Canadian securities regulators publish final rule for non-GAAP and other financial measures, announces a recent news release

Here’s some of what it says:

• The Canadian Securities Administrators (CSA) today published disclosure requirements for issuers that disclose non-GAAP (generally accepted accounting principles) and other financial measures on a voluntary basis. The rule improves the quality of information provided to investors for various financial measures that commonly lack standardized meaning.
• “This new rule will provide investors with the transparency they have asked for, consistent terminology and a standardized framework,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. “We believe we struck the right balance in the final rule by adjusting the scope and simplifying the disclosure requirements in response to stakeholder feedback.”
• National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure will:

• …Require specified disclosure for certain financial measures presented outside the financial statements, such as non-GAAP financial measures and supplementary financial measures, (as defined in the final rule); and
• Apply to disclosures for a financial year ending on or after October 15, 2021 (for reporting issuers) and for certain offering documents or transactions filed after December 31, 2021 (for non-reporting issuers). 

The big picture is that by being embodied in a regulatory instrument rather than (as they’ve been to this point) in staff guidance and commentary, the requirements are likely to meet with a higher standard of compliance, and to provide a better basis for enforcement action against wrongdoers. So, for example, if an issuer fails to adequately provide “an explanation of the composition of the non-GAAP financial measure” or “an explanation of how the non-GAAP financial measure provides useful information to an investor and explains the additional purposes, if any, for which management uses the non-GAAP financial measure,” it might in theory find itself open to the full range of penalties and sanctions available under securities law. The instrument will take some consideration though, for example in its distinctions between “non-GAAP financial measures,” “specified financial measures,” and “supplementary financial measures,” and the different requirements for each. For instance:

• An issuer that operates in the retail industry may disclose financial results for “same-store sales” each reporting period. When same-store sales, a component of overall sales, is calculated in accordance with the accounting policies used to prepare the sales line item presented in the primary financial statements, it would not meet the definition of a non-GAAP financial measure. However, since in this example “same-store sales” is used by the issuer to depict financial performance by reporting sales performance from period to period, it would meet the definition of a supplementary financial measure.
• Conversely, when the measure is not calculated in accordance with the issuer’s accounting policies, such measure would meet the definition of a non-GAAP financial measure. For example, if the sales figure in “same-store sales” is sales presented on a constant-dollar basis, this constant-dollar sales figure meets the definition of a non-GAAP financial measure since it excludes amounts (i.e., the effect of foreign exchange differences) that are included in the most directly comparable financial measure presented in the primary financial statements (i.e., sales)….

The instrument acknowledges one of the main recurring points of debate:

• We acknowledge that some stakeholders continue to prefer that we limit, in specific circumstances, the disclosure of certain financial measures, and develop industry-specific requirements for certain financial measures. However, due to the numerous types of ever-evolving financial measures disclosed across a range of industries, we continue to believe that disclosure requirements are best suited to respond to investor needs for quality information without being overly prescriptive. These requirements would allow investors to better analyze different financial measures within an industry or among different industries.

As I’ve written here in the past, I’ve often considered the focus on this issue to be a bit overblown, on the basis that much of the stated harm caused by these measures could only come to pass as a result of carelessness and inattention by those who act on them. Even if I’m taking that too lightly, it seems given the slow speed of the regulatory machine (it’s getting on for three years since a version of the rule was initially issued for comment), flagrantly misleading disclosures of this type were much more common, say, five or ten years ago than they are now. But some practitioners never run out of reasons for further foot-dragging. The summary of comments attached to the new instrument reports that fifteen commenters would in one way or another have waited for the IASB to move further along with its exposure draft on general presentation and disclosures, which covers some of the same ground. The CSA noted that the IASB project “is still underway and is not anticipated to be finalized in the current year. We also anticipate that an IASB standard is unlikely to be effective until approximately 18-24 months after being published in its finalized form. Thus, we see no reason to delay this project for multiple years…” For additional multiple years, that would be…

The opinions expressed are solely those of the author