• Disclosure Matters: Pay Attention to What Isn’t From the Financial Statements
  • January 23, 2014 | Authors: Gregory Hogan; Alexandra Iliopoulos; Joel McElravy
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • Odds are high that the public disclosure you are approving includes one or more “non-GAAP financial measures”, being financial measures that do not meet the criteria under the relevant accounting principles (GAAP) for inclusion in financial statements. Measures like EBITDA, Cash Cost/Ounce, Adjusted Earnings, Adjusted EBITDA, Funds From Operations, Adjusted Funds From Operations, Net Operating Income, Free Cash Flow, All in Cash Cost and Net Debt are all examples of non-GAAP financial measures. Investors and financial analysts have come to rely on these metrics, as they can provide additional insight into overall performance, financial position or cash flow or may measure matters specific to the issuer’s industry. Disclosure containing such metrics often raises concerns however, as there is no standard method to calculate these measures, creating comparability difficulties across similar issuers and across time for the same issuer.

    The securities regulators have previously provided their views on the manner in which non-GAAP financial measures should be presented in CSA Staff Notice 52-306 - Non-GAAP Financial Measures and Additional GAAP Measures. Their expectations have been published for over 10 years. However, if you ask the OSC how issuers are doing with their disclosure of non-GAAP financial measures, the answer is “disappointing”. Following a review of the disclosure of 50 issuers, OSC staff identified concerns in the disclosure of 86% of the issuers reviewed. The OSC is concerned that absent improvements, investors may be confused or potentially misled when non-GAAP financial measures are not presented appropriately.

    When approving disclosure documents, the following checklist for any non-GAAP financial measures being presented can assist in meeting the expectations of the regulators and producing more useful disclosure:

    • Define the measure:

      • Disclosure should be carefully reviewed for financial measures that may be “non-GAAP financial measures”.

    • Explain the objectives for using the measure, including why the measure is meaningful to investors and why management uses it:

      • It is important to avoid boilerplate language in doing this.

    • State that there is no standardized meaning and that it is not comparable to other issuers.

    • Present with equal or greater prominence the most directly comparable GAAP measure.

    • Provide a quantitative reconciliation to the most directly comparable GAAP measure.

    • Explain any changes in the measure from prior disclosure.

    The OSC has provided a number of useful examples of good disclosure in various situations (and some examples of poor disclosure) in OSC Staff Notice 52-722 Report on Staff’s Review of Non-GAAP Financial Measures and Additional GAAP Measures. Issuers should also refer to CSA Staff Notice 52-306 - Non-GAAP Financial Measures and Additional GAAP Measures which provides guidance on disclosure.

    While issuers generally do a better job with MD&A disclosure, the same rules apply for non-GAAP financial measures contained in any disclosure document, including press releases, websites and marketing materials. Issuers are reminded of their responsibility to ensure non-GAAP financial measures publicly disclosed are not misleading. Regulatory action may be taken against issuers that disclose information in a manner considered misleading and therefore potentially harmful to the public interest.