Editor’s note: This is general educational information about Canadian disclosure rules for non-GAAP and other financial measures. It is not investment, legal or accounting advice. Everything below is drawn from the instrument, companion policy and regulator publications listed at the end.
Almost every Canadian earnings release contains at least one number that does not appear in the audited financial statements. Adjusted earnings, adjusted EBITDA, free cash flow and organic growth are all constructed by management, and none of them has a fixed definition. Canadian securities regulators spent nearly two decades handling that through staff guidance, then converted the guidance into a binding rule. Since August 25, 2021, National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure has set out what an issuer must publish whenever it puts such a figure in front of investors.
From staff notice to enforceable rule
The predecessor was CSA Staff Notice 52-306 Non-GAAP Financial Measures, first published on November 14, 2003 and revised repeatedly, with further versions dated November 21, 2003, August 4, 2006, November 9, 2010, February 17, 2012 and January 14, 2016. A staff notice states what regulators expect. It is not a rule, and the distance between the two is the point of the change.
National Instrument 52-112 came into force on August 25, 2021. It does not apply to a reporting issuer in respect of documents filed for a financial year ending before October 15, 2021, and it did not apply to issuers that are not reporting issuers until after December 31, 2021. The companion policy confirms the rule reaches disclosure on a website and through social media platforms, and states that a reporting issuer should not use social media for a specified financial measure where the required accompanying disclosure cannot be given.
The instrument defines a non-GAAP financial measure as one that depicts historical or expected future financial performance, financial position or cash flow, and that in its composition excludes an amount included in, or includes an amount excluded from, the most directly comparable measure disclosed in the primary financial statements. Separate categories cover non-GAAP ratios, total of segments measures, capital management measures and supplementary financial measures, each with its own section. An earnings release is defined by reference to section 11.4 of National Instrument 51-102, so the rule bites on the release itself and not only on the MD&A.
What section 6 actually demands
For a historical non-GAAP measure, section 6 sets six conditions and an issuer must meet all of them. The measure has to be labelled with a term that describes it given its composition and that distinguishes it from totals, subtotals and line items in the primary financial statements. It has to be identified as a non-GAAP financial measure. The document has to disclose the most directly comparable measure from the primary financial statements, and the non-GAAP measure must be presented with no more prominence than that comparable measure.
In proximity to the first instance of the measure, the document must explain that the measure is not standardized under the financial reporting framework used and might not be comparable to similar measures disclosed by other issuers. It must set out the composition of the measure, explain how the measure provides useful information to an investor along with any additional purposes for which management uses it, give a quantitative reconciliation to the most directly comparable measure for the current and comparative period, and, where the label or composition has changed from what was previously disclosed, explain why.
Finally, where the measure appears in MD&A or an earnings release, the same measure for a comparative period, determined using the same composition, must also be disclosed unless doing so is impracticable.
The reconciliation itself has a defined standard. To be in the permitted format it must be disaggregated quantitatively in a way that would enable a reasonable person applying a reasonable effort to understand the reconciling items, and it must explain each reconciling item. It must not describe a reconciling item as “non-recurring”, “infrequent”, “unusual”, or a similar term, if a loss or gain of a similar nature is reasonably likely to occur within the 2 financial years that immediately follow the disclosure, or has occurred during the 2 financial years that immediately precede it.
Forward-looking non-GAAP measures are handled in section 7. They must carry the same label as the equivalent historical measure, appear with no more prominence than the equivalent forward-looking measure disclosed under the reporting framework, and, where no such measure is disclosed, be accompanied by a description of the significant differences between the forward-looking measure and the equivalent historical one.
How prominence is judged
The companion policy declines to reduce prominence to a formula and calls it a matter of judgment, then supplies examples that leave little doubt. Presenting a non-GAAP measure in the form of a statement of profit or loss and other comprehensive income without a reconciliation, a presentation the policy calls the single column approach, makes it more prominent. So does omitting the most directly comparable measure from a news release headline or caption that includes the non-GAAP measure. So does using bold, underlining, italics or a larger font to emphasise the non-GAAP figure. Where the comparable measure is presented with equal or greater prominence, the requirement is met.
The comparison with Europe is instructive because the destination is similar and the instrument is not. The European Securities and Markets Authority addresses the same practice through Guidelines on Alternative Performance Measures, which ask issuers to define the measures they use, give them meaningful labels reflecting their content, avoid labels that are the same or confusingly similar, and reconcile each measure to the most directly reconcilable line item in the financial statements. That is guidance addressed to issuers and to the authorities that supervise them. The Canadian text is drafted as a prohibition: an issuer must not disclose the measure unless the conditions are satisfied.
Analysis: the rule targets the adjective, not the adjustment
Nothing in the instrument stops a company from reporting adjusted earnings, and nothing constrains what it may adjust for. A management team can still exclude restructuring charges, impairments, share-based compensation and acquisition costs and call the residue adjusted earnings. What the rule governs is the vocabulary and the layout, so that such a figure cannot be presented more prominently than the statutory result it sits beside.
The most consequential sentence in the instrument is the restriction on the words “non-recurring”, “infrequent” and “unusual”. Tying those labels to the 2 financial years on either side of the disclosure converts a rhetorical claim into a testable one. An issuer that has taken a restructuring charge in each of the two preceding years cannot describe the current one as non-recurring, and a reader can check the assertion against the previous filings rather than accepting it. That is a narrow provision doing work that a general instruction to be fair could not.
The prominence and labelling requirements do similar work on the shape of a release. Requiring the most directly comparable statutory figure in the same headline, at no smaller a size, removes the presentational gap that made adjusted numbers the default reading. Requiring the same composition for the comparative period closes the other route, which is a change of definition between periods, and where the definition does change the issuer must say why.
What the rule cannot deliver is comparability between companies. The instrument requires an issuer to state that its measure is not standardized and might not be comparable to similar measures disclosed by others, which is an admission rather than a remedy. Two Canadian issuers can report adjusted earnings under identical labels and different compositions, both fully compliant. The reader’s work therefore has not disappeared, it has moved: the reconciliation table, the composition explanation and the comparative period figure are now required to be present, and the comparison between two companies still has to be built by hand from those three items.
