New national instrument sets out requirements for issuers that include non-GAAP and other financial measures in public disclosure

  • A new National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure will apply to reporting issuers (other than investment funds, designated foreign issuers and SEC foreign issuers) and some non-reporting issuers.
  • Issuers that include non-GAAP and certain other financial measures in public disclosure will be required to provide additional information to help investors understand the context of such measures.
  • The new requirements are intended to reduce issuers' uncertainty regarding disclosure obligations, while providing transparency for investors.
  • National Instrument 52-112 was originally published for comment in September 2018 (the 2018 Proposal) and republished in revised form on February 13, 2020 (the 2020 Proposal). The final version addresses concerns raised by industry stakeholders during the earlier comment periods.
  • National Instrument 52-112 is expected to come into force on August 25, 2021 and, for reporting issuers, will apply to disclosure for financial years ending on or after October 15, 2021. This appears to be intended to capture financial institutions with October 31 year-ends, and also appears to mean that, for calendar year-based issuers, it will potentially apply to Q3 results for venture issuers unless they are released prior to August 25, 2021. For most reporting issuers, the new requirements are likely to require a certain number of adjustments to current number of adjustments to current disclosure practices.

The Prevalence of Non-GAAP Measures

As the Globe and Mail reported in 2016, the use of non-GAAP measures has now become routine for the overwhelming majority of reporting issuers. Despite this, disclosure of non-GAAP financial measures has generally not been formally regulated in Canada, with issuers referring to CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures (SN 52-306) for guidance in regard to the disclosure of such financial measures. 

To address the lack of standardization in non-GAAP financial measures and following an extensive consultation process, on May 28, 2021, the Canadian Securities Administrators (CSA) published National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 51-112), which will establish specific requirements for issuers seeking to include non-GAAP and other financial measures in public disclosure documents. Given the prevalence of non-GAAP measures in Canadian issuers' disclosure, the adoption of NI 51-112 will likely have a widely felt impact on Canadian public company reporting.

While SN 52-306 has been updated numerous times over the years, regulators have found that disclosure practices in respect of such measures continue to vary. As we previously discussed, the Ontario Securities Commission has expressed concerns in regards to industry compliance with SN 52-306 for some time, and the lack of consistency across industries and issuers has arguably made it more difficult for investors to analyze different financial measures among different companies. Similarly, in recent years the Securities and Exchange Commission (SEC), which has been regulating non-GAAP measures for some time, has expressed similar concerns and updated its guidance on the use of non-GAAP measures on numerous occasions.  

A proposed version of NI 52-112 was originally published in 2018, and a revised proposal was published in 2020. The final version of NI 51-112 reflects concerns and feedback communicated by industry stakeholders during the 2018 and 2020 comment processes.

Disclosure Requirements

Under NI 52-112, issuers may not disclose historical non-GAAP financial measures unless the following requirements are met:

  • the non-GAAP financial measure is labelled with a term that describes the measure and distinguishes it from totals, subtotals and line items disclosed in the primary financial statements of the entity to which the measure relates;
  • the non-GAAP financial measure is identified as a non-GAAP financial measure;
  • the document discloses the most comparable financial measure disclosed in the primary financial statements of the entity to which the non-GAAP financial measure relates;
  • the non-GAAP financial measure is given no more prominence than the comparable financial measure;
  • in proximity to the first instance of the non-GAAP financial measure, certain information is included or, where permitted, incorporated by reference, such as explanations as to the composition of the non-GAAP financial measure, how it provides useful information, and a quantitative reconciliation to the most comparable financial measure; and
  • unless impractical, 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.

Where non-GAAP financial measures disclose forward-looking information, the document will have to, among other things, (i) disclose an equivalent historical non-GAAP financial measure; (ii) label the non-GAAP financial measure using the same label used for the historical non-GAAP financial measure; and (iii) include a description of any significant difference between the historical and forward-looking non-GAAP financial measure.

Similar (although more limited) requirements are included in regard to the disclosure of non-GAAP ratios, total of segments measures, capital management measures, and supplementary financial measures.

The CSA note that they have attempted to clarify and reduce some of the disclosure requirements compared to the requirements in the earlier proposals. For example, the 2020 Proposal included the ability for issuers to satisfy certain non-GAAP disclosure requirements by referring to disclosures in their MD&A. Notably, while the 2020 Proposal did not permit issuers to incorporate disclosure by reference in a news release, NI 52-112 will now permit issuers to do so. As such, issuers will not have to include, for example, a quantitative reconciliation of a non-GAAP financial matter in their news releases if they refer to the information in their MD&A.  However, interim MD&A cannot refer to annual MD&A, so full disclosure of non-GAAP measures including reconciliations will have to be included in both interim and annual MD&A.

What is a non-GAAP Financial Measure?

Under NI 52-112, a "non-GAAP financial measure" is defined as a financial measure disclosed by an issuer that:

  1. depicts the historical or expected future financial performance, financial position or cash flow of an entity,
  2. with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity,
  3. is not presented in the financial statements of the entity, and
  4. is not a ratio, fraction, percentage or similar representation.

Common industry terms that may fall under this definition include "adjusted EBITDA", "adjusted net income", and "free cash flow". NI 52-112 also provides definitions for "non-GAAP ratio", "total of segments measure", "capital management measure" and "supplementary financial measure".

The definition of "non-GAAP financial measure" is intended to be generally consistent with the definitions found in SN 52-306 and SEC rules.  

Application of the Rules

Under NI 52-112, the applicable disclosure requirements will apply to reporting issuers in respect of the disclosure of a financial measure subject to NI 52-112 in a document if the document is "intended to be, or reasonably likely to be, made available to the public." Accordingly, the new requirements under NI 52-112 are intended to apply not only to documents required to be filed on SEDAR, but also to materials made available on issuer websites and social media. The disclosure requirements will also apply to non-reporting issuers in respect of disclosure of a specified financial measure in a document if the document is: (i) subject to general prospectus requirements; (ii) filed in connection with a distribution relying on the relatively rarely used exemption for offering memoranda; or (iii) submitted in connection with specified transactions, including a reverse takeover or significant acquisition.

Investment funds, designated foreign issuers and SEC foreign issuers (i.e., SEC issuers generally organized under the laws of a non-Canadian jurisdiction) will not be subject to the new requirements in NI 52-112. Canadian incorporated companies with SEC issuer status will be caught, however. Further, some disclosures will also be exempt from the requirements, including: (i) specified disclosures related to mineral projects and oil and gas activities; (ii) specified disclosures required to be filed with securities regulators, such as pro forma financial statements; and (iii) disclosures required under law or by a self-regulatory organization where the composition of the financial measure is specified by the applicable law or SRO.  

Notably, the scope of the application of NI 52-112 has been reduced slightly compared to the 2018 Proposal, which would generally have applied to all but SEC foreign issuers. According to the CSA, several commenters expressed concern with the breadth of issuers to which the 2018 Proposal would have applied.  

Practical Implications and Transition Period

While non-GAAP measures are not inherently problematic—and are often helpful tools for presenting a company's financial performance—the CSA's move towards formal rules arises after years of mounting stakeholder concern and regulatory engagement about the quality and consistency of disclosure surrounding such measures.

Rules concerning non-GAAP measures were first implemented in the United States in 2002 as part of the Sarbanes-Oxley Act, after a series of widely publicized corporate accounting scandals. The CSA adopted SN 52-306 in 2003.

Assuming Ministerial approvals, NI 51-112 will come into force on August 25, 2021. For reporting issuers, the new rules will apply to disclosures for a financial year ending on or after October 15, 2021. For non-reporting issuers, the rules will apply to filings after December 31, 2021.

The adoption of NI 51-112 will affect the large number of Canadian public companies that report a non-GAAP measure. For most reporting issuers, the new requirements are likely to require a certain number of adjustments to current disclosure practices. In certain instances, such adjustments may be significant. Certain issuers may also have been disclosing for some time non-GAAP ratios, total of segments measures, capital management measures, and supplementary financial measures which were not subject to SN 52-306 but will be impacted by NI 52-112. As such, issuers should allow themselves sufficient time to consider the new requirements and prepare for enhanced disclosure as required during the transition period.

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.