Canada’s securities regulators are publishing material to help investors through the maze guidance of unconventional earnings measures used in financial reporting. The Canadian Securities Administrators staff has issued a notice to address concerns earnings measures other than those prescribed by Generally Accepted Accounting Principles (GAAP).

“Investors should be cautious when looking at non-GAAP earnings measures,” said John Carchrae, chairman of the CSA Chief Accountants Committee. “It is important to understand that these measures present only part of the picture and may selectively omit certain expenses, resulting in a more positive portrayal of a company’s performance.”

It has become common practice for many issuers to publish non-GAAP earnings measures, such as pro forma earnings, operating earnings, cash earnings, EBITDA and adjusted earnings. These terms lack standard, agreed upon meanings and are unlikely to be comparable to measures presented by other issuers.

Among the expectations for issuers specifically described in the staff notice are the following:
– Present prominently with the non-GAAP earnings measures the earnings measures for the period determined in accordance with GAAP, and provide a clear reconciliation between the two.
– Describe the objectives of the non-GAAP earnings measures and discuss the reasons for excluding individual items required by GAAP to be included in determining net income or loss.
– Avoid including non-GAAP earnings measures within the financial statements.

“We are not suggesting that companies should stop reporting non-GAAP earnings measures if they will help investors understand the financial results,” says Carchrae. “But it is essential to explain clearly how the measures are calculated, and to include GAAP measures as well, so that investors see the full picture.”