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). This is the second request for public comment on the topic and follows an earlier publication of the proposed rule in September 2018 (the Original Proposal). The Proposed Instrument reduces the scope of the Original Proposal, but the CSA believes the Proposed Instrument appropriately balances the interests of cost-effective regulation and investor protection. Guidance regarding the use of non-GAAP measures is currently addressed by CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (the Guidance). The Guidance is non-binding, while the Proposed Instrument will introduce mandatory disclosure obligations regarding disclosure of non-GAAP and other financial measures and will be legally binding on issuers.

Non-GAAP and other financial measures have long concerned the CSA. Despite the Guidance, the CSA has found that disclosure regarding non-GAAP measures and specified financial measures varies significantly between issuers. As a result, disclosure may be non-transparent and lead to investor confusion. Other financial measures that are proposed to be regulated are capital management, supplementary financial and total of segments measures. These measures raise similar concerns for the CSA as they often lack context on their own as they are derived from the financial statement notes, do not generally have standardized meanings under financial reporting frameworks and vary significantly between industries and issuers.

What non-GAAP and other financial measures are addressed by the Proposed Instrument?

The Proposed Instrument applies to non-GAAP financial measures and three categories of other financial measures: capital management measures, total of segments measures and supplementary financial measures, and non-GAAP ratios. All of these measures and ratios are referred to as specified financial measures in the Proposed Instrument.

A non-GAAP financial measure is defined in the Proposed Instrument as a financial measure 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 comparable financial measure presented in the issuer's financial statements;
  • is not presented in the financial statements of the issuer; and
  • is not a ratio.

Common non-GAAP financial measures include terms such as adjusted EBITDA or earnings, free cash flow, distributable cash, cost per ounce, adjusted funds from operations and earnings before non-recurring items.

A capital management measure is a financial measure presented by an issuer, that is presented in the notes to the financial statements but not the primary financial statements, to enable users of financial statements to evaluate the issuer's objectives, policies and processes for managing capital. A total of segments measures is a financial measure presented by an issuer that is a subtotal or total of two or more reportable segments of an 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 means a financial measure 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.

Highlights of the Proposed Instrument

The Proposed Instrument prohibits issuers from disclosing specified financial measures in issuer documents unless accompanied by required disclosure. The following are the key changes in the Proposed Instrument from the Original Proposal:

  • Application: The Proposed Instrument will apply to:
    • reporting issuers; and
    • non-reporting issuers in respect of disclosure of a specified financial measure in a document 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.

The Proposed Instrument does not apply to investment funds or designated foreign issuers as was the case in the Original Proposal. SEC foreign issuers are exempt under both proposals.

  • Narrowing and separating definitions: The Proposed Instrument narrows and clarifies the definition of a non-GAAP financial measure. The definition in the Original Proposal included non-GAAP ratios, but such ratios are now separately defined in the Proposed Instrument and subject to their own disclosure requirements.
  • The definition of segment measure has been changed to a definition of total of segments measure and captures a subtotal or total of two or more reportable segments before disclosure is required.
  • Non-GAAP ratios: Non-GAAP ratios (e.g., liquidity ratios, debt-to-equity ratios or solvency ratios) may be based on measures contained in an issuer's financial statements. A non-GAAP ratio is defined as a financial measure presented as a ratio that has a non GAAP measure as one of its components. Such ratios are subject to required disclosure.
  • Exemption for certain documents: The Proposed Instrument does not apply to specified financial measures disclosed in:
    • transcripts of oral statements that are released by the issuer. While oral statements were exempt from the Original Proposal, transcripts were subject to the requirements;
    • pro forma statements;
    • National Instrument 43-101 – Standards of Disclosure for Mineral Projects and, subject to limited exceptions, National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities;
    • material contracts or security holder documents required to be filed under the continuous disclosure regime;
    • documents that require the disclosure of the specified financial measure under law or by the issuer's SRO; and
    • certain specified items in other forms.
  • Disclosure: The Proposed Instrument reduces, simplifies and clarifies the required disclosure. Where a disclosed non-GAAP measure is historical information it must be accompanied by disclosure of the most comparable financial measure presented in the financial statements and provide an explanation of the composition of the measure. Where non-GAAP financial measures are forward looking, the Proposed Instrument reduces the disclosure required from the Original Proposal by removing the requirement for a quantitative reconciliation. Instead, issuers must describe each reconciling item between the forward looking non GAAP financial measure and the historical non-GAAP financial measure. Separate disclosure requirements will apply depending on the nature of the financial measure.

The Proposed Instrument aligns Canada's disclosure requirements more closely with other jurisdictions. As the International Accounting Standards Board is in the early stages of considering the inclusion of traditional non-GAAP financial measures in notes to the financial statements, there may be changes to IFRS. 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. The Proposed Instrument aligns more closely with the SEC rules and guidance.

Commenters on the Original Proposal indicated they will need significant time to implement the new requirements and any implementation date should be tied to the beginning of an annual reporting period. The CSA has indicated it will consider such comments in establishing an appropriate implementation date.

A copy of the Proposed Instrument and its Companion Policy can be accessed here. Comments are due May 13, 2020.

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.