SECURITIES REGULATION & IR

On May 27, 2021, the Canadian Securities Administrators (CSA) published National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 52-112) and its companion policy (the Companion Policy). NI 52-112 sets out disclosure requirements for non-GAAP financial measures, non-GAAP ratios and other financial measures.

NI 52-112 and the Companion Policy (together, the Rules) came into force on August 25, 2021 and apply to reporting issuers for documents filed for a financial year ending on or after October 15, 2021. The Rules also apply to non-reporting issuers for documents filed after December 31, 2021 in connection with a distribution made in reliance on the offering memorandum exemption under National Instrument 45-106 Prospectus Exemptions.

Definition of Non-GAAP Financial Measures

A “non-GAAP financial measure” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) depicts the historical or expected future financial performance, financial position or cash flow of an entity, (b) 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, (c) is not disclosed in the financial statements of the entity, and (d) 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’.

The Companion Policy makes clear that the following are not considered ‘non-GAAP financial measures’ for the purposes of NI 52-112:

• Amounts that do not depict historical or future ‘financial performance’, ‘financial position’ or ‘cash flow’, which relate to elements of the financial statements, such as share price, market capitalization, or credit rating.
• Financial information that does not have the effect of providing a financial measure that is different from a financial measure presented in the financial statements, such as the addition or subtraction of an identical line item, subtotal, or total originating from multiple periods of primary financial statements.
• Non-financial information, such as number of units, number of subscribers, volumetric information and number of employees.

Requirements for Non-GAAP Financial Measures that are Historical Information

NI 52-112 requires that an issuer must not disclose a non-GAAP financial measure that is historical information in a document unless, among other things:

• the non-GAAP financial measure is appropriately labelled. (For example, it should not be confusingly similar to the label used under the financial reporting framework used to prepare the financial statements, cause confusion based on the measure’s composition or be overly optimistic);
• the document also presents the most directly comparable financial measure used in the issuer’s financial statements;
• the non-GAAP financial measure is presented with no more prominence than the most directly comparable financial measure; and
• in proximity to the first instance of the non-GAAP financial measure, the document, among other things:
  • explains that it is not a standardized financial measure and might not be comparable to similar financial measures disclosed by other issuers;
  • discloses, directly or by incorporating by reference (where permitted), an explanation of the composition of the non-GAAP financial measure and how it provides useful information to an investor and explains any additional purposes for which management uses the non-GAAP financial measure; and
  • discloses, directly or by incorporating by reference (where permitted), a quantitative reconciliation of the non-GAAP financial measure for its current and comparative period, to the most directly comparable financial measure in prescribed form.

Requirements for Non-GAAP Financial Measures that are Forward-looking Information

The disclosure obligations under NI 52-112 in respect of non-GAAP financial measures that are forward-looking include that:

• the document discloses an equivalent historical non-GAAP financial measure;
• the non-GAAP financial measure that is forward-looking information is presented with no more prominence in the document than that of the equivalent historical non-GAAP financial measure; and
• in proximity to the first instance of the non-GAAP financial measure that is forward-looking information, the document provides, directly or by incorporation by reference (where permitted), a description of any significant difference between the non-GAAP financial measure that is forward-looking information and the equivalent historical non-GAAP financial measure.

Requirements for Non-GAAP Ratios and Other Financial Measures

One of the objectives of NI 52-112 is to tailor requirements to other financial measures that do not meet the definition of a non-GAAP financial measure, resulting in reduced disclosure obligations. Those other measures include, among other things, non-GAAP ratios and supplementary financial measures.

A “non-GAAP ratio” is defined in NI 52-112 as a financial measure disclosed by an issuer that (a) is in the form of a ratio, fraction, percentage or similar representation, (b) has a non-GAAP financial measure as one or more of its components, and (c) is not disclosed in the financial statements of the entity.

A “supplementary financial measure” is a financial measure disclosed by an issuer that (a) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of an entity, (b) is not disclosed in the financial statements of the entity, (c) is not a non-GAAP financial measure, and (d) is not a non-GAAP ratio.

Incorporation by Reference

NI 52-112 allows an issuer, in a document that contains a specified financial measure, to incorporate by reference certain disclosure required by NI 52-112 that is contained in the issuer’s Management’s Discussion & Analysis. However, the issuer may not incorporate by reference certain required disclosure if the document that contains the specified financial measure is in an earnings release.

Scope of Application

The Companion Policy provides guidance on the application of NI 52-112 including:

• If the financial measure is only identified by label without a corresponding numerical amount or measure, a specified financial measure has not been disclosed and, thus, the disclosure requirements in NI 52-112 do not apply.
• NI 52-112 does not apply to pro-forma financial statements included in a filing required under securities legislation, such as pro-forma financial statements required to be included in a business acquisition.
• Financial measures that are required to be disclosed by a law or a self-regulatory organization of which the issuer is a member and which composition is determined in compliance with the law or the requirement of the self-regulatory organization are not subject to NI 52-112.

The adoption of NI 52-112 affects Canadian issuers that report non-GAAP measures. Companies should become familiar with the new disclosure requirements and allow themselves sufficient time to prepare enhanced financial disclosure and ensure compliance.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Curtis Chance (Associate), Thomas Fung (Associate) and Xin Gao (Associate) at McCarthy Tétrault LLP.