations regarding disclosure of non-GAAP financial measures in order to ensure that such measures do not mislead investors. Despite this guidance, the CSA has found that disclosure practices surrounding non-GAAP financial measures continue to vary and, in some circumstances, potentially mislead investors. Consequently, they have determined that it would be appropriate to give expanded guidance in the Proposed Instrument and its accompanying companion policy (the “Proposed Companion Policy”) but adopt the requirements in a National Instrument to give them the force of law that will provide CSA staff with a stronger tool to take appropriate regulatory action as needed. 

Summary of the Proposed Instrument

More detailed, but not exhaustive, information on the proposed requirements in the Proposed Instrument are included later in this article but a summary of the Proposed Instrument is as follows: 

  • It applies to all issuers (including investment funds), except for SEC foreign issuers, and all documents (e.g., Management’s Discussion and Analysis, press releases, the Annual Information Form, prospectuses etc.) including other written communications in websites or social media.
  • It pertains to the disclosure of financial measures (including ratios) that are:
    • non-GAAP financial measures;
    • segment measures;
    • capital management measures; and
    • supplementary financial measures.
  • It includes an updated definition of a non-GAAP financial measure which builds upon and incorporates the disclosure guidance in SN 52-306.
  • It introduces the concept of segment measures, capital management measures, and supplementary financial measures, together with associated disclosure requirements. 

Summary of the Proposed Companion Policy

The Proposed Companion Policy contains useful examples and guidance in the following key areas:

  • A definition of a non-GAAP financial measure, including the terms “disaggregation” and “equivalent financial measure”.
  • A definition of a supplementary financial measure, including the “periodic basis” attribute.
  • Guidance on requirements for a non-GAAP financial measure on labelling, prominence, consistency, location, identification, and usefulness.
  • Guidance on reconciliation requirements for a non-GAAP financial measure, including guidance on the determination of the most directly comparable measure.
  • Guidance on prominence requirements for a non-GAAP financial measure that is a ratio.
  • Guidance on reconciliation requirements for a non-GAAP financial measure that is a financial outlook.
  • Guidance on disclosure requirements for a segment measure and a capital management measure.

The expanded detail set out in the Proposed Companion Policy is intended to clarify the four defined types of financial measure subject to the Proposed Instrument and to explain how the CSA expects the disclosure requirements in the Proposed Instrument to be satisfied. I suggest it also provides implicit guidance on how the CSA expects the disclosure expectations in the current SN 52-306 to be satisfied.

Application 

The Proposed Instrument applies to any:

  • non-GAAP financial measure,
  • segment measure,
  • capital management measure or
  • supplementary financial measure

that an issuer discloses in a document and that is intended to be, or reasonably likely to be, made available to the public in Canada, whether or not filed under securities legislation, unless the issuer discloses a specific financial measure in accordance with a requirement of securities legislation or the laws of a jurisdiction of Canada (i.e. such as earnings coverage ratio required to be disclosed in a prospectus offering for a debt instrument).

Non-GAAP Financial Measures

The Proposed Instrument defines a “non-GAAP financial measure” as:

  • 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
  • a financial outlook for which no equivalent financial measure is presented in the primary financial statements.

The Proposed Instrument provides that an issuer must not disclose a non-GAAP financial measure in a document unless all of the following apply:

  • the non-GAAP financial measure is labelled appropriately given its composition and in a way that distinguishes it from totals, subtotals and line items presented in the primary financial statements;
  • the non-GAAP financial measure is presented with no more prominence in the document than the most directly comparable financial measure presented in the primary financial statements;
  • the document presents the same non-GAAP financial measure for the comparative period; and
  • the first time the non-GAAP financial measure appears in the document, the document
    • identifies the non-GAAP financial measure as such,
    • states that the non-GAAP financial measure does not have a standardized meaning under the financial reporting framework used to prepare the financial statements and may not be comparable to similar financial measures presented by other issuers,
    • explains how the non-GAAP financial measure provides useful information to a reasonable person and explains the additional purposes, if any, for which management uses the non-GAAP financial measure,
    • provides a quantitative reconciliation, to the most directly comparable financial measure presented in the primary financial statements, which reconciliation:
      • is disaggregated in such a way that it provides a reasonable person an understanding of the reconciling items,
      • does not describe a reconciling item as non-recurring, infrequent or unusual when a similar loss or gain is reasonably likely to occur within the next two years or has occurred during the prior two years, and
      • is explained in such a way that it provides a reasonable person an understanding of each reconciling item, and
    • explains the reason for a change, if any, in the label, composition or calculation of the non-GAAP financial measure.

Non-GAAP Financial Measures That Are Ratios

The Proposed Instrument provides that the non-GAAP financial measure does not need to be presented with more prominence in the document than the most directly comparable financial measure presented in the primary financial statements if:

  • the non-GAAP financial measure is a ratio, and
  • the ratio is presented with no more prominence in the document than similar financial measures presented in the primary financial statements.

The Proposed Instrument further provides that you do not need to identify a non-GAAP financial measure as such if: 

  • the non-GAAP financial measure is a ratio for which all financial components are disclosed or presented in the financial statements, or
  • the non-GAAP financial measure is a ratio for which all financial components are disaggregations, calculated in accordance with the accounting policies used to prepare the financial statements, of line items presented in the primary financial statements.

The Proposed Instrument further provides that you do not need to provide a quantitative reconciliation, to the most directly comparable financial measure presented in the primary financial statements if:

  • the non-GAAP financial measure is a ratio, and
  • the first time the ratio appears in the document, the document describes how the ratio is calculated and:
    • identifies each non-GAAP financial measure used to calculate the ratio and otherwise complies with the disclosure requirements for each non-GAAP financial measure identified, or
    • provides a quantitative reconciliation to the ratio as calculated using the most directly comparable financial measures presented in the primary financial statements.

Segment Measures

The Proposed Instrument defines a “segment measure” as 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 provides that if an issuer discloses in a document other than the financial statements a total of segment measures that is not a total, subtotal or line item presented in the primary financial statements, the document must:

  • the first time the total of segment measures appears in the document, provide a quantitative reconciliation of the total of segment measures to the most directly comparable financial measure presented in the primary financial statements,
  • present the total of segment measures with no more prominence than the most directly comparable financial measure referred to in paragraph (a), and
  • include the presentation of the total of segment measures for the comparative period, if the total of segment measures has been previously disclosed.

Capital Management Measures

The Proposed Instrument defines a “capital management measure” as 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.

The Proposed Instrument applies to a capital management measure that:  

  • is disclosed in a document other than the financial statements, and
  • is not: 
    • a total, subtotal or line item presented in the primary financial statements, or
    • 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.

The Proposed Instrument provides that if an issuer discloses a capital management measure referred to above in a document, the document must:

  • present the capital management measure with no more prominence than:
    • the most directly comparable financial measure presented in the primary financial statements, or
    • similar financial measures presented in the primary financial statements, if the capital management measure is a ratio,
  • the first time the capital management measure appears in the document:
    • describe how the capital management measure is calculated,
    • state that the accounting policies used to prepare the financial statements do not specify how the capital management measure is calculated,
    • explain how the capital management measure provides useful information to a reasonable person and explains the additional purposes, if any, for which management uses the capital management measure, and
    • provide, except where the capital management measure is a ratio, a quantitative reconciliation of the capital management measure to the most directly comparable financial measure presented in the primary financial statements, and
  • include the presentation of the capital management measure for the comparative period, if the capital management measure has been previously disclosed.

Supplementary Financial Measures

The Proposed Instrument defines a “supplementary financial measure” as a financial measure that is not disclosed or presented in the financial statements and that:

  • 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
  • is, or is intended to be, disclosed on a periodic basis to present an aspect of financial performance, financial position or cash flow.

The Proposed Instrument provides that if an issuer discloses a supplementary financial measure in a document, the document must: 

  • the first time the supplementary financial measure appears in the document,
    • describe how the supplementary financial measure is calculated, and
    • explain the reason for a change, if any, in the label, composition or calculation of the supplementary financial measure if it has been previously disclosed, and
  • include the presentation of the supplementary financial measure for the comparative period, if the supplementary financial measure has been previously disclosed.

Prominence of a Non-GAAP Financial Measure

The Proposed Companion Policy states that “determining whether a non-GAAP financial measure is presented with no more prominence is a matter of judgment, taking into account the overall disclosure and the facts and circumstances in which the disclosure is made” and the CSA “expects that presentation of a non-GAAP financial measure would not in any way confuse or obscure the presentation of financial measures presented in accordance with the financial reporting framework used in the preparation of the issuer’s financial statements.”

The Proposed Companion Policy states that the following are examples that the CSA views as causing a non-GAAP financial measure to be more prominent than the most directly comparable measure presented or disclosed in the financial statements:

  • Presenting a full statement of profit or loss and other comprehensive income of non-GAAP financial measures without presenting it in the form of a reconciliation of each non-GAAP financial measure to the most directly comparable measure, sometimes referred to as a single column approach.
  • Omitting the most directly comparable measure from a press release headline or caption that includes a non-GAAP financial measure.
  • Presenting a non-GAAP financial measure using a style of presentation (for example, bold or larger font) that emphasizes the non-GAAP financial measure over the most directly comparable measure.
  • Describing a non-GAAP financial measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the most directly comparable measure.
  • Multiple non-GAAP financial measures being used for the same purpose thereby obscuring disclosure of the most directly comparable measure.
  • Providing tabular or graphical disclosure of non-GAAP financial measures without presenting an equally prominent tabular or graphical disclosure of the most directly comparable measures or without including the most directly comparable measures in the same table or graph.
  • Providing a discussion and analysis of a non-GAAP financial measure in a more prominent location than a similar discussion and analysis of the most directly comparable measure. For greater certainty, the CSA takes the view that a location is not more prominent if it allows an investor who reads the document, or other material containing the non-GAAP financial measure, to be able to view the discussion and analysis of both the non-GAAP financial measure and the most directly comparable measure contemporaneously. For example, within the previous, same or next page of the document.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Nerland Lindsey LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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