A new rule to be set on non-GAAP reporting

In recent years, non-GAAP reporting has risen in prevalence. On the one hand, management may feel this reporting offers a greater picture of what a company’s performance, financial position and prospects look like, while some argue that non-GAAP reporting isn’t sufficiently transparent.

On September 6, the Canadian Securities Administrators (CSA) published for comment the much-anticipated rule on the disclosures required for non-GAAP financial measures and other financial information. This proposed rule will replace CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures. 

While staff views on non-GAAP reporting are in place, a rule holds much more significance in terms of mandatory compliance.

“Non-GAAP reporting can provide valuable insight into a company’s business, past performance and future prospects,” explains Rosemary McGuire, director, research, guidance and support at CPA Canada. “However, if not used properly it also has the capacity to confuse or mislead investors.”

Some of the problems with non-GAAP reporting cited by critics include: opportunity for manipulation or risk of management bias since non-GAAP measures typically present a more favourable picture of performance relative to GAAP measures; a lack of transparency over what the measure depicts; overly aggressive or inappropriate adjustments; a lack of inconsistent definitions period to period; a lack of comparability within a sector; and greater prominence than comparable GAAP measures, says McGuire.

Although the new rule will not necessarily offer a complete long-term solution, it does send a message that improvements are needed. It will also force companies to review their reporting techniques.

“While the CSA’s new rule will undoubtedly drive renewed attention by companies and investors around non-GAAP reporting, which is a good thing, how successful it will be in mitigating concerns over the long-term will remain to be seen,” says McGuire. “There is an opportunity for companies to reflect on their use of non-GAAP financial measures and determine whether each measure provides relevant and useful information to investors. Companies should also be proactive and begin to enhance their governance and controls around non-GAAP measures.”

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On November 15, CPA Canada is offering a one-hour webinar on Non-GAAP measures: Regulatory update and reporting considerations.