The Canadian Securities Administrators are calling for income trusts to improve their disclosure of distributable cash, among other things.

The CSA issued a staff notice that has been revised to clarify their expectations about the presentation of distributable cash. “CSA staff has concluded that distributable cash is, in all circumstances, a cash flow measure, and that distributable cash is fairly presented only when reconciled to cash flows from operating activities as presented in the issuer’s financial statements,” it says.

At the same time, the CSA issued a report on CSA staff’s second continuous disclosure review of income trust issuers. The review “indicates that income trust issuers need to significantly improve the nature and extent of their disclosure and in particular, their distributable cash disclosure in Management’s Discussion and Analysis.”

In the course of the review, of the 45 income trust issuers reviewed, seven had to re-file disclosure documents or file disclosure documents that they did not previously file; 31 committed to provide disclosure enhancements in future MD&A, financial statements, AIF or press releases; and, just seven had no identifiable deficiencies.

The report identifies a variety of disclosure issues, including: the presentation of distributable cash; in many cases, income trust issuers did not provide sufficient disclosure about their sources of funding relating to current and future cash distributions; and various other areas where disclosure was lacking, including regarding risks and uncertainties, overall performance and results of operations, goodwill impairment testing, executive compensation disclosure, timely disclosure, and, disclosure of material contracts.

In the notice, the CSA says, “Staff recognizes that non-GAAP financial measures may be a useful means of providing investors with additional information to assist them in understanding critical components of an issuer’s financial results. It is important, however, that such measures not be presented in a way that confuses or obscures the GAAP measures.”

“Staff reminds issuers of their obligation to discuss in MD&A management’s perspective on the results of operations. Issuers should consider whether the separate presentation of non-GAAP financial measures provides added benefit to readers,” it says. “Staff suggests that a comprehensive discussion in the MD&A of operations and the impact of specific events on operations may be preferable to presenting non-GAAP financial measures.”

It also reminds issuers of their responsibility to ensure that information they provide to the public is not misleading. “Selective editing of financial information may be misleading if it results in the omission of material information. Staff cautions issuers that regulatory action may be taken if issuers disclose information in a manner considered misleading and therefore potentially harmful to the public interest,” it adds.

CSA staff expects issuers to define clearly any non-GAAP financial measure and to explain its relevance to ensure it does not mislead investors, it stresses. “Issuers presenting non-GAAP financial measures should present those measures on a consistent basis from period to period,” it notes.

The notice also says that, in staff’s view, it is not appropriate to present non-GAAP financial measures in the GAAP financial statements. And, “In staff’s view, non-GAAP financial measures should not reflect adjustments for items identified as non-recurring, infrequent or unusual, when a similar charge or gain is reasonably likely to occur within the next two years or occurred during the prior two years.”