Canada: Non-GAAP Financial Measures: Canada's Securities Regulators Propose Stricter Rules

Canada's securities regulators are proposing new rules on how companies present non-GAAP financial measures like adjusted earnings, adjusted EBITDA, free cash flow, pro forma earnings, distributable cash, earnings before non-recurring items and others.

The new rules would have the force of law, unlike the existing regulatory guidance on non-GAAP financial measures. This means that the regulators would have stronger compliance and enforcement tools if a company's non-GAAP financial measures are misleading.

Comments on the proposed rules are due by December 5.

Overview of the Proposed Regime

Because of the ever-evolving nature of non-GAAP disclosures across a range of industries, the regulators decided not to prohibit any particular types of non-GAAP measures or impose any industry-specific requirements. Instead, the rules would formalize and expand on the existing staff guidance.

The new regime would classify financial measures into four mutually exclusive categories: non-GAAP financial measures (which may also be ratios or financial outlooks); supplementary financial measures; segment measures; and capital management measures.

Non-GAAP financial measures would be subject to more stringent requirements than the other three types of measures, as described below. Financial measures presented orally would not be subject to the new rules, but written transcripts of oral statements would be. The proposed companion policy cautions companies that non-GAAP financial measures should not be disclosed through social media channels like Twitter where character limits preclude disclosing all required information.

The key elements of the proposed Canadian rules are substantially the same as the U.S. rules on non-GAAP financial measures. The U.S. regime is similarly prescriptive. That said, the new Canadian regime would be more detailed, especially in light of the examples and guidance in the proposed companion policy.

Non-GAAP Financial Measures

A non-GAAP financial measure would be defined as:

  • a measure of financial performance, financial position or cash flow that is disclosed outside the financial statements and that is not a disaggregation, calculated in accordance with IFRS,1 of a line item in the primary financial statements, or
  • a financial outlook for which no equivalent financial measure is presented in the primary financial statements.
  1. Labelling

Consistent with existing regulatory guidance, non-GAAP financial measures would have to be labelled appropriately and distinctly from line items, subtotals and totals in the financial statements. The proposed companion policy provides the following examples of expectations for labelling non-GAAP financial measures:

  • It would be misleading to present "cash flows from operations," calculated as cash flows from operating activities before changes in non-cash working capital items, because doing so creates confusion with the IFRS item "cash flows from operating activities" in the Statement of Cash Flows.
  • A label like "results from operating activities" would be misleading if the measure excluded items of an operating nature, such as inventory write-downs, restructuring costs, impairment of assets used for operations, or stock-based compensation. For resource issuers, the exclusion from operating measures of asset retirement obligations and environmental remediation recovery is unlikely to be permissible.
  • A label like "free cash flow" should not be used to inappropriately imply that residual cash is available for discretionary spending, if the company has mandatory debt service requirements or other non-discretionary obligations that have not been deducted.
  • Labels like "protected returns" may be overly optimistic and misleading.
  1. Prominence of Non-GAAP Financial Measures

Consistent with existing regulatory guidance, non-GAAP financial measures must be presented with no more prominence than the most directly comparable IFRS measure from the financial statements. The proposed companion policy provides the following examples:

  • A non-GAAP measure should not appear in a news release headline or caption without the most directly comparable IFRS measure.
  • Non-GAAP measures should not be accompanied by commentary, (e.g., "record performance") without equally prominent commentary about the corresponding IFRS measure.
  • Graphics or tables should not be used to present non-GAAP measures without similar graphics or tables presenting the corresponding IFRS measures. nbsp;
  1. Reconciling and Explaining Non-GAAP Financial Measures

The proposed rules on reconciling and explaining non-GAAP financial measures are substantially similar to existing regulatory guidance in respect of the following:

  • The first time a non-GAAP financial measure appears in a document such as MD&A or a news release, it must be identified as such (unless it is a ratio of which all financial components either come from the financial statements or are disaggregations, calculated in accordance with IFRS, of line items).
  • A non-GAAP measure must be accompanied by a warning that it does not have a standardized meaning and may not be comparable to other companies' similar non-GAAP measures.
  • The company must explain how management uses a non-GAAP measure.
  • The measure must be reconciled to the most directly comparable IFRS measure. For ratios, the reconciliation requirement may be met by identifying the components of the ratio, describing how it is calculated, and reconciling each component. Alternatively, the ratio itself may be reconciled using the most directly comparable IFRS measure.
  • Companies must not describe reconciling items as non-recurring, infrequent or unusual when similar losses or gains are reasonably likely to occur within the next two years or have occurred in the past two years.

The proposed rules and companion policy expand on existing regulatory guidance in the following respects:

  • Companies would have to explain how a non-GAAP measure is useful to a reasonable person (as opposed to being useful to an investor).
  • The method of calculating non-GAAP measures would have to be explained and disaggregated in a manner that permits a reasonable person to understand each reconciling item.
  • Significant management judgements or estimates used in calculating non-GAAP measures would have to be disclosed, along with the circumstances giving rise to reconciling items, e.g., an adjustment for impairment of goodwill should be supported by the cause of the impairment.
  • Comparative period non-GAAP measures would have to be presented and reconciled.
  • Any period-to-period changes in the label, composition or calculation of a non-GAAP measure would have to be explained.

To satisfy the above requirements, a company could footnote non-GAAP measures the first time they appear in a document and provide the required reconciliations and related disclosures in a different section of the same document. Cross-references to different documents would not be permitted, although website disclosures of non-GAAP financial measures could contain links to the location of the reconciliations and other required information.

Forward-Looking Non-GAAP Measures

The existing regulatory guidance contains a general statement that it covers forward-looking non-GAAP measures. The proposed new rules are more detailed. Forward-looking non-GAAP financial measures (e.g. financial outlooks such as forecasted adjusted earnings or projected free cash flow), would generally be treated the same as historical non-GAAP measures, unless an historical measure equivalent to the financial outlook is presented on the face of the financial statements.

Financial outlooks would have to be reconciled to the most directly comparable item in a forward-looking statement of financial position, statement of comprehensive income or statement of cash flows. Alternatively, if a company does not prepare forward-looking financial statements, the outlook would have to be accompanied by the equivalent historical non-GAAP financial measure and the company would have to either:

  • describe each material difference between the financial outlook and the most directly comparable financial outlook for which an equivalent historical measure is presented on the face of the financial statements, or
  • describe each significant component of the financial outlook used in its calculation.

Supplementary Financial Measures

Supplementary financial measures are measures that a company discloses periodically—often key performance indicators (KPIs) like same-store sales for a retailer—that are disaggregations, calculated in accordance with IFRS, of line items in the financial statements. Supplementary financial measures would be subject to less onerous requirements compared to those for non-GAAP measures in 1-3 above.

  • The first time a supplementary financial measure appears in a document, it would have to be accompanied by disclosure (or a footnote referencing such disclosure) that describes how it is calculated.
  • The corresponding measure for the comparative period would have to be provided, if previously disclosed by the company.
  • Any period-to-period changes in the label, composition or calculation of the measure would have to be explained.

Segment Measures

The new rules would define a segment measure as a measure of segment profit or loss or segment revenue, expenses, assets or liabilities that is disclosed in the notes to the financial statements. Totals of segment measures would have to be reconciled to the most directly comparable IFRS measure presented on the face of the financial statements. These totals could not be presented with greater prominence than the corresponding IFRS measures, and the comparative period measure must also be presented, if previously disclosed by the company. The additional requirements for non-GAAP measures in 1-3 above would not apply.

Capital Management Measures

The new rules would define a capital management measure as a financial measure that is disclosed in the notes to the financial statements that enables users to evaluate a company's objectives, policies and processes for managing capital.

No requirements would apply to capital management measures that are totals, subtotals or line items on the face of the financial statements or that are merely disaggregations, calculated in accordance with IFRS, of line items.

Other capital management measures would have to be reconciled to the most directly comparable IFRS measure presented on the face of the financial statements. They could not be presented with greater prominence than the corresponding IFRS measures. The first time a capital management measure appears in a document such as MD&A or a news release, it would have to be accompanied by:

  • a description of how it is calculated, including whether it is calculated pursuant to a lending or other agreement;
  • a statement that its calculation is not determined by IFRS;
  • an explanation of how the measure provides useful information to a reasonable person and any additional purposes for which management uses the measure; and
  • the comparative period capital management measure, if previously disclosed by the company.

The additional requirements for non-GAAP measures in 1-3 above would not apply.

Measures in the Financial Statements

Any financial measure that is presented on the face of the primary financial statements would be entirely excluded from the scope of the rules.

Any financial measure disclosed in the notes to the financial statements (other than segment measures and capital management measures) would also be excluded from the scope of the rules.

Broad Application

The proposed new regime would apply to all issuers, not just reporting issuers, including investment funds.

Foreign issuers whose securities are listed on a U.S. stock exchange or who are otherwise SEC-reporting issuers would not be subject to the new rules. This is consistent with how the SEC treats Canadian MJDS issuers, (i.e., they are generally exempt from the U.S. rules on non-GAAP financial measures).

Other foreign issuers would be subject to Canada's proposed new rules, even if they have minimal Canadian shareholdings and are incorporated in a jurisdiction with sophisticated securities laws, such as the U.K., Germany or Australia. Cross-border compliance burdens will increase for these issuers, to the extent the new Canadian rules are more onerous than their home country's rules on non-GAAP measures. This approach to regulation is at odds with the current treatment of designated foreign issuers, which are generally exempt from many Canadian securities laws.

Recommended Steps for Companies

The proposed rules are subject to comment by market participants and may be revised by securities regulators before being finalized. The rules will not be retroactive, and a transition period will likely be provided to give companies time to prepare amended or new disclosures of non-GAAP and other financial measures. We recommend that companies begin reviewing their disclosure documents, such as MD&A and news releases, as well other materials like investor relations documents and website content, with a view to eventual compliance with a more onerous regime. Companies should determine whether their existing non-GAAP disclosures would be treated as non-GAAP financial measures, supplementary financial measures, segment measures or capital management measures to help identify which rules would apply and any current gaps in the company's practices compared to what the new rules would require. Doing this work will enable companies to develop a strategy for amending, if necessary, how they present financial measures once a new regime is adopted.

Footnote

1 International Financial Reporting Standards as issued by the International Accounting Standards Board, which is the GAAP required to be used by most Canadian public companies. If an issuer uses a different GAAP, such as U.S. GAAP, references in this bulletin to IFRS may be read as references to the other GAAP.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions