Canada: CSA Proposes Rule Regarding Non-GAAP And Other Financial Measures

Introduction and Background

On September 6, 2018, the Canadian Securities Administrators (CSA) issued a notice and request for comment on Proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (the Proposed Instrument), Proposed Companion Policy 52-112 Non-GAAP and Other Financial Measures Disclosure (the Proposed Companion Policy) and related proposed consequential amendments and changes to various other instruments and policies.1

Currently, CSA staff guidance on non-GAAP and other financial measures is contained in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (SN 52-306), which was first introduced in 2003. Although SN 52-306 has been updated several times to respond to changing circumstances, and despite the fact that Canadian securities regulators have published various staff notices and reports that comment on the topic, the CSA noted in its request for comment on the Proposed Instrument and Proposed Companion Policy that it continues "to find that disclosure practices surrounding non-GAAP financial measures vary."

If implemented, the Proposed Instrument would replace current CSA guidance, including SN 52-306. Importantly, unlike current CSA guidance, the Proposed Instrument (once final) would be legally binding on issuers.

The Proposed Instrument is intended to address disclosure requirements for non-GAAP and other financial measures. It includes comprehensive disclosure requirements whose overall goal is to improve the quality of information provided to investors.

Overview of the Proposed Instrument

The scope of the Proposed Instrument is broad. It will apply to all issuers2 (including investment funds), except for SEC foreign issuers, and all documents (e.g., MD&A, press releases, Annual Information Forms, prospectuses, etc.) including other written communications in websites or social media.

There are, however, some exceptions to the scope of the Proposed Instrument. For example, the updated definition of "non-GAAP financial measure" excludes all measures "presented" or "disclosed" (as those terms are defined in the Proposed Instrument) within an issuer's financial statements.

The Proposed Instrument pertains to and sets out disclosure requirements for four types of financial measures, the latter three of which are new concepts that have been introduced in the Proposed Instrument:

  • Non-GAAP financial measures: A "non-GAAP financial measure" means: (a) "a financial measure of financial performance, financial position or cash flow that is not disclosed or presented in the financial statements and that is not a disaggregation, calculated in accordance with the accounting policies used to prepare the financial statements, of a line item presented in the primary financial statements", or (b) "a financial outlook for which no equivalent financial measure is presented in the primary financial statements".

    • The Proposed Companion Policy provides that common terms used to identify non-GAAP financial measures may include "adjusted earnings", "adjusted EBITDA", "free cash flow", "pro forma earnings", "cash earnings", "distributable cash", "cost per ounce", "adjusted funds from operations", and "earnings before non-recurring items".
  • Segment measures: A "segment measure" is "a financial measure of segment profit or loss, revenue, expenses, assets, or liabilities that is disclosed in the notes to the financial statements."
  • Capital management measures: A "capital management measure" is a "financial measure that is disclosed in the notes to the financial statements to enable users of financial statements to evaluate the issuer's objectives, policies and processes for managing capital."
  • Supplementary financial measures: A "supplementary financial measure" means a financial measure that is not disclosed or presented in the financial statements and that (a) "is a disaggregation, calculated in accordance with the accounting policies used to prepare the financial statements, of a line item presented in the primary financial statements", and (b) "is, or is intended to be, disclosed on a periodic basis to present an aspect of financial performance, financial position or cash flow".

The disclosure requirements in the Proposed Instrument are substantially similar to the guidance provided in the current SN 52-306. For instance, it requires that an issuer not disclose a non-GAAP financial measure unless: (a) it is labelled appropriately given its composition and in a way that distinguishes it from totals, subtotals and line items presented in the primary financial statements; (b) it is presented with no more prominence in the document than the most directly comparable financial measure presented in the primary financial statements; (c) the document presents the same non-GAAP financial measure for the comparative period; and (d) the document complies with certain other requirements that apply when the measure first appears in the document. The requirements for the other types of financial measures – segment, capital management, and supplementary – are similar.

With that being said, issuers (and other stakeholders) may be pleased to find that the Companion Policy contains significantly more guidance than the current SN 52-306.


Publication of the Proposed Instrument, the Proposed Companion Policy and related materials signals that securities regulators across Canada are taking a closer look at issuers' disclosure practices.

Although not yet final, the Proposed Instrument and Proposed Companion Policy provide additional guidance concerning regulatory expectations of issuers as it relates to non-GAAP disclosure practices. Issuers are reminded that Staff Notice 52-306 "cautions issuers that regulatory action may be taken if an issuer discloses information in a manner considered misleading and therefore potentially harmful to the public interest." We expect an increase in regulatory reviews and enforcement once the Proposed Instrument becomes final.

In the interim, use of non-GAAP measures in a manner that leaves a misleading impression of the issuer's true financial position may also expose an issuer to class action risk. Provincial securities legislation contains statutory causes of action for misrepresentations in offering documents and continuous disclosure.

As scrutiny on this issue sharpens, Canadian public companies should carefully review their accounting and related disclosure practices to ensure adequate transparency with respect to non-GAAP metrics. This is better done proactively than at the behest of a regulator, in the teeth of an activist attack, or in the glare of media scrutiny.

Stakeholders will have until December 5, 2018 to provide comments on the Proposed Instrument, the Proposed Companion Policy and the consequential amendments.

The author wishes to thank Scott Thorner, articling student, for his contribution to this article.


[1] Including Multilateral Instrument 45-108 Crowdfunding (MI 45-108); Companion Policy 45-108 Crowdfunding (45-108CP); Companion Policy 51-102CP Continuous Disclosure Obligations (51-102CP); Companion Policy 51-105CP Issuers Quoted in the U.S. Over-the-Counter Markets (51-105CP); and Companion Policy 52-107CP Acceptable Accounting Principles and Auditing Standards (52-107CP).

[2] Interestingly, the Proposed Instrument uses the language "issuer", implying that its potential application would not be limited to reporting issuers.

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