Background

On May 27, 2021, the Canadian Securities Administrators (CSA) published National Instrument 52-112 - Non-GAAP and Other Financial Measures Disclosure (NI 52-112) and related companion policy, which raises the standard of regulation for disclosing non-GAAP and other financial measures on a voluntary basis.

NI 52-112 will replace a 2016 CSA Staff Notice, which sets out the current CSA guidelines and expectations for non-GAAP financial measure disclosure, and will be binding on reporting issuers when it comes into force on August 25, 2021, subject to ministerial approvals. NI 52-112 updates the definition of non-GAAP financial measures and builds on the current disclosure guidance set out in the 2016 CSA Staff Notice. It also adds disclosure requirements in relation to non-GAAP ratios and other financial measures, including capital management measures, supplementary financial measures and “total of segments” measures.

Issuers often disclose non-GAAP financial measures and other financial measures in order to provide investors with additional insight from management’s perspective into the issuer’s financial performance, financial position or ability to generate cash flow. However, the CSA has observed variability among disclosure practices in this area, which can be a source of confusion for investors when comparing financial performance between issuers. The aim of NI 52-112 is to address the need for transparency in an issuer’s disclosure of these measures, by creating a standardized framework and consistent terminology.

Application

NI 52-112 applies to all reporting issuers (except investment funds, SEC foreign issuers and designated foreign issuers) in relation to any document that is intended to be, or reasonably likely to be, made available to the public. It also applies to non-reporting issuers in connection with certain offering and transaction documents, such as offering memorandums. Reporting issuers will need to begin complying with the new requirements as it relates to disclosures for a financial year ending on or after October 15, 2021, while non-reporting issuers will need comply for certain filings made after December 31, 2021.

Requirements

 i. Non-GAAP financial measures – historical or forward-looking

Non-GAAP financial measures depict historical or expected future financial performance, financial position or cash flow of the reporting entity. A non-GAAP financial measure is one that is not disclosed in the issuer’s financial statements. It is a measure that is not a ratio, fraction, percentage or similar representation, and either includes an amount that is excluded in the most directly comparable financial measure in the primary financial statement, or excludes an amount that is included in that statement.

Some of the most frequently cited non-GAAP measures include “free cash flow”, “adjusted earnings” and “distributable cash”. They lack standard meanings, and could have different compositions, depending on the issuer and the industry.

Under NI 52-112, an issuer must not disclose a non-GAAP financial measure that is historical information in a document unless the following requirements are met:

• the measure is identified as a non-GAAP financial measure in the disclosure document
• the measure is labelled using a term that describes the measure and distinguishes the measure from totals, subtotals and line items disclosed in the issuer’s financial statements
• the document discloses the most directly comparable financial measure that is disclosed in the issuer’s financial statements, without giving more prominence to the non-GAAP financial measure
• explaining at the first mention of the non-GAAP financial measure, that it is not a standardized financial measure used to prepare the financial statements and may not be comparable to similar financial measures disclosed by other issuers
• explaining the composition of the non-GAAP financial measure and how it is calculated
• explaining how the measure provides useful information to the investor as well as any additional uses, if any, the measure provides to management
• prohibiting the use of labels that are overly optimistic, which may cause confusion, purport to represent “results from operating activities” but exclude items of an operating nature, or which are similar to those normally used under the financial reporting framework in preparing the financial statements
• include a quantitative reconciliation between the non-GAAP financial measure and the most directly comparable financial measure presented in the issuer’s financial statements
• unless otherwise impractical to do so, where the non-GAAP financial measure is disclosed in MD&A or in an earnings release, the document discloses the non-GAAP financial measure for a comparative period

An issuer must not disclose non-GAAP measures that are forward-looking information (e.g., estimates of future free cash flow) in a document unless the following requirements are met:

• the document discloses an equivalent historical non-GAAP financial measure
• the forward-looking non-GAAP financial measure is labelled in the same way as the equivalent historical non-GAAP financial measure
• the forward-looking non-GAAP financial measure is presented with no more prominence than that of the equivalent historical non-GAAP financial measure
• inclusion of a description of any significant differences between the forward-looking non-GAAP financial measure and the equivalent historical non-GAAP financial measure

 ii. Non-GAAP ratios and other financial measures

NI 51-112 sets out a new definition for non-GAAP ratios, which is defined as a financial measure in the form of a ratio, fraction, percentage or similar representation, that has a non-GAAP measure as one of its components and it is not disclosed in the financial statements. For example, a retailer might disclose “sales per square foot”. If the sales figure is not calculated in accordance with the applicable accounting policy, this would be a non-GAAP ratio.

NI 51-112 also address other categories of financial measures, including capital management measures, total of segments measures and supplementary financial measures, which could be confusing or misleading if disclosed outside the context of an issuer’s financial statements.

A “capital management measure” is one that is intended to enable an individual to evaluate an entity’s objectives, policies and processes for managing the entity’s capital. A “total of segments” measure is a subtotal or total of two or more reportable segments. Both capital management measures and total of segments measures are not components of or disclosed in the primary financial statements, but rather in the notes to the financial statements.

A “supplementary financial measure” is a measure that 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. A supplementary financial measure is not disclosed in the financial statements and is not encompassed by the definitions of the other measures. To illustrate, a supplementary financial measure for a retailer might be a comparison of “same-store sales” from one financial period to another if, in the financial statement from which it’s drawn, same-store sales is calculated in accordance with accounting policies used to prepare the sales line item.

Disclosure requirements in NI 51-12 for non-GAAP ratios and other financial measures are generally similar to the requirements for non-GAAP financial measures described above.

When is disclosure not required?

NI 52-112 provides for specific exceptions where the requirements under the instrument does not provide. These exceptions include: (i) disclosures required under National Instrument 43-101 - Standards of Disclosure for Mineral Projects or National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (other than voluntarily disclosed oil and gas metrics under section 5.14 of NI 51-101); (ii) disclosures made in compliance with a requirement under Canadian or foreign laws or a requirement of a self-regulatory organization of which the issuer is a member; (ii) financial measures presented orally or in transcripts of oral statements; and (iv) disclosure of a specified financial measure if the calculation of the specified financial measure is derived from a financial covenant in a written agreement, or disclosure prepared by someone other than the issuer.

If you have any questions on the new disclosure requirement contained NI 51-112, contact Eric Lung or any member of our Securities and Corporate Finance Team.

*Sukhjit Basra, a summer student in Dentons’ Vancouver office, assisted with the preparation of this insight.