In Practice TARYN ABATE Non-GAAP Measures I
T’S DÉJÀ VU. At least, that’s what the current debate swirling around non-GAAP measures and the use of adjusted numbers feels like in light of increased regulatory and media attention. Regulatory bodies around the world have been issuing new or updated guidance on what to do in order to ensure investors have the information they need and are not misled by non-GAAP measures. In Canada, for example, the Canadian Securities Administrators released Staff Notice 52-306 (Revised) — Non-GAAP Financial Measures in January 2016. “Non-GAAP measures may be useful in highlighting particu-
lar aspects of financial performance or condition; however, poor use of them can result in a lack of transparency, comparability and consistency,” says Gord Beal, vice-president of research, guidance and support at CPA Canada. The Office of the Chief Accountant of the Ontario Securities
Commission (OSC) published a staff notice in November 2016 that examines several financial reporting issues, including com- panies’ use of non-standard accounting metrics, and indicates that the use of non-GAAP measures remains an “ongoing area of focus” for the regulator. Specifically, the OSC remains con- cerned about companies using non-GAAP numbers and giving non-GAAP measures greater prominence than more conven- tional accounting metrics, among other things. All this regulatory activity is not new. Concern over non-GAAP measures and how they might mislead investors emerged as a hot topic in the 1990s. There is now a significant body of knowl- edge offering a foundation for understanding the broad spec- trum of views surrounding the use of non-GAAP measures.
A 20-year echo CPA Canada took a look at 20 years of peer-reviewed academic research on the topic and released its summation in Non-GAAP Measures — A 20-Year Echo, Academic Literature Review (1996- 2016). Here are some key themes of the report. Reporting quality. The research is mixed as to whether disclo- sure of non-GAAP measures is useful and improves the quality of reporting; the usefulness depends largely on the industry, country and size of company. Increased consistency in report- ing, transparency and some form of assurance could help improve the credibility of non-GAAP measures. Several studies suggest that when appropriately presented, non-GAAP mea- sures can provide value-relevant information that is not avail- able through GAAP measures alone. Governance. The quality of non-GAAP measures is oſten linked
to the quality of corporate governance. For example, there is some evidence that the more independent a company’s board of directors and the greater the level of accounting expertise within the audit committee, the better the quality of non-GAAP measures and the less likely these measures will be used opportunistically. Regulation. In a nutshell, research shows that the regulation of non-GAAP measures improves the quality of reporting, which in turn increases investor confidence. In general, investors appreciate the regulation. Several studies also show that while regulations reduce the use of non-GAAP measures to mislead investors, they also reduce a company’s willingness to use non- GAAP measures to convey relevant information to investors.
The quality of non-GAAP measures is often linked to the quality of corporate governance
Industry matters. Non-GAAP measures are more prevalent in certain industries because investors find them more useful than GAAP measures. For example, several studies focused on non- GAAP measures such as distributable cash and funds from operations in the real estate industry. Education. Case studies that feature a range of issues and require students to question management motivations and assumptions highlight some best practices for reporting non- GAAP measures.
Access CPA Canada’s report at cpacanada/non-GAAP review CPA Canada has also compiled technical summaries, practical application guides and frequently asked questions to support the understanding of non-GAAP measures. To access the online library of IFRS resources, visit
cpacanada.ca/ifrs.
TARYN ABATE, CPA, CA, CPA (ILL.), is a principal in the research, guidance and support group at CPA Canada
MARCH 2017 | CPA MAGAZINE | 25
Photo: Paul Orenstein
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