CSA Publishes Final Non-GAAP and Other Financial Measures Rule

On May 27, 2021, the Canadian Securities Administrators (CSA) published the final forms of National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 52-112) and its related companion policy (the Companion Policy), which provide binding disclosure requirements and associated guidance for non-GAAP (generally accepted accounting principles) and certain other financial measures disclosed by reporting issuers and certain other issuers.

NI 52-112 and the Companion Policy will replace the existing CSA guidance on non-GAAP financial measure disclosure in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (SN 52-306) and are expected to come into effect on August 25, 2021. The transition provisions of the final NI 52-112 state that it will not apply to disclosures by reporting issuers in respect of documents filed for financial years ending before October 15, 2021, as well as to certain disclosures made by non-reporting issuers until after December 31, 2021.

For reporting issuers, this means that NI 52-112 will initially apply in respect of an issuer’s annual filings for a financial year ending on or after October 15, 2021 (e.g., NI 52-112 will apply to annual filings, including with respect to annual management's discussion and analysis (MD&A) or annual earnings releases, for issuers with upcoming financial year ends of October 31, November 30 or December 31, 2021) and to any other documents filed subsequently. NI 52-112 will not apply to 2021 interim filings. The guidance set out in SN 52-306 will continue to apply to such interim filings.

BACKGROUND

On February 13, 2020, the CSA published revised proposals for NI 52-112 and the Companion Policy (collectively, the Revised Proposals), which contained substantive changes to the CSA's original proposals for NI 52-112 and the Companion Policy, which were first published for comment on September 6, 2018. For more information, see our February 2020 Blakes Bulletin: CSA Proposes Revised Non-GAAP and Other Financial Measures Rule.

In its May 27, 2021 publication, the CSA states that the final forms of NI 52-112 and the Companion Policy contain targeted, non-material changes from the Revised Proposals, which are intended to clarify and streamline the application of NI 52-112 and the disclosure requirements contained therein. As NI 52-112 and the Companion Policy have been published in their final forms, there is no further comment period in relation to them.
NI 52-112 applies to:

1. all reporting issuers (other than investment funds, "designated foreign issuers" or "SEC foreign issuers") in respect of the disclosure of non-GAAP financial measures (historical or forward-looking), non-GAAP ratios, total of segments measures, capital management measures and supplementary financial measures (collectively, specified financial measures) in a document that is intended to be, or reasonably likely to be, made available to the public, and
2. non-reporting issuers in respect of the disclosure of specified financial measures in a document that is made available to the public and is subject to the prospectus requirements, filed with securities regulatory authorities in connection with a distribution of securities made in reliance on the offering memorandum exemption, or submitted to a recognized stock exchange in connection with a qualifying transaction, reverse take-over, change of business, listing application, significant acquisition or similar transaction.

CHANGES FROM THE REVISED PROPOSALS

Following its process of stakeholder outreach and engagement in respect of the Revised Proposals, the CSA made the following changes to the Revised Proposals in the final forms of NI 52-112 and the Companion Policy:

• Introduced new exceptions to the scope of application of NI 52-112;

• Narrowed and clarified various definitions and disclosure requirements;

• Permitted incorporation by reference for certain (but not all) required disclosures in respect of specified financial measures included in an earnings news release;

• Expanded incorporation by reference to issuer's MD&A for certain required disclosures for all specified financial measures; and

• Enhanced readability.

Additional Exceptions to the Application of NI 52-112

In addition to the exceptions to the scope of application that were contained in the Revised Proposals, the final form of NI 52-112 will not apply to:

1. disclosure of a specified financial measure by an issuer where the calculation of such measure is derived from a financial covenant in a written agreement to which the issuer is a party (i.e., a credit agreement);
2. reports prepared by a person or company, other than the issuer that is the subject of the specified financial measure (e.g., specified financial measures contained in valuation reports or fairness opinions prepared by a third party which are filed or incorporated by reference in a document filed by an issuer), although any specified financial measures from third party reports that are taken and disclosed by the issuer will be subject to NI 52-112; and
3. disclosure of specified financial measures by registered dealers, advisers or investment fund managers (collectively, registered firms), if the document in which a disclosure is made is intended to be, or is reasonably likely to be, made available to a client or a prospective client of the registered firm, and the measure does not relate to the registered firm’s financial performance, financial position or cash flow.

As compared to the Revised Proposals, the final form of NI 52-112 also contains a partial exception for certain specified financial measures required to be disclosed under Form 51-102F6 Statement of Executive Compensation (Form 51-102F6) or Form 51-102F6V Statement of Executive Compensation – Venture Issuers. However, as a departure from the current requirements of Form 51-102F6 in respect of disclosure of performance goals or similar conditions that are non-GAAP financial measures, NI 52-112 will require applicable reporting issuers to, in proximity to the first instance of disclosure of each historical non-GAAP financial measure, any total of segments measure and any capital management measure that is not disclosed as a ratio, fraction, percentage or similar representation, disclose (directly or by incorporating by reference from their MD&A) in the permitted format, a quantitative reconciliation of the measure to the most directly comparable financial measure disclosed in the issuer’s primary financial statements.

Incorporation by Reference

While the Revised Proposals permitted issuers to incorporate by reference certain discrete disclosures (including quantitative reconciliations) from the issuer’s MD&A, the Revised Proposals did not permit such incorporation by reference for earnings news releases filed by an issuer. The final form of NI 52-112 permits issuers to incorporate by reference from their MD&A most of the required disclosures (but not quantitative reconciliations) in respect of specified financial measures included in their earnings news releases. As such, reporting issuers will now need to include the full quantitative reconciliations of non-GAAP financial measures, total of segment measures and capital management measures, as well as a description of any significant differences between a forward-looking non-GAAP financial measure and its historical equivalent, in their earnings news releases. In our experience, this will be a change for many issuers who have, until now, simply referred the reader to this disclosure in their MD&A.

Finally, the final form of NI 52-112 also clarifies that issuers may not incorporate by reference disclosure required in respect of specified financial measures from one MD&A to another.

WHAT'S NEXT

NI 52-112 and the Companion Policy are expected to come into effect on August 25, 2021, provided all necessary ministerial approvals are obtained. As noted above, NI 52-112 will apply to applicable disclosures of non-GAAP and other specified financial measures by reporting issuers in annual filings in respect of financial years ending on or after October 15, 2021 (and in any other documents filed thereafter) and by applicable non-reporting issuers made after December 31, 2021. Prior to the application of NI 52-112 and the Companion Policy, issuers should continue to follow the guidance in SN 52-306, which will be withdrawn once the transition to NI 52-112 and the Companion Policy are complete.

For further information please contact:

Jeff Bakker                   403-260-9682
Matthew Merkley        416-863-3328
Raees Nakhuda           416-863-5837
Brendan Reay              416-863-5273
Kristopher Simard       403-260-9643


or any other member of our Capital Markets group.