New disclosure requirements will become mandatory in August 2021



MONTREAL – Lack of transparency in the calculations, insufficient context and significant variations depending on the issuer and the industry, a “more robust tool was needed to take the appropriate regulatory measures,” said the Canadian Securities Administrators (CSA) when ‘They first introduced their new set of rules to regulate the disclosure of non-GAAP financial measures. It was in 2018.

Many comment letters and three drafts later, we now have the final version of the National standard 52-112 Non-GAAP Information and Other Financial Measures (The instrument).

Unlike the existing guidance on non-GAAP financial measures (Staff Notice 52-306), the new instrument has the force of law. This means that “adjusted earnings”, “adjusted EBITDA”, “free cash flow”, “pro forma profit” and other financial metrics of this world will soon be the target of close scrutiny, as the new instrument, although short, is accompanied by an accompanying 20-page policy, which clearly states the intention of legislators.

1. Who falls into non-GAAP

The regulations apply to all reporting issuers, except investment funds and certain foreign issuers, and to non-reporting issuers for certain offering documents and transactions.

Reporting issuers will be subject to the new rules when they disclose financial measures outside of their financial statements, including disclosures on websites, in press releases and on social media platforms. For non-reporting issuers, the regulation will only apply to an offering memorandum or related marketing materials if the document is filed in connection with an offering made pursuant to a memorandum exemption. offer. It will also apply to non-reporting issuers in other specific scenarios, such as an IPO, reverse takeover, significant acquisition or similar transactions.

However, it is important to note that the Regulations also contain some exceptions, particularly for issuers in the mining, oil and gas sectors. The regulation does not apply (1) to the information required in respect of a major mining project of an issuer under NI 43-101 Disclosure standards for mining projects and under section 5.4 of form 51-102A2 Annual Information Form (Description of the activity for companies with mining projects), and (2) the disclosure required under NI 51-101 Disclosure standards for oil and gas activities, with the exception of information on oil and gas parameters which is made under section 5.14 of this regulation (Information using oil and gas parameters), as an issuer includes them on a voluntary basis.

2. When to fall into Non-GAAP?

The regulation will come into force on August 25, 2021 and will apply to disclosures for a fiscal year ending on or after October 15, 2021 for reporting issuers, and for filings after December 31, 2021 for non-reporting issuers.

3. How will this change the non-GAAP landscape?

There is no doubt that the Instrument and its accompanying Policy will change the landscape of non-GAAP disclosure. Here are some examples of how affected issuers and their disclosure will be affected:

A. Beware of non-GAAP definitions

The regulation applies to five different concepts, each with its own definition: (1) non-GAAP financial measures, (2) non-GAAP ratios, (3) total segment measure, (4) management measure capital, and (5) additional financial measure. Therefore, just because a number does not fall within the definition of a non-GAAP financial measure does not mean that it will not be considered a non-GAAP ratio or an additional financial measure, for example. Disclosure requirements are determined based on the definition to which the number corresponds.

The Add-On Instruction gives the example of a transmitter that discloses sales per pi2 on a periodic basis, the figure of which is taken directly from the financial statements of issuers or is part of such an item:

  • If the turnover is calculated in accordance with the accounting principles of the issuer used to prepare the position, it meets the definition of additional financial measure.
  • However, if the turnover is do not calculated in accordance with the issuer’s accounting principles, it meets the definition of non-GAAP ratio.

The disclosure required for non-GAAP ratios is more extensive than for additional financial measures. For example, when disclosing non-GAAP ratios, the issuer should provide an explanation (1) of the composition of the non-GAAP ratio, (2) how the non-GAAP ratio provides useful information to an investor and the additional objectives, if any, for which management uses the non-GAAP ratio, and (3) the reason for any change in the label or composition of the non-GAAP ratio. Such disclosure is not required with respect to additional financial measures, but lighter disclosure is always required.

B. Exec Comp falls under non-GAAP requirements

During the consultation period, opinions were divided as to whether the measures used for executive compensation should be explicitly included in the regulation, but when assessing the comments on this topic, the CSA did not have not seen the political justification for treating these measures differently.

However, as with other measures, the requirements of the regulation are only triggered by the disclosure of a financial amount for the measure, and not by qualitative disclosure. Likewise, in the context of an executive compensation statement, if a financial measure is identified (for example, adjusted net income) and the calculation is described (for example, adjusted net income for gains or losses of change) but no financial amount is disclosed (i.e. no dollar amount), the new rules would not apply because a financial measure was not disclosed, it only been identified and described.

C. Non-GAAP Reconciliation

The requirement to provide a quantitative reconciliation between the non-GAAP financial measure and the most directly comparable financial measure presented in the issuer’s financial statements is not new. What is new, however, is the long 2 page explanation provided in the accompanying policy about this specific item. The support policy explains, among other things, how to: (1) identify the most directly comparable financial measure, (2) determine the importance and proximity of a non-GAAP financial measure, (3) calculate the reconciliation using inputs, (4) determine the level of detail expected in the reconciliation, and (5) present and format the required information. By providing such a level of detail, the CSA certainly provide more clarity as to their expectations.

The Supplementary Instruction also contains detailed guidance on a number of other sections of the standard, including how to label a financial measure, assess and explain the usefulness of a financial measure, present comparative information for a non-GAAP financial measure. or a non-GAAP ratio, to name a few. It also contains a list of measures that are not taken into account by the Instrument, for example, amounts that do not represent historical or future “financial performance”, “financial position” or “cash flows”, that relate to items in the issuer’s financial statements. , such as stock price, market capitalization, or credit rating.

D. Non-GAAP Flexibility

The Instrument is intended not to contain any specific limitations or industry specific requirements on how to calculate a measurement; the CSA believe that non-GAAP financial measures or other financial measures are fixed over time and change constantly across a wide range of industries. The purpose of the Instrument was to meet investors’ need for quality financial reporting and, according to the CSA, an overly prescriptive framework could prevent this.

In the context of the comments received from the various stakeholders during the consultation period, flexibility was recognized as a major factor in ensuring the viability of the Regulation in the long term and as such, the final version narrows the scope of application of the Regulation. its application to certain issuers, dispenses certain information and allows an issuer to incorporate by reference certain information in a management report or press release.

E. Dollar number of non-GAAP requirements?

When the CSA first introduced the regulation in 2018, they said no cost increases were expected for issuers to comply with the new disclosure requirements, mainly because the regulation had largely incorporated part of the information guidelines that were already required under Staff Notice 52-306. . However, the CSA have recognized that the introduction of new concepts, such as sector measures, capital management measures and additional financial measures, as well as related disclosure requirements, could result in additional administrative costs for issuers. , at least during the first reporting period if these measures were to be disclosed. The CSA qualified these costs as “intangible” at the time. It remains to be seen, now that the Instrument is in its final form, how much time and money issuers will need to spend to understand and comply with the new 30-page rules and guidance.

Further, even though the regulation states that the required disclosure of comparative information for non-GAAP figures may be omitted if it is “impracticable” to do so, the cost or time required to prepare such disclosure would not be. sufficient justification for an issuer to avoid providing such disclosure.

4. Is Non-GAAP closed?

The regulations are final, but are not immune to further changes due to potential changes to International Financial Reporting Standards (IFRS). The International Accounting Standards Board (IASB) published in January 2021 proposed amendments to IFRS to provide investors with better information on the financial performance of issuers. These changes could, among other things, modify the structure and content of the income statement and result in the inclusion of certain non-GAAP measures in a note to the financial statements and could therefore require new mandatory information. As the IASB’s proposals are only in their early stages, it is difficult to determine what changes, if any, will be made to IFRS. The CSA have mentioned the oversight of these proposals from the IASB and will consider at that time whether the changes to IFRS will also result in other changes to securities legislation, including the regulation.

Marie-Christine Valois and Janie Harbec are partners at the Montreal office of Fasken Martineau DuMoulin LLP (“Fasken”).



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