The Canadian Securities Administrators have issued a staff notice regarding the use of non-GAAP financials, saying that it is concerned that investors could be misled by their use.

The notice aims to provide guidance to issuers who use non-GAAP disclosures. CSA staff have observed that certain non-GAAP financial measures were being presented without the disclosures and reconciliations recommended for non-GAAP earnings measures. As a result, staff has decided to explicitly broaden the scope of this notice to all non-GAAP financial measures.

The CSA says that issuers commonly present a non-GAAP financial measure without any explanation of the reasons for using it, or a discussion of how management uses the measure. “Staff is concerned that investors may be confused or even misled by non-GAAP financial measures,” it says. “To minimize the potential for confusion, such measures need to be accompanied by clear disclosure that the measures do not have a standardized meaning, an explanation of their composition and a reconciliation to the most directly comparable measure in the issuer’s GAAP financial statements.”

CSA staff have also observed instances of issuers reporting non-GAAP financial measures that appear to be defined differently from quarter to quarter or from year to year. And, they are concerned that some issuers give greater prominence to one or more non-GAAP financial measures related to earnings than to net income determined in accordance with GAAP.

The CSA 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 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.”

The CSA notice lays out specific requirements that issuers should follow to clearly define clearly any non-GAAP financial measure and to explain its relevance.

Particularly in the case of income trusts, it notes that CSA staff considers distributable cash to be a non-GAAP financial measure. “If an issuer presents information about distributable cash, then the staff expectations set out in this notice are applicable,” it says.

The notice also has recommendations concerning segment disclosures and forward-looking information.

http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Notices/csanotices/2003/csa_20031114_52-306_non-gaap.htm