Review reveals more problems with disclosure

Non-GAAP measures overused: CSA

TORONTO • Almost one-fifth of the 840 companies whose continuous disclosure was reviewed by Canadian regulators in the year ended March 30 were forced to refile something.

The percentage of firms told to re-file rose to 18 per cent from 13 per cent in fiscal 2017, according to a report issued by the Canadian Securities Administrators on Thursday.

Though there were fewer companies reviewed in the most recent year, the number required to make re-file some of their disclosure still rose.

In addition, eight per cent of firms reviewed were referred to enforcement or added to cease trade and default lists in 2018, up from six per cent the year before when 1,014 firms were reviewed.

In each of the past two years, about 80 per cent of the reviews were “issue oriented,” targeted to “a specific accounting, legal or regulatory issue, an emerging issue or industry, implementation of recent rules or on matters,” where regulators say they believe there may be “a heightened risk of investor harm.”

Reviews can also be triggered as a result of general monitoring through news releases, media articles, or complaints, the CSA said.

An issue that has been and remains a concern for regulators is the use of nonGAAP (generally accepted accounting principals) financial measures, particularly by real estate firms and on the websites of companies in other sectors.

The use of such measures, along with proper disclosure of what’s being done, can help explain changes in performance, cash flows or financial condition.

However, the regulators have tracked “increased prevalence … where the stated purpose and usefulness of the measure is unclear and fails to align with the natures of the adjustments that are being made.” This, along with a lack of clear disclosure about what’s being done, has the potential to leave investors “confused or even misled.”

Regulators say non-GAAP measures are not supposed to be the primary focus of companies’ website content or “key messaging” to investors in corporate presentations, investors fact sheets, news releases or on social media, but many firms continue to “give excessive prominence to the NGMs (non-GAAP) measures.”

In some cases, a “less favourable” generally accepted accounting measure “is not presented or discussed, or is disclosed in a less prominent location,” the regulators say.

The report notes that the use of non-GAAP measures is prominent in the real estate sector. Several issuers don’t provide adequate transparency about various adjustments being made to arrive at their non-GAAP measures, such as adjusted funds from operations (AFFO), particularly when the adjustments are management estimates.

“For example, adjustments for maintenance capital expenditures are often not explained in sufficient detail,” the CSA report says.

The regulators looked at companies’ continuous disclosure contained in various documents and other investor communications including financial statements, management discussion and analysis, technical mining reports, news releases, and social media.

“The volume of disclosure filed does not necessarily equate to full compliance,” the report noted.

FIRMS TOLD TO REFILE BY REGULATORS ROSE TO 18 PER CENT.