Investors in income trusts could see a clearer picture of their investment risk as a result of recommendations for reporting of income trusts’ distributable cash issued today by the Canadian Institute of Chartered Accountants (CICA).

Inconsistencies in how income trusts calculate distributable cash and other measures have made it difficult for investors to evaluate income trust financial results over time and compare them across entities. Canada’s Chartered Accountants are taking a lead role in resolving this issue with recommendations developed by the Canadian Performance Reporting Board (CPRB) for improved disclosure, transparency and standardization in the reporting of distributable cash in Management’s Discussion and Analysis (MD&A).

This new guidance complements a recently published Canadian Securities Administrators (CSA) policy statement by providing a standardized measure for reporting distributable cash and a disclosure framework that will assist preparers in meeting the objectives of the CSA policy.

“Up until now, the lack of consistent distributable cash calculations and disclosures among income trusts has led to significant confusion about what the term distributable cash represents,” said Kevin Hibbert, director and chief accountant, Standard and Poor’s Canada, in a release. “The CICA’s new guidance, in combination with the new CSA policy, provides income trusts with much needed direction in how to improve comparability, clarity and consistency in the reporting of distributable cash.”

For Kevin Dancey, president and CEO of the CICA, the main issue is safeguarding investors. “As a leader in establishing best practices in reporting and disclosure, the CICA is filling this gap in financial reporting that has put investors in income trusts at undue risk. The focus of our guidance is to give investors information to answer two specific questions: Where did the cash come from that funded their cash distributions and, in arriving at the amount available for distribution, has the income trust made the investments necessary to maintain its operations.”

The term ‘distributable cash’ generally refers to the cash that an income trust could potentially distribute to unit holders. Investors use this information when assessing the entity’s ability to fund future distributions and to help value their investments. A standardized measure accompanied by disclosure about productive capacity and finance strategy will assist investors when making these assessments.

The CICA guidance recommends that income trusts report a new measure called “Standardized Distributable Cash” to improve consistency of reporting and comparability between entities. Together with other disclosures recommended in the framework, the new measure gives the industry a common methodology for providing investors with information to answer four key questions:

  1. How much cash was generated in the period and where did it come from?
  2. What is the entity’s strategy for managing productive capacity and to what extent has that capacity been maintained?
  3. What is the entity’s strategy for managing debt (including long-term unfunded operational liabilities such as pension plans) and how does this impact distributions?
  4. What financial covenants exist that might restrict future distributions and to what extent is the entity in compliance with those covenants?



CICA said investors need this kind of information to properly understand and interpret what is meant by distributable cash , and to assess and compare investments. With the passing of legislation to implement last fall’s decision to tax income trusts’ distributions — commencing in 2011 for existing trusts — disclosures of productive capacity management and finance strategies take on additional significance for investors as these entities make plans for how to deal with the post 2011 environment.

“By following this guidance, income trusts will provide their investors with transparent and comparable information on how their cash distributions are funded, as well as other related disclosures, such as the entity’s productive capacity history,” Dancey added. “CEOs and CFOs may also wish to consider this guidance when determining whether or not financial information in the regulatory filings is fairly presented for certification purposes and it may likewise be of assistance to audit committees making similar assessments.”

The CICA developed the recommendations after considering the comments of the income trust community and investors to draft guidance issued last fall.

Copies of this guidance can be obtained from CICA’s Performance Reporting Resource Centre at www.cica.ca/cpr.