The Canadian Securities Administrators (the CSA) have issued National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (the Instrument). The final rules follow two public consultations and replace the guidance contained in former CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures. The Instrument imposes legally binding disclosure obligations regarding disclosure of non-GAAP financial measures, non-GAAP ratios, and other financial measures. It addresses the CSA’s concern that disclosure regarding non-GAAP and other financial measures varied significantly between industries and issuers as they do not have standardized meanings under a financial reporting framework and may lack context when disclosed outside of the financial statements. As a result, some disclosure reviewed has been non-transparent and confusing to investors.
The Instrument has the transition provisions described below.
What non-GAAP and other financial measures are addressed in the Instrument
The Instrument addresses non-GAAP financial measures, non-GAAP ratios and three categories of other financial measures: total of segments measures, capital management measures and supplementary financial measures (collectively defined as specified financial measures in the Instrument).
A non-GAAP financial measure is defined in the Instrument as a financial measure disclosed by an issuer that:
- depicts the historical or expected future financial performance, financial position or cash flow of an entity;
- with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure presented in the issuer’s primary financial statements;
- is not presented in the financial statements of the issuer; and
- is not a ratio, fraction, percentage or similar representation.
Common non-GAAP financial measures include terms such as adjusted EBITDA or earnings, free cash flow, distributable cash, total cost per ounce, adjusted funds from operations, pro forma earnings and earnings before non-recurring items.
Primary financial statements is defined as any of the following:
- the statement of financial position;
- the statement of profit or loss and other comprehensive income;
- the statement of changes in equity; and
- the statement of cash flows.
A non-GAAP ratio means a financial measure presented by an issuer as a ratio, fraction, percentage or similar representation that has a non-GAAP financial measure as one or more of its components and is not disclosed in the financial statement of the issuer.
The Instrument also requires disclosure to accompany other financial measures (i.e. capital management, total of segments and supplementary financial measures) are disclosed outside the financial statements. The three measures are defined as follows:
- a capital management measure is a financial measure disclosed by an issuer that is not a component of a line item disclosed in the primary financial statements and is disclosed in the notes to the financial statements, but not in the primary financial statements of an issuer. The measure enables users of financial statements to evaluate the issuer’s objectives, policies and processes for managing capital;
- a total of segments measure is a financial measure disclosed by an issuer that is a subtotal or total of two or more reportable segments of an entity, is not a component of a line item disclosed in the primary financial statements of the issuer and is presented in the notes to the financial statements but not in the primary financial statements of the issuer;
- a supplementary financial measure is a financial measure disclosed by an issuer that is not (a) presented in the financial statements and (b) is, or is intended to be, disclosed periodically to depict the historical or expected future financial performance, financial position or cash flow of the issuer, that is not a non-GAAP financial measure or a non-GAAP ratio as defined in the Instrument; and
- a specified financial measure means any of the above measures or ratios.
Highlights of the Instrument
The Instrument does not contain mandated and specific requirements on how to calculate measures. Rather, it prohibits issuers from disclosing specified financial measures in issuer documents unless accompanied by the required disclosure. The purpose is to increase the quality of information an investor receives about the composition and the objectives of such measures. The key features of the Instrument include:
- Application: The Instrument applies to:
- reporting issuers in respect of their disclosure of a specified financial measure in a document that is expected to be made available to the public;
- reporting issuers in respect of their disclosure of a specified financial measure on a website and/or social media; and
- non-reporting issuers in respect of their disclosure of a specified financial measure in a document made available to the public that is (a) subject to the general prospectus requirements set out in National Instrument 41-101 General Prospectus Requirements, (b) filed with a regulator or securities regulatory authority in connection with an exempt offering made in reliance on the offering memorandum exemption (including any marketing materials filed); or (c) submitted to a recognized exchange in connection with a qualifying transaction, reverse takeover, change of business, listing application, significant acquisition or similar transaction.
- Non-application: The Instrument does not apply to investment funds, designated foreign issuers or SEC foreign issuers.
- Narrowing and clarifying definitions: The Instrument narrows and clarifies the definition of a non-GAAP financial measure. The term does not include non-GAAP ratios, which ratios are now separately defined in the Instrument and subject to their own disclosure requirements. The definition of a total of segments measure captures a subtotal or total of two or more reportable segments before disclosure is required. However, if an issuer discloses a financial measure of a reportable segment and such financial measure is not presented in the financial statements, the issuer should consider whether this financial measure meets the definition of a non-GAAP financial measure.
- Exemption for certain documents: The Instrument does not apply to specified financial measures disclosed in:
- transcripts of oral statements that are released by the issuer;
- pro forma financial statements required to be filed under securities legislation;
- National Instrument 43-101 Standards of Disclosure for Mineral Projects and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (other than oil and gas metrics);
- section 5.4 of Form 51-102 F2 – Annual Information Form, being information with respect to issuers with mineral projects;
- material contracts or security holder documents required to be filed under the continuous disclosure regime;
- reports prepared by third parties other than the issuer that is the subject of the specified financial measure, such as analyst reports, fairness options and valuation reports;
- documents that require the disclosure of the specified financial measure by law or by the issuer’s SRO;
- Form 51-102 F6 – Statement of Executive Compensation and Form 51-102 F6V – Statement of Executive Compensation – Venture Issuers, except complying with certain disclosure requirements of the Instrument on the use of non-GAAP financial measures, the total of segments measures and capital management measures;
- disclosure of a specified financial measure by an issuer that is a registered firm if the disclosure is intended to be made or is reasonably likely to be made to a client or prospective client of the firm and the measure does not relate to the registered firm’s financial performance, financial position or cash flow; and
- disclosure of a specified financial measure if the calculation is derived from a financial covenant in a written agreement.
- Disclosure: The Instrument reduces, simplifies and clarifies the required disclosure. Separate disclosure requirements will apply depending on the nature of the specified financial measure:
- non-GAAP measure: Where a disclosed non-GAAP measure is historical information, it must be adequately labelled and identified as a non-GAAP financial measure, accompanied by disclosure of the most directly comparable financial measure presented in the primary financial statements and an explanation of the composition of the measure, all presented with no more prominence than the most directly comparable financial measure. In proximity to the non-GAAP measure, the issuer must disclose that it is not a standardized measure and disclose (or incorporate by reference if permitted) an explanation of its composition, why it provides useful information, a quantitative reconciliation of the measure to its most directly comparable financial measure in the permitted format and any changes to the last disclosure. If the non-GAAP measure is in MD&A or an earnings release, if practicable, the non-GAAP measure is disclosed for a comparative period in the document.
- Where non-GAAP financial measures are forward-looking, issuers must describe any significant difference between each reconciling item, namely the forward-looking non-GAAP financial measure and the equivalent historical non-GAAP financial measure. SEC issuers need not comply if disclosure is made under US disclosure rules.
- non-GAAP ratios: Non-GAAP ratios must be approximately labelled with no more prominence than the most directly comparable financial measure and must make disclosure similar to that for non-GAAP measures. If the ratio is disclosed in MD&A or in an earnings release, the ratio for a comparative period must be included if it is practicable to do so or the non-GAAP ratio is not forward-looking.
- total of segments and capital management measures are subject to similar disclosure. Supplementary financial measures must be labelled descriptively, and distinguish the measures from totals, subtotals and items disclosed in the primary financial statements.
- Incorporation by reference: The Instrument permits incorporation by reference for certain disclosures. If information from MD&A is incorporated, a statement specifying the location of the information and that the MD&A is available on SEDAR must be included. Special restrictions apply to incorporations by reference of information involving an earnings release.
What is happening in other jurisdictions?
The Instrument aligns Canada’s disclosure requirements more closely with certain other jurisdictions. As the International Accounting Standards Board is in the process of considering the inclusion of traditional non-GAAP financial measures in notes to the financial statements, there may be changes to the IFRS in the future. The International Organization of Securities Commissions is strengthening its approach to disclosure of such measures. The SEC has already issued requirements in the area and provides ongoing guidance.
When will the Instrument come into force?
Commenters on prior proposals indicated they would need significant time to implement the new requirements and that any implementation date should be tied to the beginning of an annual reporting period. The Instrument will come into force August 25, 2021. Despite this date, the CSA has established the following implementation dates:
- for reporting issuers, the Instrument will not apply in respect of documents filed for a financial year ending before October 15, 2021; and
- for non-reporting issuers, the Instrument will not apply until after December 31, 2021.
A copy of the Instrument and its Companion Policy can be accessed here.