Canada: Recent CSA Staff Notices Focus On Non-GAAP And Income Trust Disclosure Deficiencies

Non-Gaap Financial Measures

CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures was issued in August of 2006. Its purpose is to provide greater guidance regarding the CSA’s views on disclosure of non-GAAP financial measures, including forward-looking non-GAAP financial measures. Staff Notice 52-306 revises the guidance provided in an earlier notice published in November 2003 and, as a result of the broader guidance contained in it, results in the withdrawal of CSA Staff Notice 52-303 – Non-GAAP Earnings Measures.

Since publishing the original Staff Notice 52-306, the CSA have concluded that distributable cash (a measure used by many income trusts) is, in all circumstances, a cash flow measure and is fairly presented only when reconciled to GAAP cash flows from operating activities. As a result, the original Staff Notice has been re-published to communicate the CSA’s expectations on how such reconciliations should be made.

The CSA’s focus in providing the guidance contained in the new Staff Notice is to ensure that investors fully understand what comprises a particular non-GAAP financial measure and are not misled by ambiguities or inconsistencies in the way in which these measures are presented. According to the CSA, issuers should:

  • state explicitly that non-GAAP measures are not standardized or comparable among issuers;
  • present the most closely related GAAP measures with equal or greater prominence than related non-GAAP measures;
  • explain why non-GAAP measures are useful and how they are used by management;
  • provide clear, quantitative reconciliations from non-GAAP measures to the related GAAP measures, with a reference to such reconciliations the first time the non-GAAP measure is presented; and
  • explain any changes in the composition of non-GAAP measures to those previously disclosed.

This guidance relates directly to deficiencies identified by the CSA in various disclosure documents, such as press releases, MD&A, prospectus filings and, occasionally, financial statements. The CSA have also stated that in their view it is not appropriate to present non-GAAP measures in GAAP financial statements, nor for non-GAAP measures to reflect adjustments for non-recurring, infrequent or unusual items when similar charges or gains occurred in the past two years or are reasonably likely to occur in the following two years.

For income trust issuers, Staff Notice 52-306 clarifies the need to reconcile distributable cash with cash flows from operating activities as presented in the issuer’s financial statements, which, in the CSA’s view, is the most directly comparable GAAP measure. The CSA have also stated that where cash distributions paid do not equal distributable cash, the reasons for the difference should be discussed, including an explanation of how additional distributions were financed in situations where cash distributions paid materially exceed distributable cash.

Finally, Staff Notice 52-306 clarifies that information presented in accordance with Section 1701 - Segment Disclosures of the CICA Handbook is not considered to be a non-GAAP financial measure, unless such information (as discussed in the MD&A or elsewhere) is adjusted in any way from the same information presented in the financial statements.

Income Trust Disclosure Review

Disclosure is also the focus of the concurrently issued CSA Staff Notice 51-319 – Report on Staff’s Second Continuous Disclosure Review of Income Trust Issuers. Staff Notice 51-319 supplements guidance and interpretation relating to disclosure by business income trusts set out in various other policies and notices, and provides the results of the full continuous disclosure review of forty-five business income trust issuers. Overall, the CSA report that in order to fully comply with continuous disclosure requirements, income trust issuers need to significantly improve their disclosure, particularly distributable cash disclosure, in MD&A. To this end, the CSA suggest that to satisfy MD&A disclosure requirements, issuers should supplement distributable cash disclosure with comprehensive disclosure of the assumptions, risks, uncertainties, working-capital requirements and financing decisions related to the trust, in order to help investors determine whether estimated distributable cash is reasonable and sustainable.

In particular, the CSA note that distributable cash disclosure in MD&A was significantly deficient with respect to the discussion on liquidity, risks and uncertainties and overall performance and results of operations. To address these deficiencies, according to the CSA, issuers should:

  • provide sufficient disclosure about their sources of funding relating to current and future cash distributions (so that unitholders can determine if any portion of distributions is funded by non-operating cash flows), quantify these amounts and discuss their impact on long-term sustainability of cash distributions;
  • provide detailed discussions of risk factors, including those relevant to the operating entity, including detailed discussions about commitments to replace and maintain capital assets as well as quantitative discussions about expected annual capital maintenance levels relative to current levels, and the expected effect on distributions;
  • quantify the past and expected future impact of each risk, to the extent possible (for example, as a sensitivity analysis of potential fluctuations in the price of a commodity) and its expected impact on distributions; and
  • disclose any steps the issuer has taken or plans to take to mitigate the impact of the described risks.

Staff Notice 51-319 reiterates guidance contained in Staff Notice 52-306 regarding non-GAAP financial measures and sheds light on additional areas such as goodwill, executive compensation, timely disclosure and material contract disclosure.


With respect to goodwill, the CSA have found some income trust issuers to be deficient in the time frames chosen for goodwill impairment testing (which, they suggest, is required on an annual basis) and advise that multiple valuation methods should be used to assess the fair value of reporting units whenever goodwill-impairment testing is performed.

Executive Compensation

Executive compensation disclosure deficiencies highlighted by the review focus on disclosure of compensation paid to external management companies and their employees. Staff Notice 51-319 reminds issuers that requirements of securities legislation that apply to the senior officer or executive officers of a reporting issuer will usually apply to executive officers of an external management company. In addition to disclosing management fees, incentive fees or other amounts payable to external management companies, the CSA suggest that income trust issuers should also make executive compensation disclosure (as required by Form 51-102F6) for executive officers of any external management company. This includes disclosure of any compensation payable directly by the issuer to executive officers as well as compensation payable by the management company to its executive officers that can be attributed to payments received from the income trust.

Timely Disclosure

On the timely disclosure front, the CSA note that some income trusts are not properly disclosing changes that occur at the operating entity level in the manner required to disclose "material changes" under securities legislation. They remind issuers that such changes should be reviewed to determine whether they amount to or result in changes in the business, operations or capital of the income trust issuer that would reasonably be expected to have a significant effect on the trust unit price, with a focus on events that impact distributions to unitholders. In particular, the CSA note the failure to make material change disclosure where the operating entity breached financial covenants under its credit facility, resulting in a suspension or significant reduction in distributions.

Credit Facilities As Material Contracts

With respect to credit facilities or credit arrangements, the CSA note that since these often include restrictive financial covenants over the amount of cash the trust may distribute, the material terms of any such arrangement entered into by income trust issuers should always be available to unitholders. Staff Notice 51-319 reminds issuers that National Policy 41-201 advises income trust issuers that any contract having a direct correlation to anticipated cash distributions is considered a material contract for prospectus-filing purposes. While the requirement is not specifically stated in that policy, the CSA advise that new contracts of this type, or amendments to previously filed contracts, should be filed on SEDAR to comply with an issuer’s obligation to file material contracts under NI 51-102.

These staff notices represent a continuing focus by the CSA on income trusts and non-GAAP measures, especially with respect to distributable cash disclosure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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