Disclosure of non-GAAP financial measures "disappointing": OSC

December 17, 2013

Last week, the Ontario Securities Commission issued a report setting out the findings of its review of the non-GAAP financial measures and additional GAAP measures commonly disclosed by issuers in public documents. The report, which found that issuers in almost all industries use some type of non-GAAP or additional GAAP financial measure considered common to their particular industry, also found that there is often no standard method in calculating the industry measure. Commonly used non-GAAP financial measures include EBITDA, adjusted earnings and net debt; commonly used additional GAAP measures include operating income and cash flow from operating activities before changes in non-cash working capital.

In preparing the report, the OSC reviewed the disclosure of 50 Ontario-based reporting issuers and focused on where non-GAAP financial measures or additional GAAP measures were reported and how they were calculated, presented and disclosed.


In the report’s summary of findings, the OSC expressed disappointment at the review’s results, identifying concerns with the disclosure of 86% of issuers reviewed. The OSC also noted that 82% of issuers reviewed committed to enhancing disclosure in future filings, including by making changes to address missing or inadequate quantitative reconciliations to the most directly comparable GAAP measure, explaining why the measures are meaningful to investors and the additional purposes, if any, for why management uses these measures and providing meaningful names when additional GAAP measures are presented in the financial statements.

The report also reiterated the OSC’s disclosure expectations as outlined in CSA Staff Notice 52-306, most recently updated in February 2012. Based on its review, the OSC identified the following areas for improvement: (i) explaining the objectives for using the non-GAAP financial measures or the additional GAAP measure; (ii) providing a clear quantitative reconciliation between the non-GAAP financial measure and its most directly comparable GAAP measure; (iii) providing meaningful names for additional GAAP measures that are not confusing; and (iv) disclosing how the additional GAAP measures are calculated in relation to minimum disclosure items required by IFRS.

Common concerns raised by the OSC included, among others: (i) the use of boilerplate language in MD&A and press releases for an explanation of the issuer’s use of non-GAAP financial measures; (ii) giving non-GAAP measures greater prominence than the most directly comparable GAAP measure; (iii) failure to reconcile the non-GAAP financial measure to the most directly comparable GAAP measure, clearly or at all; (iv) failure to adequately explain why an additional GAAP measure provides relevant information to investors and how it facilitates the investor to better understand the issuers financial position and performance; and (v) failure to adequately disclose how an additional GAAP measure was calculated in relation to the minimum disclosure items required by IFRS.

The OSC also noted that where key performance indicators are used by an issuer that contain financial information sourced from financial statements, issuers should carefully consider whether such KPIs are non-GAAP financial measures. If so, the KPIs should be treated in accordance with CSA Staff Notice 52-306. Furthermore, issuers were reminded of their responsibility to ensure that publicly disclosed non-GAAP financial measures and additional GAAP measures are not misleading and that action may be taken against issuers that disclose information in a manner considered misleading and therefore potentially harmful to the public interest.

The OSC will continue to monitor and review disclosure of non-GAAP financial measures and additional GAAP measures as part of its normal course continuous disclosure review program. For further details please see OSC Staff Notice 52-722.

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