Following the adoption of international accounting rules, the inconsistent use and disclosure of certain supplemental accounting measures risks confusing investors, says the Ontario Securities Commission (OSC).
The OSC today published OSC Staff Notice 52-722 Report on Staff’s Review of Non-GAAP Financial Measures and Additional GAAP Measures, which spells out the results of a review of issuer disclosure focusing on the use of non-GAAP financial measures (NGM) and additional GAAP measures (AGM). It says that issuers are increasingly using these supplemental accounting measures since the introduction of International Financial Reporting Standards (IFRS).
It reviewed the disclosure of 50 issuers — focusing on where NGMs and AGMs are reported, calculations and presentations of these measures, and, their disclosure — which led the OSC to conclude that there are widespread weaknesses in this aspect of issuer disclosure that may lead to investor confusion.
“The results of our review were disappointing. Many issuers need to improve the quality of their disclosure related to non-GAAP financial measures or additional GAAP measures,” the notice says.
The report indicates that 82% of the issuers reviewed have committed to enhancing disclosure in their future filings, including “changes to address missing or inadequate quantitative reconciliations to the most directly comparable GAAP measure, disclosures 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.”
“We are concerned that absent improvements in these areas, investors may be confused or potentially misled when non-GAAP financial measures or additional GAAP measures are not presented appropriately,” it says.
The Canadian Securities Administrators (CSA) have issued guidance to issuers on the disclosure of NGM and AGM, which are often used in disclosure such as press releases, prospectus filings and management discussions; NGMs are not presented in financial statements, although AGMs may be, under IFRS.
“Issuers in almost all industries use some type of a non-GAAP financial measure or an additional GAAP measure considered common to that particular industry. However, there is often no standard method to calculate the industry measure,” the report notes. And, the OSC says that while this may provide investors with additional information which helps them understand an issuer’s financial performance, “Nevertheless, investors must have a sufficient understanding of what these measures are and their relevance for decision making.”
“Investors are entitled to clear and transparent information when non-GAAP financial measures and additional GAAP measures are presented. These measures must be easy to understand and be relevant,” said Huston Loke, director of corporate finance at the OSC. “We encourage issuers and their advisers to refer to the guidance in this notice as they prepare their annual and interim filings.”
The OSC says it will continue to monitor and review disclosure of non-GAAP financial measures and additional GAAP measures as part of its normal continuous disclosure review program.