The Canadian Securities Administrators have recently issued a revised version of CSA Staff Notice 52-306 Non-GAAP Financial Measures.
The biggest surprise to readers might be that the revision actually results in a shorter document – it’s only about two thirds as long as its predecessor. The previous version was titled “Non-GAAP Financial Measures and Additional GAAP Measures” – it’s the omission of the latter concept that drives most of the changes and eliminations.
“Additional GAAP measures” was a term devised to cover the range of undefined measures that might be appropriately presented under IAS 1 as being relevant to understanding various aspects of the financial statements. The previous notice set out various expectations for how these measures would be disclosed – observing for example that “the name ‘income before the undernoted items’ is generally not meaningful because ‘undernoted items’ does not sufficiently describe the elements that are missing from ‘income’.” But after the recent amendments flowing from the IASB’s disclosure initiative, IAS 1 now covers this ground itself (if not exactly in the same way). The CSA has therefore retrenched, to focus the notice back on the stuff that isn’t addressed by IFRS.
The definition of a non-GAAP financial measure, somewhat tweaked from before is this: “a numerical measure of an issuer’s historical or future financial performance, financial position or cash flow that is not specified, defined or determined under the issuer’s GAAP (as that term is defined in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards) and is not presented in an issuer’s financial statements. A non-GAAP financial measure excludes amounts that are included in, or includes amounts that are excluded from, the most directly comparable measure specified, defined or determined under the issuer’s GAAP.”
Here’s some new content that clarifies some aspects of the basic scope of the notice:
- “Some issuers disclose performance measures that are calculated without using financial measures (for example, number of units or number of subscribers). Some issuers disclose performance measures that are calculated using financial information presented in the financial statements (for example, sales per square foot, where the sales figure is extracted directly from the financial statements). In both of the preceding scenarios, such performance measures are not considered to be non-GAAP financial measures. However, if a non-GAAP financial measure is used to calculate a performance measure (such as an “adjusted earnings” financial measure used to calculate an “adjusted earnings per unit” measure), then that non-GAAP financial measure should be disclosed and (the disclosure expectations in the) notice (apply) to that non-GAAP financial measure.”
Of course, for items such as sales per square foot, some of what’s in the notice would still provide a useful reference point for ensuring the information isn’t misleading and is appropriately disclosed. But other specific aspects – such as reconciling from the measure back to the financial statements – just wouldn’t be relevant.
The basic disclosure expectations for non-GAAP measures cover the same ground as before. The notice also covers the situation where a number like (say) EBITDA, acceptably included on an IFRS income statement, is presented in a press release or some other location before the financial statements are filed on SEDAR. In this case, it says: “In order to avoid any confusion about these additional subtotals, management should explain their composition. This may be accomplished by: including a copy of the statement that contains these additional subtotals (for example, the statement of profit or loss and other comprehensive income), or reconciling these additional subtotals to the most directly comparable line item specified or defined by IFRS that will be presented in financial statements (for example, profit or loss).”
Also, observing that the amendments to IAS 1 cover additional line items presented in the balance sheet and income statement but not those that might be presented in the statement of cash flows, the notice observes that the same kinds of disclosures and practices would make sense in that situation too.
None of this, of course, will change the basic long-standing debate about non-GAAP financial measures – are they a useful analytical tool which should basically be tolerated and/or facilitated, or a scourge that should be stamped out or at least actively stigmatized? As I wrote here a few weeks ago, IASB Chair Hans Hoogervorst recently appeared to take the latter view, commenting that “the world of financial statements needs to be the anchor of trust for investors, rather than the sugar-coated realm of non-GAAP measures.” But then a report on the IASB’s own website seemed to suggest investors will happily gobble up all the sugar they can get, for instance: “it would be interesting to have margins and net profit being adjusted for cyclical fluctuations and for items that are not expected to recur frequently or regularly.” I’ve always thought it’s hopeless to tell investors where they should look, if their eyes are helplessly led elsewhere. It’s not that investors don’t necessarily agree with the “anchor of trust” line – it’s that anchors just aren’t that exciting. Or (by design) that flexible…
The opinions expressed are solely those of the author