Written by John E. Piasta, Bradley D. Markel, Kristopher R. Hanc and Alexander Baker
On September 6, 2018, the Canadian Securities Administrators (CSA) published a Notice and Request for Comment (the "Notice") regarding Proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (the "Proposed Instrument") and Proposed Companion Policy 52-112 Non-GAAP and Other Financial Measures Disclosure (the "Proposed Companion Policy" and, together with the Proposed Instrument, the "Proposed Materials"). The Proposed Materials set out disclosure requirements for non-GAAP financial measures and other financial measures (i.e., segment measures, capital management measures and supplementary financial measures, all defined in the Proposed Instrument) and provide guidance on how the CSA will interpret and apply the Proposed Instrument.
Current Regime for Disclosing Non-GAAP Financial Measures
The CSA currently provides guidance regarding the disclosure of non-GAAP financial measures in CSA Staff Notice 52-306. The guidance in Staff Notice 52-306 is intended to help ensure that information disclosed regarding non-GAAP financial measures does not mislead investors. In order to ensure that a non-GAAP financial measure does not mislead investors, Staff Notice 52-306 indicates that an issuer should present, with equal or greater prominence to that of a non-GAAP financial measure, the most directly comparable measure specified or defined under the issuer's GAAP (a "GAAP Measure") and a clear quantitative reconciliation from the non-GAAP financial measure to the most directly comparable GAAP Measure.
Need for Authoritative Legislative Requirements for Disclosing Non-GAAP Financial Measures and Other Financial Measures
Despite various efforts by the CSA to update and provide guidance on Staff Notice 52-306 as issues arise, the CSA is concerned that disclosure practices for non-GAAP financial measures continue to vary among issuers and industries. Furthermore, the CSA has also found that other financial measures that do not meet the definition of "non-GAAP financial measure" under Staff Notice 52-306 are problematic when they are not accompanied by appropriate disclosure. For example, financial measures that are disclosed in the notes to the financial statements may lack context when displayed as such, potentially creating interpretive issues and misleading investors. Due to the numerous types of ever-evolving financial measures disclosed across a range of industries, the CSA believe that implementing comprehensive disclosure requirements are best suited to respond to investors' need for quality information. Furthermore, by enacting a National Instrument, these rules will have the force of law, unlike the existing guidance, thereby providing regulators with stronger enforcement tools where the disclosure requirements are not met.
How the Proposed Instrument Changes the Current Regime
The Proposed Materials are intended to replace Staff Notice 52-306 and complement other CSA financial disclosure requirements. While disclosure requirements in the Proposed Instrument are designed to substantially align with the existing guidance in Staff Notice 52-306, the Proposed Instrument does introduce some important changes. In particular, the Proposed Instrument:
- explicitly applies to all issuers (including investment funds), except for SEC foreign issuers, and all documents (e.g., MD&A, press releases, AIF, prospectuses, etc.) including other written communications in websites or social media;
- introduces the concepts of segment measures, capital management measures and supplementary financial measures, together with associated disclosure requirements;
- includes an updated definition of a "non-GAAP financial measure" which builds upon and incorporates the disclosure guidance of Staff Notice 52-306; and
- addresses the disclosure of specific financial measures (including ratios) that are non-GAAP financial measures, segment measures, capital management measures and supplementary financial measures.
For reference, the definitions of the four types of disclosure categories in the Proposed Instrument are provided at the end of this summary.
The Proposed Instrument does not limit an issuer's ability to disclose non-GAAP financial measures or other financial measures provided the disclosure is not misleading. If an issuer chooses to disclose these financial measures, the Proposed Instrument contains clear and formalized disclosure requirements that are intended to reduce the uncertainty regarding disclosure obligations. Under the Proposed Instrument, as under Staff Notice 52-306, when disclosing non-GAAP financial measures an issuer must still present, with equal or greater prominence to that of a non-GAAP financial measure, the most directly comparable GAAP Measure and a clear quantitative reconciliation from the non-GAAP financial measure to the most directly comparable GAAP Measure.
Overall, the goal of the guidance provided in the Proposed Companion Policy is to assist issuers in applying the provisions of the Proposed Instrument so as to help ensure non-GAAP financial measures and other financial measures do not mislead investors. For example, the Proposed Companion Policy contains examples and guidance in the following key areas:
- definition of a non-GAAP financial measure, including the terms "disaggregation" and "equivalent financial measure";
- definition of a supplementary financial measure, including the "periodic basis" attribute;
- requirements for a non-GAAP financial measure on labelling, prominence, consistency, location, identification, and usefulness;
- reconciliation requirements for a non-GAAP financial measure, including guidance on the determination of the most directly comparable measure;
- prominence requirement for a non-GAAP financial measure that is a ratio;
- reconciliation requirement for a non-GAAP financial measure that is a financial outlook;
- disclosure requirements for a segment measure and a capital management measure;
- limitations on disclosing non-GAAP financial measures and other financial measures on social media if character limits would preclude the disclosure of all required information under the Proposed Instrument; and
- application of the Proposed Instrument to publications which an issuer provides links to using social media.
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.
Request for Comment Regarding the Proposed Materials
The Notice seeks general comments on the Proposed Materials and is particularly concerned with whether:
- the proposed definition of a non-GAAP financial measure captures (or fails to capture) specific financial measures that should not (or should) be captured;
- there are any additional disclosures that the Proposed Instrument omits but would enhance the overall quality of disclosure or benefit investors;
- the content of the Proposed Policy is unclear or inconsistent with the Proposed Instrument; and
- the inclusion of all of the proposed documents to the application of the Proposed Instrument is appropriate.
We noted a potential source of ambiguity in the Proposed Instrument regarding what constitutes a "segment" as such term is used within the definition of the term "segment measure". The Proposed Companion Policy refers to "reportable segments" so it appears that is the intent, but if so, the Proposed Instrument should define that term. Otherwise, whether a "segment" is a business unit, a profit centre, a cost centre, a division, or all or none of these, appears to remain unclear as the Proposed Companion Policy provides no specific definition of such term.
We encourage anyone with questions or comments regarding the Notice or disclosure requirements for non-GAAP financial measures or other financial measures to contact any member of Bennett Jones Capital Markets team.
Definitions of Disclosure Categories
"Capital management measures" means 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.
"Non-GAAP financial measures" means:
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.
"Segment measures" means a financial measure of segment profit or loss, revenue, expenses, assets, or liabilities that is disclosed in the notes to the financial statements.
"Supplementary financial measures" means 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.