CSA Adopts National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure

On May 27, 2021, the Canadian Securities Administrators (the “CSA”) published National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (“NI 52-112”) and its companion policy (the “Companion Policy”). NI 52-112 and the Companion Policy (together, the “Rules”) will come into force on August 25, 2021 and will apply to reporting issuers for documents filed for a financial year ending on or after October 15, 2021. The Rules also apply to non-reporting issuers for documents filed after December 31, 2021 in connection with a distribution made in reliance on the offering memorandum exemption under National Instrument 45-106 Prospectus Exemptions, such as an offering memorandum and related marketing materials. The adoption of the Rules follows the conclusion of a second comment period which ended on June 29, 2020.

NI 52-112 sets out disclosure requirements for non-GAAP financial measures, non-GAAP ratios, and other financial measures (i.e. capital management measures, total of segments measures and supplementary financial measures) and replaces the guidance in CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures (“SN 52-306”).

Definition of non-GAAP Financial Measures

A “non-GAAP financial measure” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) depicts the historical or expected future financial performance, financial position or cash flow of an entity, (b) 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 disclosed in the primary financial statements of the entity, (c) is not disclosed in the financial statements of the entity, and (d) is not a ratio, fraction, percentage or similar representation.

The Companion Policy makes clear that the following are not considered “non-GAAP financial measures” for the purposes of NI 52-112:

  • Amounts that do not depict historical or future “financial performance”, “financial position” or “cash flow”, which relate to elements of the financial statements, such as share price, market capitalization, or credit rating.
     
  • Financial information that does not have the effect of providing a financial measure that is different from a financial measure presented in the financial statements, such as the addition or subtraction of an identical line item, subtotal or total originating from multiple periods of primary financial statements.
     
  • Non-financial information, such as number of units, number of subscribers, volumetric information and number of employees.

Integration of SN 52-306 guidance in the Rules

SN 52-306 aimed to ensure that non-GAAP financial measures, which, according to securities regulators, can lack transparency as to their calculation and vary significantly by issuer and industry, do not mislead investors. The Rules substantially incorporate the disclosure guidance in SN 52-306.  However, SN 52-306 did not distinguish between and provide separate requirements for non-GAAP financial measures that are historical information and those that are forward-looking information. 

Requirements for non-GAAP financial measures that are historical information

NI 52-112 requires that an issuer must not disclose a non-GAAP financial measure that is historical information in a document unless, among other things:

  • the non-GAAP financial measure is appropriately labelled (for example, it should not be confusingly similar to the label used under the financial reporting framework used to prepare the financial statements, cause confusion based on the measure’s composition or be overly optimistic),
  • the document also presents the most directly comparable financial measure used in the issuer’s financial statements,
  • the non-GAAP financial measure is presented with no more prominence than the most directly comparable financial measure;
  • the non-GAAP financial measure is presented for a comparative period, unless impracticable; and
  • in proximity to the first instance of the non-GAAP financial measure, the document:
    • explains that it is not a standardized financial measure and might not be comparable to similar financial measures disclosed by other issuers;
    • discloses, directly or by incorporating by reference (where permitted), an explanation of the composition of the non-GAAP financial measure and how it provides useful information to an investor and explains any additional purposes for which management uses the non-GAAP financial measure;
    • discloses, directly or by incorporating by reference (where permitted), a quantitative reconciliation of the non-GAAP financial measure for its current and comparative period, to the most directly comparable financial measure in prescribed form; and
    • if the label or composition of the non-GAAP financial measure has changed from what was previously disclosed, discloses, directly or by incorporating by reference (where permitted), an explanation of the reason for the change.

The Companion Policy provides that, to satisfy these requirements, an issuer may identify the non-GAAP financial measure as such when it first appears in the document and then reference a separate section within the same document that contains the disclosure required by the second to sixth bullets above.

Requirements for non-GAAP financial measures that are forward-looking information

The disclosure obligations under NI 52-112 in respect of non-GAAP financial measures that are forward-looking include that:

  • the document discloses an equivalent historical non-GAAP financial measure;
  • the non-GAAP financial measure that is forward-looking information is

labelled using the same label used for the equivalent historical non-GAAP financial measure;

  • the non-GAAP financial measure that is forward-looking information is

presented with no more prominence in the document than that of the equivalent historical non-GAAP financial measure;

  • in proximity to the first instance of the non-GAAP financial measure that is forward-looking information, the document provide, directly or by incorporation by reference (where permitted), a description of any significant difference between the non-GAAP financial measure that is forward-looking information and the equivalent historical non-GAAP financial measure.

Requirements for Non-GAAP Ratios and Other Financial Measures

The CSA noted that other financial measures that do not meet the definition of a non-GAAP financial measure in NI 52-112 present similar issues if not accompanied by appropriate disclosure. SN 52-306 did not distinguish between requirements in respect of non-GAAP financial measures and other financial measures, resulting in issuers applying the non-GAAP financial measure rules to their other financial measures. One of the objectives of NI 52-112 is to tailor requirements to those other financial measures, resulting in reduced disclosure obligations. Those measures include non-GAAP ratios, total of segments measures, capital management measures and supplementary financial measures.

A “non-GAAP ratio” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) is in the form of a ratio, fraction, percentage or similar representation, (b) has a non-GAAP financial measure as one or more of its components, and (c) is not disclosed in the financial statements of the entity.

A “total of segments measure” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) is a subtotal or total of 2 or more reportable segments of an entity, (b) is not a component of a line item disclosed in the primary financial statements of the entity, (c) is disclosed in the notes to the financial statements of the entity, and (d) is not disclosed in the primary financial statements of the entity.

A “capital management measure” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) is intended to enable an individual to evaluate an entity’s objectives, policies and processes for managing the entity’s capital, (b) is not a component of a line item disclosed in the primary financial statements of the entity, (c) is disclosed in the notes to the financial statements of the entity, and (d) is not disclosed in the primary financial statements of the entity.

A “supplementary financial measure” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of an entity, (b) is not disclosed in the financial statements of the entity, (c) is not a non-GAAP financial measure, and (d) is not a non-GAAP ratio. For example, same-store sales disclosed on a periodic basis (or intended to be disclosed on a periodic basis) would represent a supplementary financial measure. A financial ratio that is not a non-GAAP ratio could also meet the definition of supplementary financial measure if disclosed on a periodic basis to depict historical or future financial performance, financial position or cash flow.

Incorporation by Reference

NI 52-112 allows an issuer, in a document that contains a specified financial measure, to incorporate by reference certain disclosure required by NI 52-112 that is contained in the issuer’s MD&A. However, the issuer may not incorporate by reference certain required disclosure (such as quantitative reconciliation of a non-GAAP financial measure or total of segments, description of significant difference between a non-GAAP financial measure that is forward-looking information and the equivalent historical non-GAAP financial measure) if the document that contains the specified financial measure is in an earnings release filed by the issuer.

Scope of Application

The Companion Policy provides guidance on the application of NI 52-112 including:

  • If the financial measure is only identified by label without a corresponding numerical amount or measure, a specified financial measure has not been disclosed and, thus, the disclosure requirements in NI 52-112 do not apply. This may be the case when a non-GAAP financial measure is used in connection with the description of executive compensation policies, for example.
  • NI 52-112 does not apply to pro-forma financial statements included in a filing required under securities legislation, such as pro-forma financial statements required to be included in a business acquisition.
  • Financial measures that are required to be disclosed by a law or a self-regulatory organization of which the issuer is a member and which composition is determined in compliance with the law or the requirement of the SRO are not subject to NI 52-112. For example, disclosure of earnings coverage ratios prescribed by item 9 of Form 41-101F1 Information Required in a Prospectus are not subject to NI 52-112.

 

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