Canadian Securities Administrators formally adopt new rules for disclosure of non-GAAP and other financial measures
By Lindsay Cox and Claudia Honetschlaeger
On May 27, 2021, the Canadian Securities Administrators (CSA) announced the adoption of National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure (NI 52-112), Companion Policy 52-112 – Non-GAAP and Other Financial Measures Disclosure (the Companion Policy) and related consequential amendments (together, the New Instrument). The full text of the CSA announcement and the New Instrument are available here.
The New Instrument sets out disclosure requirements for specified financial measures, which includes non-GAAP financial measures, non-GAAP ratios, total of segments measures, capital management measures and supplementary financial measures, each of which is defined in the New Instrument. The Companion Policy provides additional information, guidance and examples to assist issuers with complying with the requirements of the New Instrument. Subject to obtaining necessary ministerial approvals in certain jurisdictions, the New Instrument will be adopted by each member of the CSA and come into force on August 25, 2021, and will replace the guidance provided in CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures.
The CSA initially published proposed rules relating to non-GAAP and other financial measures in September 2018 and received feedback from a large number of stakeholders. In February 2020, the CSA published revised draft rules, in response to such stakeholder feedback, which addressed many concerns raised by such stakeholders and simplified the previously proposed rules. The adoption of the New Instrument follows the conclusion of a second comment period that ended on June 29, 2020.
The New Instrument will apply to disclosure of specified financial measures (as described below) by reporting issuers with financial years ending on or after October 15, 2021, and to non-reporting issuers beginning January 1, 2022. This means that reporting issuers with a December 31 year-end must comply with the New Instrument for any filings on or after January 1, 2022.
Scope and application of the New Instrument
Overall, the New Instrument implements certain disclosure standards for non-GAAP financial measures, non-GAAP ratios, and other financial measures (i.e., capital management measures, supplementary financial measures, and total of segments measures, as defined in the New Instrument) which may lack standardized meanings and are not prepared in accordance with the issuer's financial reporting standards.
Unless a specific exemption applies (i.e., investment funds, SEC foreign issuers, and certain designated foreign issuers), the New Instrument applies to disclosure by all reporting issuers of a specified financial measure in any document intended to be, or reasonably likely to be, made available to the public. The Companion Policy clarifies that this is intended not only to include information filed on SEDAR, but all written communications (including in electronic form) such as news releases, websites and social media platforms. In addition, the New Instrument applies to a non-reporting issuer's disclosure of specified financial measures in a document made available to the public, if that document is subject to the prospectus requirements of Canadian securities laws (i.e. an information circular containing prospectus level disclosure of the issuer), is filed with a regulator in connection with a distribution made under the "offering memorandum" prospectus exemption, or is submitted to a recognized exchange in connection with a qualifying transaction, reverse takeover, change of business, listing application, significant acquisition or similar transaction.
The New Instrument does not apply to, among other exceptions, certain disclosure required under other securities instruments in relation to mineral projects and oil and gas activities; third-party reports that have not been prepared by the issuer or entity ; transcripts of oral statements; pro-forma financial statements required under securities legislation; disclosure of a specified financial measure if such disclosure is required by law; the calculation of the specified financial measure is derived from a financial covenant in a written agreement; certain disclosures of specified financial measures by registered firms; and certain disclosures in an issuers' statement of executive compensation under securities laws.
Specified financial measures
The New Instrument applies to five separate categories of "specified financial measures":
Non-GAAP financial measures. A "non-GAAP financial measure" is a financial measure not disclosed in an entity's financial statements, that depicts the historical or expected future financial performance, financial position or cash flows of an entity, is not a ratio, fraction, percentage or similar representation, and 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 primary financial statements of the entity. For example, "free cash flow", "adjusted EBITDA" and "adjusted funds from operations".
Non-GAAP ratios. A "non-GAAP ratio" is a financial measure that has a non-GAAP financial measure as one or more of its components (i.e. "free cash flow per share"), is in the form of a ratio, fraction, percentage or similar representation, and is not disclosed in the entity's financial statements.
Total of segments measures. A "total of segments measure" is a financial measure that subtotals or totals two or more reportable segments of an entity and is disclosed in the notes to the entity's financial statements (i.e. is not disclosed in, and is not a component of a line item disclosed in, the primary financial statements of the entity ).
Capital management measures. A "capital management measure" is a financial measure that is disclosed in the notes to the entity's financial statements (i.e. is not disclosed in, and is not a component of a line item disclosed in, the primary financial statements of the entity) and is intended to enable an individual to evaluate an entity's objectives, policies and processes for managing its capital.
Supplementary financial measures. A "supplementary financial measure" is a financial measure that is not disclosed in the financial statements of the entity, is not a non-GAAP financial measure and is not a non-GAAP ratio. Such measure is, or is intended to be, disclosed periodically by the issuer to depict the historical expected future financial performance, financial position or cash flow of an entity.
Certain disclosure requirements
The New Instrument provides that the specified financial measures above will now be subject to, in addition to other specific requirements provided in the New Instrument, the following disclosure requirements:
Labelling. Non-GAAP financial measures, non-GAAP ratios and supplementary financial measures must be labelled using a term that describes the specified financial measure. In respect of non-GAAP financial measures, the specified financial measure must be identified as such, and the label must distinguish the measure from items disclosed in the primary financial statements for which the measure relates. The label for supplementary financial measures must distinguish the measure from total, subtotals and lines items described in the primary financial statements of the issuer. A non-GAAP financial measure that is forward-looking information must be labelled using the same label used for the equivalent historical non-GAAP financial measure.
Comparable measure. If a non-GAAP financial measure is disclosed, the document containing such disclosure must also contain the most directly comparable financial measure that is disclosed in the primary financial statements of the entity to which the measure relates. If a non-GAAP ratio is disclosed, each non-GAAP financial measure that is a component of the non-GAAP ratio must also be disclosed.
Prominence. Subject to certain exceptions, specified financial measures must be presented with no more prominence in a document than that of the most directly comparable financial measure presented in the primary financial statements of the entity to which the measure relates. The Companion Policy provides guidance and examples that would cause a non-GAAP financial measure to be more prominent. For instance, one of the examples given in the Companion Policy is presenting a non-GAAP financial measure using a style of presentation (e.g., bold, underlined, italicized, or larger font) that emphasizes the non-GAAP financial measure over the most directly comparable financial measure.
Explanation, reconciliation and description of significant differences. The first time a non-GAAP financial measure appears in a document, in proximity to its first appearance in the document, the document must provide certain disclosure stating that the non-GAAP financial measure is not a standardized measure, explaining the measure's composition and why it is used, and how such measure provides useful information to an investor. For some specified financial measures, issuers must also provide an explanation of the composition of the specified financial measure and/or a quantitative reconciliation for its current and, in certain circumstances, its comparative period for the most directly comparable financial measure presented in the primary financial statements of the entity. Where a non-GAAP financial measure is disclosed as forward-looking information, a description of the significant difference between such financial measure and the equivalent historical non-GAAP financial measure must be presented.
Comparative disclosure. If a specified financial measure is disclosed in an issuer's MD&A or in an earnings release, the same financial measure must be presented for the comparative period and using the same composition, unless it is impracticable to do so.
Other important considerations
In addition to the above requirements imposed by the New Instrument, issuers should be cognizant that:
- Incorporating by reference certain of the required disclosure from an issuer's MD&A would be permitted in some circumstances. However, there are limitations on the ability to incorporate by reference including, as an example, an issuer publishing an earnings news release that includes a non-GAAP financial measure must include a reconciliation to the most directly comparable financial measure presented in the primary financial statements of the issuer and cannot satisfy this requirement by incorporation by reference.
- The New Instrument will have the force of law, which differs from existing guidance provided by the CSA on non-GAAP financial measures. This will allow the CSA and related regulators to pursue enforcement actions and impose stricter compliance on issuers if disclosure of specified financial measures are misleading or are not provided in compliance with the New Instrument.
Please contact any member of our Business Law group to discuss the New Instrument. This bulletin is general information only, not legal advice, and is intended to be a summary only of the information contained in the New Instrument.