FINANCIAL REPORTING AND IR

For some time now the Ontario Securities Commission (OSC) has been focusing on the disclosure of non-GAAP and additional GAAP measures incorporated into reporting issuers’ publicly available information.

On December 11, 2013, the OSC released updated findings and most recent guidance to reporting issuers choosing to disclose non-GAAP financial measures and additional GAAP measures.

What are Non-GAAP and Additional GAAP Measures?

The OSC defines a ‘non-GAAP measure’ as a numerical measure, based on the issuer’s historical or future performance, financial position or cash flow that does not meet one or more criteria of an issuer’s GAAP for presentation in the financial statements, and either:

• excludes amounts that are included in the most directly comparable measure as calculated and presented in accordance with the issuer’s GAAP; or
• includes amounts that are excluded from the most directly comparable measure calculated and presented in accordance with the issuer’s GAAP.[1]

Many non-GAAP measures are derived from a company’s profit or loss in accordance with GAAP, but through omission or inclusion of certain items, often present a more positive outcome of financial performance than the core GAAP measure. Some common non-GAAP measures include EBITDA, cash cost per ounce (in the mining sector) and adjusted earnings.

Non-GAAP measures are not permitted to be presented in the financial statements. However, with the adoption of IFRS, companies are permitted to present additional GAAP measures within the financial statements when this is relevant to understanding the company’s financial position, financial performance and cash flow.

The OSC defines an ‘additional GAAP measure’ as:

• A line heading or subtotal relevant to an understanding of the financial statements and not a minimum line item mandated by IFRS; or
• A financial measure in the notes to the financial statements that is relevant to an understanding of the financial statements and is not presented elsewhere in the financial statements.

A common additional GAAP measure is operating income (loss).

Non-GAAP measures are often found in news releases, MD&As, and prospectus filings, while additional GAAP measures are presented in the company’s financial statements.

OSC review finds four areas for improvement

The OSC reviewed the disclosure of 50 Ontario-based reporting issuers and identified four areas for improvement.

1. Explain the objectives for using the non-GAAP or the additional GAAP measure

The OSC identified a number of examples where the reporting issuers presented non-GAAP and additional GAAP measures but did a poor job of explaining why the measure was meaningful to the user and why management applied the measure.

In some cases, the reports included boilerplate wording that asserted the measure was a stronger indicator of performance or was commonly used throughout the industry.

The OSC suggests that providing adequate discussion as to why the measure is meaningful to users will better suit investors in evaluating the company’s performance.

2. Provide a clear and quantitative reconciliation

GAAP measures are well defined under IFRS. These definitions are widely accepted and widely known. Using a non-GAAP measure has the potential to confuse users, as these measures in particular often paint a rosier picture than is calculated by applying the GAAP measure.

The OSC recommends reconciling the non-GAAP measure to the comparable GAAP measure, to alleviate confusion. 

3. Provide meaningful names for additional GAAP disclosures

A number of reporting issuers provided descriptions of additional GAAP disclosures that the OSC suggested were not meaningful to users of the financial statements. Example includes ‘income before the undernoted’ and ‘income before operating expenses’.

There is an expectation that an adequate description will be provided for the additional GAAP measure explaining why it is relevant and how it facilitates the users’ understanding of the financial statements. 

4. Disclose how the additional GAAP measure is calculated

The OSC noted there was often no explanation as to how an additional GAAP measure was calculated. The OSC expects a reporting issuer to disclose how the additional GAAP measure was calculated in relation to the GAAP measure.

Transparency is critical

Users of financial statements will often find non-GAAP and additional GAAP measures useful in analyzing the financial information. However, this usefulness declines significantly when these measures are not easily understood.

Each reporting issuer should strive to provide clear and transparent information – or risk an unpleasant compliance reminder from your regulator. 

You can download a copy of the OSC’s report from the OSC website.