Improved Communication With Supplementary Financial Measures

Draft for Comment
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General Principles and
Guidance for Reporting Net
Free Cash Flow and Ebitda
Improved Communication with

Supplementary Financial Measures
General Principles and Guidance for Reporting
Net Free Cash Flow and Ebitda
2013 Chartered Professional Accountants of Canada

All rights reserved. This publication is protected by copyright and written permission is required to
reproduce, store in a retrieval system or transmit in any form or by any means (electronic, mechanical,
photocopying, recording, or otherwise).
For information regarding permission, please contact permissions@cpacanada.ca.
This publication may be downloaded at www.cica.ca/cpr.
ISBN 978-1-55385-757-0
PREFACE
Improved Communication with Supplementary Financial Measures General Principles and Guidance on Reporting Net Free Cash Flow and EBITDA is published by
CPA Canadas Canadian Performance Reporting Board (CPRB). It contains general
principles for reporting supplementary financial measures, which it defines as those
financial measures not specifically identified with a GAAP framework.1 As well,
it sets out recommendations specifically directed at reporting Net Free Cash Flow
and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
The guidance should be useful wherever these measures are publicly reported. This
may include the financial statements, the Managements Discussion and Analysis
(MD&A), the Annual Report, or press releases.
This guidance consolidates and updates two previous publications: Reporting Supplementary Financial Measures and Improved Communication with Non-GAAP Financial
Measures. A summary of significant differences between the publications is set out in
the Appendix to this material.
Supplementary financial measures have become increasingly popular among preparers
and investors who find they provide additional insight into an entitys performance and
financial condition. Indeed, the popularity of such measures extends beyond general
purpose financial reporting and many financial agreements contain conditions that are
determined by reference to supplementary financial measures.
One of the major issues with respect to supplementary financial measures is the lack of
consistent definitions governing their calculation and disclosure, even among entities
in the same industry. This lack of standard definitions is one reason that regulators
have restricted the use of some measures in financial statements and require extensive
disclosure and reconciliations. However, the widespread use of such measures, even
given such inconsistencies, indicates that users believe they have value. Investors
have indicated that while they would prefer some degree of standardization in
supplementary financial measures, they will likely continue to use non-standardized
entity-specific information.
In the terminology of the Canadian Securities Administrators, supplementary financial measures

comprise additional GAAP measures in IFRS financial statements and non-GAAP financial
measures outside financial statements.
iii
IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

General Principles and Guidance for Reporting Net Free Cash Flow and Ebitda
The adoption of the International Accounting Standards Boards (IASB) International

Financial Reporting Standards (IFRSs) by publicly accountable entities in Canada
has introduced a new issue with respect to such measures. A specific requirement
of International Accounting Standard (IAS) 1 is to present additional items in the
financial statements when this is relevant to understanding an entitys financial
performance or financial position, including information in the notes that is relevant
for an understanding of any of the financial statements.2 This has led many preparers
to consider reporting within the financial statements measures that hitherto were only
considered for the MD&A, for example EBITDA.
At the same time, the Basis for Conclusions of IAS 1 contains cautionary language
concerning the exclusion of items from any sub-total described as operating activities. It notes that excluding items on the grounds that they do not involve cash flows,
such as depreciation and amortization expenses would be inappropriate, as would
excluding items clearly related to operations because they might occur irregularly or
infrequently or are unusual in amount.
The Canadian Securities Administrators (CSA) provide guidance in CSA Staff Notice
52-306 (Revised) Non-GAAP Financial Measures and Additional GAAP Measures
(CSA Staff Notice). The CSA Staff Notice recognizes the above-noted IAS 1 requirements and sets out practices when presenting additional GAAP measures in IFRS
financial statements and disclosures that should accompany non-GAAP financial
measures. The CSA Staff Notice also specifically discusses the use of EBIT and
EBITDA, Results from Operating Activities, Adjusted Statement of Comprehensive
Income and additional columns in presentation of the results of operations.
The United States Securities and Exchange Commission (SEC) also has material
about non-GAAP financial measures, primarily in Regulation G. It should be noted,
however, that the SECs guidance generally forbids the presentation of supplementary
financial measures in US GAAP-compliant financial statements.
Beyond the IASBs statements and the securities regulators materials there is little
guidance governing the criteria for determining whether and where a supplementary
financial measure should be reported and its calculation, presentation, and disclosure. Accordingly, this CPRB material aims to provide guidance about reporting
supplementary financial measures outside the financial statements when permitted
2
iv
IAS 1, paragraphs 55, 85, and 112 (c).
PREFACE
Draft for Comment
by a jurisdictions securities regulations and within financial statements prepared in

accordance with IFRSs.
In view of the widespread use of supplementary financial measures and their lack of
comparability, the CPRB believes it is useful to provide guidance on two questions:
1. What are the specific considerations such as what, when and where that
govern whether supplementary financial measures can be externally reported,
either outside the financial statements or within IFRS financial statements?
2. If supplementary financial measures are reported outside the financial statements
or within IFRS financial statements, what specific presentation, measurement and
disclosure issues need to be considered?
Accordingly, this guidance sets out a disclosure framework to enable entities to
determine where a measure should be reported. It also gives definitions for standardized measures of Net Free Cash Flow and EBITDA and contains presentation and
disclosure considerations for Net Free Cash Flow and EBITDA. The improved
comparability and transparency resulting from applying the disclosure framework
should lead to more transparent supplementary financial measures and additional
clarity for investors.
Part I of this guidance provides some general guidelines that apply to the decision to
publish supplementary financial measures. Parts II and III address the application of
the general guidance to Net Free Cash Flow and EBITDA.
This guidance reviews matters that the CPRB believes should be considered when
an entity decides to report supplementary financial measures. It is not a substitute
for either the IASBs requirements for reporting supplementary financial measures
within IFRS financial statements or securities regulators application guidance. While
not directly aimed at the needs of users of financial statements, the CPRB guidance
should also help users understand the strengths and weaknesses of supplementary
financial measures when used in the analysis of financial reports.
The CPRB recognizes that supplementary financial measures are an area where little
standard good practice exists. Accordingly, this guidance is presented as a draft
for comment until July 31, 2013. While comments about any area of the guidance

are encouraged, the CPRB would especially appreciate comments on the following
matters:
1. The criteria for relevance for additional GAAP measures and non-GAAP financial
measures.
2. The criteria for faithful representation for additional GAAP measures and nonGAAP financial measures.
3. The inclusion of and criteria for verifiability for additional GAAP measures and
non-GAAP financial measures.
4. The components for Standardized Net Free Cash Flow.
Please send comments to:
Chris Hicks, CPA, CA
Principal, Research, Guidance and Support
CPA Canada
277 Wellington Street West
Toronto, ON
M5V 3H2
chicks@cpacanada.ca
February, 2013
vi
Contents
PART I: General Guidance on Supplementary Financial Measures
I.1
Nature and Objective of Supplementary Financial

Measures................................................................................................................... 1
I.2
Relationship of CPRB Guidance to Securities

Regulators Requirements.............................................................................. 2
I.3
Qualitative Characteristics of Useful Financial Information ...... 2
I.4 Interpreting the Qualitative Characteristics

in Practical Terms................................................................................................ 5
I.5
Categorization as an Additional GAAP Measure

or a Non-GAAP Financial Measure........................................................... 7
I.6 Supplementary Financial Measure Presentation

and Disclosure .....................................................................................................11
PART II: Application to Specific Measures: Net Free Cash Flow

II.1
Free Cash Flow and Net Free Cash Flow.............................................15
II.2 Applying the Qualitative Characteristics

of the Conceptual Framework....................................................................17
II.3
Net Free Cash Flow as an Additional GAAP Measure

or a Non-GAAP Financial Measure........................................................ 22
II.4 The Presentation and Disclosure of Net Free Cash Flow.......... 24
PART III: Application to Specific Measures: EBITDA

III.1
EBITDA.....................................................................................................................31
III.2 Applying the Qualitative Characteristics

of the Conceptual Framework....................................................................31
III.3 EBITDA as an Additional GAAP Measure
or a Non-GAAP Financial Measure........................................................ 33
III.4 The Presentation and Disclosure of EBITDA.................................... 35
APPENDIX
Differences from Previous CPRB Guidance................................................... 41
vii
PART I: General Guidance

on Supplementary
Financial Measures
I.1
Nature and Objective of

Most financial reporting frameworks, such as IFRSs and US GAAP, specify
particular items to be reported in the financial statements. For example,
International Accounting Standard (IAS)1 Financial Statement Presentation
specifies the minimum line items to be presented in reporting comprehensive
income. As well, however, IAS 1 requires entities to present additional line
items, headings and sub-totals when they are relevant to an understanding of
financial performance or financial position, and information in the notes that
is not presented elsewhere but which is relevant to an understanding of any of
the financial statements.
Supplementary financial measures are those financial measures that are not
specifically identified by a GAAP framework. They fall into two categories.
The first category comprises financial measures reported outside the financial
statements in communications such as Managements Discussion and
Analysis (MD&A). These are usually referred to as non-GAAP financial
measures. The second category comprises those measures under IFRSs
that have sufficient attributes to be reported as additional items within the
financial statements, as noted above. These are referred to by the Canadian
Securities Administrators (CSA) as additional GAAP measures.1
Unlike measures prescribed by an accounting framework, supplementary
financial measures do not have generally accepted definitions. In addition,
supplementary financial measures frequently use selective information in
that they either omit amounts from a GAAP measure or add in amounts
omitted from a GAAP measure. As well, their calculation may involve
CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures and Additional GAAP
Measures.
1

subjective assumptions, judgments, and estimates that are not required by an

entitys GAAP. Supplementary financial measures involve a range of levels of
complexity and subjectivity in their construction. For example, many entities
report a supplementary financial measure such as profit before tax expense
as a separate financial statement line item, being the sum of the specified
IFRS amounts tax expense and profit or loss (assuming no discontinued
operations). On the more complex side, some entities report supplementary
financial measures involving amounts that are not defined by any measurement criteria, for example maintenance capital expenditures.
Many supplementary financial measures are widely used by management and
investors, for example EBITDA, Distributable Cash, and Free Cash Flow.
Such measures are believed to provide management and users of financial
reports with additional analytical insight into an entitys performance and
financial condition, expanding on the information stipulated by the GAAP
framework. The importance of such measures is further illustrated by their
use outside of financial reporting in debt covenants, executive compensation
plans, and purchase and sale agreements. Moreover, in interviews, preparers
and investors express the belief that supplementary financial measures provide
incremental information value beyond that found in stipulated financial
statement disclosures.
I.2
Relationship of CPRB Guidance to

Securities Regulators Requirements
Entities should follow the practices and disclosures for non-GAAP financial
measures and additional GAAP measures that are set out by securities regulators in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures
and Additional GAAP Measures (CSA Staff Notice). The CPRB believes that
Improved Communication with Supplementary Financial Measures will expand
on the CSA material and provide a framework for disclosure.
I.3 Qualitative Characteristics of Useful

Financial Information
In the CPRBs view, a useful basis for analyzing the qualities of additional
GAAP measures and non-GAAP financial measures is the International
Accounting Standards Boards Conceptual Framework For Financial Reporting
2

Draft for Comment
(Conceptual Framework). The IASB states that the qualitative characteristics in

that framework apply to information in financial statements as well as to other
financial information. The CPRB believes this should include reports such as
the MD&A and accordingly the framework can be applied to both additional
GAAP measures and non-GAAP financial measures.
The Conceptual Framework identifies two fundamental qualitative characteristics that are prerequisites for the provision of financial information, and
four enhancing qualitative characteristics. The fundamental characteristics
are that the information be relevant and faithfully represent the phenomenon
that it purports to represent. This latter quality requires that the measure be
complete, neutral, and free from error.
The Conceptual Framework provides the following discussion of the fundamental qualitative characteristics of relevance and faithful representation.

The following are extracts from the IFRS Conceptual

Framework
Relevance
Relevant financial information is capable of making a difference in the decisions made
by users. Information may be capable of making a difference in a decision even if some
users choose not to take advantage of it or are already aware of it from other sources.
Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value or both.
Financial information has predictive value if it can be used as an input to processes
employed by users to predict future outcomes. Financial information need not be a
prediction or forecast to have predictive value. Financial information with predictive
value is employed by users in making their own predictions.
Financial information has confirmatory value if it provides feedback about (confirms or
changes) previous evaluations.
Faithful representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but it must also
faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete,
neutral and free from error. Of course, perfection is seldom, if ever, achievable. The
Boards objective is to maximize those qualities to the extent possible.
A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
For example, a complete depiction of a group of assets would include, at a minimum, a
description of the nature of the assets in the group, a numerical depiction of all of the
assets in the group, and a description of what the numerical depiction represents (for
example, original cost, adjusted cost or fair value). For some items, a complete depiction may also entail explanations of significant facts about the quality and nature of
the items, factors and circumstances that might affect their quality and nature, and the
process used to determine the numerical depiction.
A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasized, de-emphasized or
otherwise manipulated to increase the probability that financial information will be
received favourably or unfavourably by users. Neutral information does not mean
information with no purpose or no influence on behaviour. On the contrary, relevant
financial information is, by definition, capable of making a difference in users decisions.
Faithful representation does not mean accurate in all respects. Free from error means
there are no errors or omissions in the description of the phenomenon, and the process
used to produce the reported information has been selected and applied with no errors
in the process. In this context, free from error does not mean perfectly accurate in all
respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate. However, a representation of that estimate can
be faithful if the amount is described clearly and accurately as being an estimate, the
nature and limitations of the estimating process are explained, and no errors have been
made in selecting and applying an appropriate process for developing the estimate.

Draft for Comment
These fundamental qualitative characteristics are necessary for financial

information to be useful. In addition, the four enhancing qualitative
characteristics should improve the usefulness of financial information. These
characteristics can be summarized as follows:
Comparability: This enables users to identify and understand similarities
and differences among items. Consistency in the use of the same methods
for the same items helps achieve the goal of comparability.
Verifiability: Different knowledgeable and independent observers could
reach consensus that a particular depiction is a faithful representation.
Timeliness: Information should be available in time to be capable of
influencing decisions.
Understandability: Information should be classified, characterized, and
presented clearly and concisely for users who have a reasonable knowledge
of business and economic activities and who are diligent in the review and
analysis of financial information.
All of these characteristics are subject to a constraint that the cost of obtaining
and processing the information must be justified by the benefits obtained by
reporting that information.
I.4
Interpreting the Qualitative

Characteristics in Practical Terms
The qualitative criteria in the Conceptual Framework are expressed abstractly.
That framework suggests that these criteria are applied by identifying information concerning an economic phenomenon that would be useful to users of
an entitys financial reports, identifying the type of information about the phenomenon that would be relevant and capable of faithful representation, and
then seeing if information is available with those qualities. For supplementary
financial measures, the measures have already been identified and are being
communicated by preparers. The issue is whether those measures have any
meaning (an attribute of relevance), that is, actually represent a phenomenon,
as well as meeting the other fundamental and enhancing qualitative criteria
expressed in the Conceptual Framework.
To interpret these criteria in practical terms, this guidance assesses the qualitative characteristics in terms of who uses the measure and the purpose for
which it is used.
5

Relevance
Relevance is defined in the Conceptual Framework as an attribute of information that is capable of making a difference in the decisions made by users.
To be relevant, therefore, a measures depiction of an economic phenomenon
should have the potential to affect users decisions and evaluations of an entity.
For practical purposes, a measure can affect users decisions and evaluations
when it is used:
by management to allocate and/or assess the financial performance of
allocated resources to specific projects or activities;
in the entitys industry to assess performance or to estimate the values of
businesses bought or sold; and
by investors to assess performance and estimate value.
A measure that is used for all three purposes is clearly relevant.
Faithful Representation
Faithful representation is the quality of a measure that makes it complete,
neutral, and free from error. In practical terms, the CPRB believes a supplementary financial measure would be:
complete, when it is not in need of adjustment or complementary
information to have meaning for users;
neutral, when it is relatively incapable of being slanted, weighted, or
manipulated to obtain a desired result or to generate a desired inference;
free from error, when the components that it purports to represent
comprise the measure, and it is as free as practicable from significant
uncertainty or estimation error; and
described in an explicit caption that is not ambiguous or misleading in
what it purports to include or exclude.
Generally, when all these attributes are present in a measure, it faithfully
represents what it purports to report.
Enhancing Characteristics
A supplementary financial measures usefulness is enhanced when the
measure is:

Draft for Comment
comparable, by being prepared on a consistent basis from entity to entity

and in a consistent fashion from period to period;
verifiable, by being presented in accordance with recognized criteria or
with sufficient information to enable an observer to see that a measure is
complete, neutral and free from error;
timely, by being available at the same time as other elements of financial
reports; and
understandable, in that users who follow the entitys activities should be
able to comprehend the measures construction and limitations.
This guidance considers factors to consider in determining verifiability. As
well, the disclosures it advocates should contribute to comparability and
understandability. Timeliness is not addressed as it is a consideration of the
financial reports in which supplementary financial measures reside, rather
than the supplementary financial measures themselves.
I.5
Categorization as an Additional GAAP

Measure or a Non-GAAP Financial
Measure
As noted above, IFRSs require entities to present additional items in the financial statements when they are relevant to understanding an entitys financial
performance or financial position, including information in the notes that
is relevant for an understanding of any of the financial statements. There are
many potentially relevant measures, however, some of which are subjective or
impossible to define outside an entitys specific situation, such as non-recurring
events.2 Many such measures are in regular use outside of financial statements.
Accordingly, the question arises as to how to assess whether a measure has the
necessary attributes for presentation in IFRS financial statements or whether
the financial information should only be presented outside of the financial
statements, such as in the MD&A, or in conjunction with other information
distributed by an entity.
The CSA Staff Notice states In staffs view, non-GAAP financial measures generally should
not describe adjustments as non-recurring, infrequent, or unusual, when a similar loss or gain is
reasonably likely to occur within the next two years or occurred during the prior two years.
7

To be relevant, a measure needs to have the potential to affect users decisions

and evaluations of an entity. In the CPRBs view, this condition exists for
an additional GAAP measure in IFRS financial statements when it is used
by the entitys chief decision makers in explaining value drivers, liquidity,
or performance.3 These criteria are similar to those employed by the IFRSs
in determining whether a component of an entity constitutes an operating
segment, and in determining the segments reported performance measure.
Financial statements provide an objective perspective of the financial performance and financial position of an entity, presented in accordance with all the
principles of an accounting framework. These attributes need to be considered
in determining whether an additional GAAP measure meets the test of
faithful representation with qualities sufficient to be included in IFRS financial statements. In practical terms, faithful representation should exist when a
measures components are defined with the same precision as other elements
of the financial statements. Therefore, a reasonable basis for concluding that
a measure is representationally faithful is that the components are defined by
IFRSs (i.e., an item of revenue, expense, asset, or liability defined by IFRSs).
As well, the caption used to describe the measure should not be ambiguous
or misleading in what it purports to include or exclude. Accordingly, an
additional GAAP measure should be described in terms that:
distinguish it from minimum IFRS disclosure requirements;
are meaningful given its composition; and
clearly explain which IFRS components it includes and excludes.
When the caption for an additional GAAP measure is not expressed in terms
of its IFRS components, the measure should be defined in a way that identifies those components and the caption used to describe the measure should
be consistent with those components. The word adjusted, per se, does not
satisfactorily identify omitted or added components.
Verifiability the ability of knowledgeable users to reach consensus that a
measure provides a faithful representation of what it purports to depict is
another important characteristic for financial statements. This characteristic
3
To be relevant for inclusion in the financial statements, a measure should also comply with the
CSAs practices and, in the CPRBs view, the tests for faithful representation and verifiability
discussed below.

Draft for Comment
should exist when knowledgeable users can identify the components of a

measure and understand that they are defined by IFRSs. Accordingly, if not
clear from a measures caption, the financial statements should state that the
components of any additional GAAP measures are determined in accordance
with specific IFRSs.
In the CPRBs view, if an entity can demonstrate that a measure is relevant,
faithfully represents the information it purports to report, and is verifiable, as
discussed above, then there is a good argument supporting its inclusion in the
financial statements as an additional GAAP measure provided it also satisfies
the practices set out in the CSA Staff Notice. A measure that meets these tests
will likely also be presented in a manner that is relevant, reliable, comparable,
and understandable, as contemplated by IAS 1.4
In the CPRBs view, supplementary measures presented outside the financial
statements do not need to meet the same objective criteria as additional GAAP
measures. While non-GAAP financial measures still need to meet the test
of fair presentation, the tests of relevance, faithful representation, and verifiability can be less rigourous and considered from the perspective of providing
managements views.
The CPRB believes a measure used by an entitys chief decision makers would
normally be relevant for reporting as a non-GAAP financial measure. Sometimes, however, a measure not used by management is nevertheless seen to be
useful by investors. Management may then want to present the measure, and
would need to facilitate communications with investors about the components
of the measure. Accordingly, in the CPRBs view, an alternative practical test
for relevance of a non-GAAP financial measure is whether it is requested by
knowledgeable investors.
A non-GAAP financial measure will often include adjustments for items
not specified by rules set out in the entitys accounting framework, and
accordingly may not be defined and calculated with the same completeness
and neutrality as an additional GAAP measure. In these circumstances, to
be a faithful representation, two matters need consideration. First, in view of
the absence of an accepted definition, the measure, if portrayed as one used
4
IAS 1, paragraph 17(b).

9

internally by management, should comprise the same components as that

actually used by management; or, if it is a measure requested by investors, it
should comprise the components that management believes investors need.
Any adjustments between the measure used in management of the entity and
its reported amount should be disclosed and explained.
Second, any reported non-GAAP financial measure should be supplemented
with a discussion about any assumptions, judgments, and estimates used
in calculating the measure and other information necessary to understand
any limitations in the measures completeness or neutrality. Such additional
disclosure should include an explanation of what the measure represents
to management, the components involved in its construction, how those
components were calculated, including the assumptions made, how any
estimates were formulated, and the implications for items excluded from a
measure. For example, when a measure adds back non-recurring costs, but
not corresponding non-recurring revenues, this obvious lack of completeness
should be explained. Similarly, a measures limitations should be explained by
discussing how changes in items included in the measure are correlated with
changes in items that have been excluded from it. For example, an explanation
should be provided if a measure includes labour costs that have been beneficially reduced by the introduction of automated equipment, but that measure
excludes depreciation cost on that equipment.
For a non-GAAP financial measure to be verifiable, an entity should
communicate information that will enable knowledgeable observers to reach a
consensus that it is a faithful representation of what it purports to report. This
will be achieved by providing a reconciliation of the measure to the nearest
GAAP measure, and by showing each adjustment, and its purpose, together
with the above noted disclosures about estimates, assumptions, completeness,
and neutrality.
10

Draft for Comment
I.6
Supplementary Financial Measure

Presentation and Disclosure
Characteristics of Supplementary Financial Measures
As noted above, supplementary financial measures, especially non-GAAP
financial measures, will have one or more of the following three characteristics: lack of a standard definition, selectivity, and subjectivity. The CPRB
believes an entity that complies with the following principles of presentation
and disclosure should address any concerns with these characteristics. The
presentation and disclosure of such measures should:
comply with securities regulators application guidance such as the
disclosures set out in the CSA Staff Notice;
state managements purpose for providing the measure;
when available, present a Standardized Measure in addition to any
Adjusted Measure that deals with entity-specific adjustments;
unless presented as a sub-total within a particular financial statement,
provide a reconciliation to the nearest GAAP measure;
discuss the effects of selectivity, i.e., inclusions and exclusions of items in
the measure, and the reason for it;
discuss the basis for any subjective determinations and judgments;
discuss how items excluded from a measure relate to the entitys overall
performance, financial position, and/or liquidity; and
avoid misleading titles or financial references.
The following detailed presentation and disclosure guidance expands on these
principles.
Presentation and Disclosure Guidance for

General
An entity may present a measure in its financial reports using the same title
but different components than other entities, for example, a Free Cash Flow
measure including entity-specific components. Accordingly, in view of the
absence of standard definitions, an entity should:
11

disclose the definition of any supplementary financial measure it presents;

state that the measure is unlikely to be comparable to measures described
using the same term (or similar terms) used by other entities;
avoid presenting a supplementary financial measure with more prominence
than the most directly comparable GAAP measure;
calculate a measure in accordance with its definition and title, and not
include or exclude items that are not self-evident from the title of the
measure; and
label measures in unambiguous terms that are not capable of being
confused with defined IFRS terms.
Purpose
When an additional GAAP measure is reported, the financial statements

should explain how management uses the measure. Correspondingly, the
purpose for a non-GAAP financial measure should be discussed. When a
non-GAAP financial measure is reported, but not used by management, this
should be stated.
Presentation of standardized measures as well as any entity-specific
adjustments
Some users have indicated that the process of comparing and assessing performance would be improved if there were standard definitions for supplementary
financial measures, even though other users note that they use entity-specific
information conveyed by adjusted measures. Accordingly, Parts II and III of
this guidance propose standardized definitions for Net Free Cash Flow and
EBITDA to provide a basis for comparison between entities. When entities
make entity-specific adjustments to such measures, this guidance also advocates
disclosing them as adjustments to the standardized amount. This would provide
both comparability and entity-specific information and minimize users effort
needed to understand the entity-specific amount.
Provide a reconciliation to the nearest GAAP measure
An entity-specific measure should be reconciled to the standardized measure

(if applicable) and the nearest GAAP measure in the financial statements. For
each adjustment, the corresponding item in the financial statements should
be identified, located, and quantified. In addition, subjective terms such as
non-recurring or non-standardized items such as same-store in same-store
sales should be defined. Further, an entity should disclose the consistency
12

Draft for Comment
of the calculation of such subjective amounts. When a change is made to the

components of a measure, the change should be explained and comparative
amounts should be presented in accordance with the new basis. Consistency
should also be considered in terms of the measures calculation in the period.
For example, when a measure includes a non-recurring or non-cash item,
the entity should consider disclosing whether it has applied the same criteria to
all other items in the measure or has been selective in its application.
In some cases, the issue may not be so much one of consistency of application
as one of nomenclature. For example, some entities report restructuring
expenses incurred after a business combination as non-recurring. This is
presumably based on the assumption that business combinations are not an
ongoing part of business operations. However, other business combinations
may occur, and restructuring expenses may be incurred repeatedly. It is
suggested that such items should be labelled expenses associated with a
business combination. This would provide more predictive insight by users
into the circumstances in which similar expenses may recur.
The effects of selectivity and the reason for it
Selectivity generally applies when a supplementary financial measure

eliminates an item from a measure specified by the accounting framework,
for example IFRSs. Accordingly, the definition and purpose for providing
an adjustment should be explained, including the economic phenomenon
presented by including or excluding an item from a GAAP measure.
For example, an entity may eliminate an expense such as depreciation from an
income measure because it believes depreciation is not a useful representation
of the costs of consuming capital assets. Other reasons might include the fact
that the entity does not intend to incur new investment in that particular
business. Or the expense is omitted because it is a sunk cost and the entitys
management believes that the difference between revenues and variable costs
is the most significant short-term performance measure.
The basis for subjective determinations and judgments
The disclosure of significant accounting assumptions, estimates, and judgments is an integral part of IFRSs. Accordingly, any assumptions, estimates
and judgments in an additional GAAP measure should already be disclosed.
When reporting a non-GAAP financial measure, any significant assumptions,
13

estimates and judgments should also be disclosed, for example, judgments

made in determining maintenance levels of capital expenditures.
Discussion and analysis of supplementary financial measures
The MD&A should provide context for supplementary financial measures by

discussing matters that the measure includes or excludes to provide awareness about other factors that may need to be considered in assessing overall
performance. Matters included or excluded from a measure may be the most
significant contributors to the change and their implications need to be
discussed to avoid misleading inferences. For example, the MD&A should
discuss any implications for future performance when a decrease in capital
expenditures results in an increase in Free Cash Flow.
Specific considerations for additional GAAP measures
When an additional GAAP measure is to be reported on the face of an IFRS

financial statement, it should be a natural sub-total of a sequence of items
disclosed in the financial statement provided it complies with the application
guidance in the CSA Staff Notice. The CSA Staff Notice states that it would
be misleading if EBITDA excluded amounts for impairment losses, restructuring expenses, or fair value changes. When an additional GAAP measure is
reported in the notes to IFRS financial statements, the note should cite the
various GAAP inclusions and exclusions in the measure.
In addition, an additional GAAP measure should be accompanied by discussion and analysis in the MD&A.
This discussion has considered some general principles for disclosing supplementary financial measures. Parts II and III of the guidance consider the
application of these general principles to Net Free Cash Flow and EBITDA,
including suggestions for standardized definitions for these measures.
14
PART II: Application to

Specific Measures: Net
Free Cash Flow
II.1
Free Cash Flow and Net Free Cash Flow

Free Cash Flow is a theoretically-developed measure that is used in calculating enterprise value, which is the value of an entitys assets irrespective of
financing arrangements. Free Cash Flow is defined as the entitys periodic cash
flow from operating activities, before the after-tax cost of interest, and after
deducting capital expenditures and other asset acquisitions.5
ROLE OF FREE CASH FLOW IN VALUATION
Cash Balances
Present Value of Dividends
Present Value of Free Cash Flow
Present Value of Share Buybacks
Continuing
Operations
Market Value
of
Enterprise
Market Value
of
Debt
Market Value
of
Shares
Discontinued
Operations
Market Value
of
Enterprise
Market Value
of
Debt
Market Value
of
Shares
Total
Enterprise
Market Value
of
Enterprise
Market Value
of
Debt
Market Value
of
Shares
Free Cash Flow:
- cash collected from customers

- cash paid to suppliers (including employees)
- capital expenditures and other asset acquisitions
Free Cash Flow is not necessarily a pure cash flow measure. In order to
estimate enterprise value from Free Cash Flow, it is necessary to deduct all
5 See Financial Statement Analysis and Security Valuation, Fifth Edition, Stephen H. Penman,
chapter 4.
15

asset acquisitions, regardless of the source of funding. Thus assets acquired by

the non-cash issuance of shares and assumption of debt would be subtracted
from operating cash flows as if they had been paid in cash. This could easily
result in large negative amounts of Free Cash Flow in periods in which business combinations occur. This may cause some concerns as investors generally
prefer to see positive amounts of Free Cash Flow. However, in theory, negative
Free Cash Flow should not be a concern: the measure is intended to be applied
in a multi-period environment where single-period negative Free Cash Flows
from such investments are expected to generate subsequent multiple years
inflows. However, while the term Free Cash Flow is often used in financial
reports, it is rarely constructed in this manner. Despite the theory, preparers
view business combinations as a use of Free Cash Flow, not an element of its
definition.
Variations on the definition of Free Cash Flow involve rearranging the
enterprise value equation. For example, assuming the debt is a perpetual
amount, Free Cash Flow minus after-tax interest expense can be related to
enterprise value less the value of related debt; this, in turn, can be related to
the entitys equity.
As noted, expressing asset acquisitions such as business combinations funded
through debt or equity as if they had been acquired for cash will often result
in significant negative single period Free Cash Flow measures. These could
generate misleading inferences about the entitys operations unless readers are
provided with information about the expectations of future years operating
cash flows. As well, in a financial reporting context, a measure described
in terms of cash flow would not be expected to include non-cash items
as deemed cash transactions. As a consequence, this guidance focuses on
Net Free Cash Flow, an actual cash flow variation of Free Cash Flow that
deducts from cash flows from operating activities after-tax interest expense
and preferred dividends and actual cash outlays for capital expenditures and
other asset acquisitions. Deducting cash outlays for other asset acquisitions
provides a measure relevant for common equity valuations in steady-state
financing situations that only involve cash funded asset acquisitions. In other
circumstances, such as when entities employ share funded asset acquisitions or
deleveraging situations, an entity should consider providing sufficient information to enable an investor to employ the full Free Cash Flow model described
16

Draft for Comment
above. The CPRB recognizes that in practice many entities reporting Free
Cash Flow treat cash funded asset acquisitions as a use of Free Cash Flow
rather than as a component in its computation. Entities would be able to
reflect this view by providing an Adjusted Net Free Cash Flow (see below).
II.2 Applying the Qualitative

Characteristics of the Conceptual
Framework
The Relevance of Net Free Cash Flow
The underlying phenomenon that Net Free Cash Flow is trying to enable
investors to estimate is the value of an entitys assets after adjusting for the
cost of its interest-paying liabilities. In a stable state, the discounted amount of
Net Free Cash Flow at the entitys after-tax cost of equity capital will provide
an estimate of the value of the entitys net assets, that is, its aggregate equity
(including non-controlling interests). This notion makes sense under two
important assumptions: first, that the entity makes those capital investments
that are necessary for the maximization of the value of the entitys assets, and
second, that the entity has a liability structure that will be relatively constant,
so that after making provision for the periodic after-tax carrying cost of debt,
no further payments will be made on account of these liabilities. That is, it is
assumed that the entitys debt structure is constant and the relevant cash flows
do not involve repayments of debt. In essence, the principal amount of debt is
assumed to be continuously rolled over.6
These assumptions would appear to be reasonable for an established entity that
is either maintaining or growing capacity through capital investments and
maintaining a constant debt to equity ratio. In those circumstances, Net Free
Cash Flow, based on cash flows from operating activities adjusted for cashfunded asset acquisitions, is a relevant measure. It is an indicator of the cash
flows that are free for use in funding future investments, or making payments
It is also implicitly assumed that the interest component of all discounted other liabilities such as
asset retirement obligations and pension obligations are likewise stable, which may be reasonable
given the other assumptions made.
17

to equity holders, whether as dividends or other forms of capital distributions

such as share repurchases.
The measure may be less meaningful, however, when an entity is reducing
capacity, generating positive cash flows from net dispositions of capital assets
and consequently likely to be permanently reducing debt. Nor is it likely to
be meaningful for start-up entities with investment requirements that exceed
operating cash flows, i.e., entities that have negative free cash flow. Even
if a start-up entity is projected to have operating cash flows that will in the
future exceed its investment requirements, the assumption of constant capital
expenditure and debt financing levels would appear to be unrealistic. But
for those entities that have achieved a reasonable scale of business and for
which debt financing levels appear to be reasonably stable, the measure of Net
Free Cash Flow is generally a faithful representation of a relevant underlying
phenomenon of interest to investors.
Faithful Representation of Net Free Cash Flow

The qualitative characteristics expected of elements of financial reports, as
established in the Conceptual Framework, include the idea that an appropriately described measure faithfully represents what it purports to report when
it is complete, neutral, and free from error. The following discussion reviews
factors to consider in evaluating the extent to which these three qualities exist
for Net Free Cash Flow measures.
Complete
There are several issues concerning the completeness of the measure as defined
here compared to the underlying phenomenon it is trying to represent.
Operating activities before or after discontinued operations
The GAAP defined measure cash flows from operating activities is the logical
starting point for a Net Free Cash Flow measure. Since users are primarily
interested in predicting future cash flows, it would appear that discontinued
operations would be of little enduring relevance. Hence cash flows from
operating activities should be exclusive of the operating cash flow consumed or
provided from discontinued operations. It should be noted, however, that any
valuation based on a Net Free Cash Flow calculation eliminating discontinued
operations needs to consider separately the value of the discontinued operations.
18

Draft for Comment
Working capital and other operating expenditures
To be complete as a cash flow measure, Net Free Cash Flow should reflect
the cash consumed or provided by such matters as changes in working capital
or Research and Development (R&D) efforts. However, a profitable but
rapidly-growing firm that is building inventory levels or spending cash on
R&D at a greater rate than it is producing cash flows from its other operating
transactions generally exhibits negative Net Free Cash Flow. Taken at face
value, this would indicate a negative equity valuation. However, the stable
state assumption required to make the measure relevant would not be met:
the cash flows expected to be generated would not be completely described
by the current periods levels, and additional data would be needed. On the
other hand, mature entities that are generating strong operating margins and
maintaining a stable working capital position will likely continue to produce
positive Net Free Cash Flow. The current periods data would then normally
be complete.
Capital expenditure
Some believe the capital expenditure that is deducted in the computation of

Net Free Cash Flow is the expenditure that must be made or is critical to
the firm. Some definitions consider this to be only those expenditures that are
necessary for the maintenance of the firm known as maintenance capex.
However, there is no standardized definition for maintenance capital expenditures. Furthermore, preparers have noted that sometimes the number used by
analysts is not the amount needed for maintenance, but the minimum amount
the entity could spend on capex and still survive. Nonetheless, given that the
relevant Net Free Cash Flow amount comes from historical results, the aggregate
capital expenditure amount should be deducted. Once an amount is spent on
capex, it is no longer available for alternative uses. Net Free Cash Flow on an
historical basis is thus calculated deducting the actual amount of total capital
expenditures. Since the cash re-invested in capital expenditure is of interest,
total capital expenditure would be reduced by proceeds from dispositions, other
than those of discontinued operations.
Dividends on preferred shares
Since Net Free Cash Flow is that utilized in the valuation of common equity,
dividends on any preferred shares not categorized as liabilities would be
deducted in arriving at Net Free Cash Flow.
19

Business combinations
As noted above, the CPRB considers cash-funded asset acquisitions to be

deductions in arriving at Net Free Cash Flow. When an asset acquisition
involves non-cash consideration, the entity should consider following the full
Free Cash Flow model.
Another of the anomalies of business combinations is that while the cost of
acquisitions is considered as a form of separate expenditure in the cash flow
statement, the resulting increase or decrease in periodic cash flows from the
acquired operations is not usually separately identified. Under IFRS standards,
the full-year effect of business combinations on an entitys revenues and costs
is generally disclosed, allowing users to understand profit on a full-year basis.
However, while equivalent adjustments for cash flows would be likewise
useful, they are generally unavailable. The best that can be said is that any
MD&A analysis of the results of operating cash flows in periods that involve
acquisitions, either in the current or comparative period, should either adjust
Free Cash Flow to reflect the acquisitions full year effect in the year of acquisition or state that no adjustments have been made.
Consolidation
Another issue is whether the measure should be computed on a corporate or

on a consolidated basis. Even when an entitys subsidiaries are wholly owned,
the parent may not be able to access the subsidiaries cash balances due to,
for example, supplier or financing agreements at subsidiaries that mandate
maintaining a minimum level of cash in the subsidiary. Restrictions on the
ability to access cash are even more likely in partially owned subsidiaries. Thus
Net Free Cash Flow at a subsidiary level may not be free at a parent level, at
least in the sense of being available for general corporate purposes. Hence the
consolidated measure of Net Free Cash Flow may in certain circumstances not
necessarily be a faithful representation of the cash flows available to the parent
entity for use in paying parent dividends. For example, an amount of Net
Free Cash Flow at a partially-owned subsidiary may be used to pay dividends
to the non-controlling interest. If the objective for the Net Free Cash Flow
calculation is to compute a valuation of the parent companys common equity,
consideration should be given to deducting such dividends paid that are
included in the scope of any consolidated financial statements.
20

Draft for Comment
The same essential challenge exists, however, with many consolidated financial
statement or GAAP measures, such as operating cash flows, or capital
expenditures. The best practice in these circumstances may be to disclose Net
Free Cash Flow at the parent level and on a segmented basis if the segments
reflect the varying degrees of parent ownership. This would be improved if
coupled with the disclosure of restrictions about an entitys ability to access
subsidiaries cash balances.
Neutral
A challenge to the quality of Net Free Cash Flow as a supplementary measure

is that the operating cash flows may not be neutral, as they are subject to
practices such as delaying the payment of bills or employing other devices
for increasing reported operating cash flows when there is no real underlying
change in financial conditions. However, such weaknesses are inherent in
all measures of operating cash flows. This challenge emphasizes the need for
supplementary financial measures such as Net Free Cash Flow to be considered in their entire context rather than in isolation. For example, Net Free
Cash Flow should be considered in the context of the entitys profitability and
changes in the entitys working capital balances.
Free from error
Net Free Cash Flow, as defined, should be free of measurement error. The
major components of Net Free Cash Flow are cash measures, relatively free
of estimation, whose elements are determined in accordance with a GAAP
framework, such as IFRSs. Accordingly, there should generally be little
concern about errors in measurement.
Verifiability of Net Free Cash Flow

Since the components of Net Free Cash Flow are determined with little need
for estimation and in accordance with definitions provided by an accounting
framework, there should be little difficulty establishing the verifiability of
such measures.
21

II.3 Net Free Cash Flow as an Additional

GAAP Measure or a Non-GAAP Financial
Measure
Part 1 of this guidance concluded that, in the CPRBs view, to be treated as an
additional GAAP measure that can be included in an entitys IFRS financial
statements:
the measure should be used by the entitys chief decision makers in
evaluating an entitys value drivers, liquidity, or performance;
its components should be defined by IFRSs; and
the caption used should be consistent with the measures IFRS components.
Net Free Cash Flow as an Additional GAAP Measure

The qualitative characteristics of Net Free Cash Flow, as outlined in the
preceding discussion, indicate that it is relevant, representationally faithful,
and verifiable, although some of these qualities are not without challenge.
However, these challenges may be addressed by the disclosure and presentation recommendations provided below. Subject to these presentation and
disclosure considerations, the relevance, representational faithfulness and
verifiability of Net Free Cash Flow indicate that it can be used as an additional
GAAP measure as well as a non-GAAP financial measure.
Net Free Cash Flow does not lend itself to presentation as an additional
GAAP measure, however. It is very unlikely that it could be reported on
the face of an entitys IFRS financial statements. The measure is a cash flow
measure involving elements of an entitys operating and investing cash flows,
but there is nowhere in the financial statements that conveniently aggregates
such amounts. Net Free Cash Flow is drawn from items that appear in the
operating, investing, and, in the case of interest and preferred dividends,
possibly the financing sections of the cash flow statement. However, the
components cannot be grouped in such a way as to present a sub-total within
that statement as it is conventionally displayed in three or more sections. It
would be inappropriate to include the measure on an entitys income statement, as Net Free Cash Flow is a cash flow measure.
Accordingly, to present the measure as an additional GAAP measure the
amount would have to be disclosed in the notes to the financial statements,
22

Draft for Comment
although there may be few circumstances where the measure can be effectively
related to a note. One possibility would be to include it in the note that
discusses policies and processes for managing capital, but it is not clear what
purpose such a measure would have in that note unless the entitys dividend
policy was related to its determination of Net Free Cash Flow. Another possibility would be to present it in the note that discusses segmented information,
if the entity provides cash flow information by segment to its chief operating
decision-maker.
The term Net Free Cash Flow does not literally indicate the nature of its
components. Accordingly, if the measure is presented in the notes to financial
statements, an entity should define its components and present them in a
reconciliation to cash flows from operating activities, identifying where each
component is disclosed on the financial statements, which would most likely
be in the statement of cash flows.
Entities reporting Net Free Cash Flow as an additional GAAP measure should
also consider providing context for the measure in the MD&A by discussing
the suite of information noted below under the heading Discussions that
Provide Context.
Alternative or Adjusted Net Free Cash Flow Measures

An alternative or adjusted definition of Net Free Cash Flow may not have
sufficient qualitative characteristics for inclusion in the financial statements.
For example, an entity may believe that Net Free Cash Flow is only meaningful if it is defined by the entity to include or exclude subjective elements such
as one-time or non-recurring charges. These amounts are generally not
defined by IFRSs and there may be difficulty in obtaining agreement as to
their interpretation. As a result of this challenge to its verifiability, the adjusted
measure could not be included in the financial statements.
In such circumstances it may nonetheless be possible to present Adjusted
Net Free Cash Flow as a non-GAAP financial measure in other areas of the
entitys financial reports, such as the MD&A and press releases. It is recommended below that any use of an adjusted Net Free Cash Flow measure be
accompanied by disclosure of a standardized Net Free Cash Flow measure
with additional disclosure of the entity specific adjustments.
23

Any adjusted Net Free Cash Flow should possess appropriate characteristics of
relevance, faithful representation and verifiability even when reported outside
the financial statements as a non-GAAP financial measure. Whether entityspecific adjustments are sufficiently verifiable and a faithful representation of
a relevant phenomenon would have to be determined in the circumstances,
considering the factors discussed in Part I of this guidance. Challenges to these
qualities could generally be satisfied by disclosure about the purpose for the
adjusted measure, clarity in the description of the measures calculation, and a
discussion of its implications and context. These points are considered further in
the discussion of entity specific Net Free Cash Flow measures below.
II.4 The Presentation and Disclosure of Net

Free Cash Flow
Specific disclosure recommendations for entities that report Net Free Cash
Flow either in the financial statements or in the MD&A are set out below.
These include:
general considerations;
a standardized and adjusted Net Free Cash Flow measure; and
discussions that provide context.
General Considerations
When an entity reports Net Free Cash Flow, it should follow the general
considerations for presentation and disclosure set out in Part I of this guidance. These include disclosure of:
the definition of the measure;
managements purpose for providing the measure; and
a reconciliation to cash flows from operating activities, and the effects of
selectivity in the measure.
Additional aspects of these disclosures are discussed below.
A Standardized and Adjusted Net Free Cash Flow

Measure
An entity should provide disclosures as noted below for standardized and entityspecific measures.
24

Draft for Comment
Users have indicated that while a degree of standardization in the definition

of Net Free Cash Flow is desirable for the measure to be comparable across
entities, non-standardized entity-specific information can also be useful in
specialized contexts. Accordingly, this guidance advocates the presentation of
a Standardized Net Free Cash Flow measure, with any entity-specific adjustments separately presented in an Adjusted Net Free Cash Flow measure.
Standardized Net Free Cash Flow
The following standardized definition of Net Free Cash Flow reflects the
preceding discussion.
Cash flows from operating activities,7 less:
i. total capital expenditures minus proceeds from the disposition of
capital assets other than those of discontinued operations;
ii. other cash-funded asset acquisitions;
iii. dividends on preferred shares, unless they were already deducted in
arriving at cash flows from operating activities; and,
iv. cash provided or consumed by the operating activities of
discontinued operations;
all as reported in the GAAP financial statements.
Standardized Net Free Cash Flow should be reconciled to cash flows from
operating activities, with each of the above-noted adjustments separately
disclosed.
An Explanation of the Meaning of Net Free Cash Flow
Any disclosure of Net Free Cash Flow should also be accompanied by an

explanation of what the measure represents, such as the following:
Standardized Net Free Cash Flow represents an indication of the
entitys capacity to generate discretionary cash for common equity
investors. It represents cash flows from continuing operating activities
less net capital expenditures, other cash-funded asset acquisitions, and
dividends on preferred shares. Since it reflects post-acquisition cash
7
Interest payments are deducted from Free Cash Flow in arriving at Standardized Net Free Cash
Flow. Under IFRSs, interest paid and received may be classified as cash flows from operating
activities, or as financing and investing activities. To the extent that such amounts are not
capitalized and not included in arriving at cash flows from operating activities, they should be
deducted (interest paid) or added (interest received) in arriving at Net Free Cash Flow.
25

flows of any business acquisition occurring in a period, it may not be

comparable to subsequent periods measures that will include full period
effects.8 Standardized Net Free Cash Flow does not necessarily represent
the cash flow in the period available for management to use at its discretion, which may be affected by other sources and non-discretionary uses
of cash. It is employed internally in the entitys internal processes to
evaluate managements performance.
To avoid confusion, a measure of Net Free Cash Flow that varies from the
above-noted definition should not be described as Standardized Net Free
Cash Flow.
Adjusted Net Free Cash Flow
If entities adopt the preceding definition of Standardized Net Free Cash Flow,
the result would be comparable from entity to entity and consistent between
periods. However, entities may believe that other adjustments should be made
to cash flows from operating activities in addition to those made in arriving at
Standardized Net Free Cash Flow.
For example, there may be a cyclical or periodic nature to the pattern of cash
flows generated from operating and investing activities. In certain seasonal
industries, inventory is built up (consuming cash) in the summer months, and
is sold (producing cash) in the winter. This can result in excluding the effects of
changes in working capital from the Net Free Cash Flow measure.
In other circumstances, non-capitalized major repairs and maintenance
occur cyclically and result in cyclical patterns to operating cash flows, such
as significant scheduled maintenance activities once every three to five years.
In other industries, routine maintenance requires a multi-year cycle of capital
expenditures on compressors or capacity rebuilds that may also require
capacity to be taken off-line for extended periods.
The relative predictability of the pattern of such cash flows can motivate
management to describe Net Free Cash Flow not in terms of the actual
historical cash patterns, but after adjusting for the cyclical or seasonal
components of operating and investing activities. These cyclical patterns could
8
26
This guidance does not advocate including pre-acquisition cash flows in the standardized measure
because they were not generated while the acquiree was under the entitys control.

Draft for Comment
be communicated as part of the explanation of the variance in Standardized

Net Free Cash Flow between periods. Alternatively, they may be addressed
by reporting an Adjusted Net Free Cash Flow that adjusts for such known
patterns. In that event, there should be a discussion of any estimates and
assumptions involved in the adjustments calculation. For example, an adjustment to eliminate the seasonal fluctuations of working capital changes may
involve an assumption about future selling prices.
Similarly, management may wish to communicate the special or non-recurring
nature of certain transactions that in their view should not inform a users
reasonable expectation of future cash flows. Entity-specific adjustments may
also include significant commitments that an entity considers in determining
the amount of cash available for discretionary activities, such as significant
commitments for future capital expenditures to be funded from operations.
The term Net Free Cash Flow suggests that the measure should reflect cash
generated in the period available for discretionary purposes. As noted, this
is not necessarily the case. For example, an entitys Net Free Cash Flow may
be restricted by an operating financial covenant. Similarly, there can be
restrictions on an entitys ability to utilize cash held in a subsidiary. Entities
may consider it informative to highlight circumstances such as these through
entity-specific adjustments. Alternatively, these matters would be discussed as
part of the financing strategy discussed later in this guidance.
When an entity wishes to provide an Adjusted Net Free Cash Flow for items
such as these, the following disclosures should facilitate users understanding
of the adjusted measure:
i. reporting the adjusted amount as Adjusted Net Free Cash Flow;
ii. the definition for the entity-specific measure and why it provides
insight;
iii. a reconciliation, incorporating Standardized Net Free Cash
Flow, separately disclosing each adjustment between the reported
Adjusted Net Free Cash Flow and cash flows from operating
activities;
iv. the definition and purpose of each adjustment, including the basis
for subjective determinations and judgments, for example, the basis
for determining maintenance capex; and
27

v. f or each adjustment, the identification, location, and quantification

of the corresponding item in the financial statements.
Entity-specific adjustments should be consistent from period to period, both
with respect to the items adjusted and their computation. As well, the computation of adjustments should be consistent within the period. When this is not
the case, this fact should be reported and an explanation for the inconsistency
provided.
When a change is made to the components of the entity-specific measure,
users understanding will be enhanced if the reason for the change is explained
and comparative amounts are presented in accordance with the new basis.
Discussions that Provide Context

As previously noted, the Net Free Cash Flow measure, used in isolation, has
limitations. For example, the measure addresses the quantum of operating
cash flows and investing cash flows, but does not consider such matters as the
stage of the entitys business, that is, whether it is growing (so that Net Free
Cash Flow is often negative) or stable (so that Net Free Cash Flow is often
positive). Accordingly, entities should complement their Net Free Cash Flow
disclosure with the following MD&A discussions to provide a suite of information that enables users to interpret the measure in specific circumstances.
Relationship of Standardized Net Free Cash Flow to investing and
financing activities
In effect, Standardized Net Free Cash Flow is a reorganization of the GAAP

Statement of Cash Flows to reflect the net of an entitys cash flows from
operating activities and its capital expenditures. Understanding the entitys
policies and actions with respect to the other sources and uses of cash provides
a more complete basis for the interpretation of Standardized Net Free Cash
Flow. These other sources and uses of cash, categorized in the cash flow
statement as financing and investing activities, include cash distributions to
common shareholders in the form of dividends or share repurchases, and debt
and equity financing.
The relationship of an entitys Standardized Net Free Cash Flow to its
investing and financing activities may best be explained by providing an
analysis of how those activities complement and differ from Standardized
28

Draft for Comment
Net Free Cash Flow. For example, outside debt financing may fund all or a
portion of the capital expenditures of an entity, and hence complement the
Standardized Net Free Cash Flow. Conversely, the repayment (rather than
refinancing) of maturing debt or lines of credit may compete with dividends
to shareholders as a use of Standardized Net Free Cash Flow.
In addition, disclosure of the entitys financing strategy will assist users to
understand this relationship. This could include matters such as the entitys
target debt to equity or leverage ratio, the degree to which it has fixed but
uncapitalized commitments such as operating leases and purchase commitments, and the likelihood of compliance with covenants. Some of this
information should already be provided in the MD&A table of contractual
obligations and the statement of capital disclosures required by GAAP.
Relationship of the entitys capital expenditures to its productive
capacity strategy
In order to assess the likelihood that an entitys Net Free Cash Flow will
be sustained, a user needs to understand the entitys strategy for productive
capacity and whether that capacity is maintained, grown, or shrunk. This
could be facilitated if the entity were to define how it views productive capacity, explain how the capacity has been changing, and discuss how capacity has
been affected by, for example, capital expenditures, acquisitions, intellectual
property, and information systems. In particular, investors want to distinguish
capital expenditures focused on growth from those made to maintain existing
levels of productive capacity. This discussion should also address the categories
of capital asset expenditures and how each asset category contributes to
growth or productive capacity maintenance.
Financing-type activities that are characterized as operating
activities
In some cases, cash flows from operations are affected by financing-type activities that are characterized as operating activities. The most common of these are
long-term operating items that are subject to timing differences between their
accrual in the income statement and the ultimate cash expenditure. Examples
are asset retirement obligations, free rent arrangements, and accrued interest on
discounted long-term obligations. These accrued income statement items are
non-cash operating transactions until funded. The funding of such amounts
may be over the life of the contract, such as free rent obligations, which are
29

deferred until rent commences to be paid. They may also be paid at the conclusion or termination of a contract, such as accrued interest on a debt instrument
originally issued at a discount, which is paid at redemption.
Such operating activities may have a significant impact on the entitys current
and/or future Standardized Net Free Cash Flow. Accordingly, entities should
ensure that the communication of Standardized Net Free Cash Flow identifies
how such items impact current and future cash flows. The analysis could
explain the extent to which such activities have consumed or provided cash
in the period, and the extent to which they have deferred cash inflows and
outflows to future periods, including when such deferrals are expected to
affect Standardized Net Free Cash Flow. As well, the analysis could identify
the total amounts required to fund obligations arising from these activities
and the amounts expected to be paid in each of the next five years. This disclosure would be similar to that required for conventional financing transactions
provided as part of the table of contractual obligations.
30
PART III: Application to

Specific Measures: EBITDA
III.1 EBITDA
EBITDA, an acronym for earnings before deductions for interest, taxes,
depreciation and amortization, represents an accounting measure of operating
performance of a group of assets independent of the manner in which they
are financed (hence the omission of interest and taxes) and independent of
the recovery of the costs of associated capital assets (hence the omission of
depreciation and amortization). It is not defined in any set of authoritative
accounting standards, and there is no theoretical or conceptual basis for its
use in security valuation. It is nonetheless a very commonly used measure
in the financial markets, and users have expressed a need for guidance on its
presentation and disclosure.
This discussion considers its relevance, representational faithfulness, and
verifiability as an additional GAAP measure and as a non-GAAP financial
measure, and the implications of these factors for the disclosure that should
accompany its use in either of these contexts.
III.2 Applying the Qualitative

Characteristics of the Conceptual
Framework
The Relevance of EBITDA
EBITDA is an example of a performance measure that has grown out of
practice rather than by design. The utility of using an EBITDA measure has
not been conceptually established nor is there significant empirical evidence of
its utility in security valuation other than in a method of comparables, a rule
of thumb based on the fact that a company that is twice as large as another
company, but virtually identical in other respects, should exhibit double the
EBITDA, double the revenues, etc. EBITDA is nevertheless extensively used
in the investment community, for example, as a measure of performance in
31

loan covenants. Some use it as an intermediate step in calculating a relevant

measure of cash flow, while others use EBITDA valuation multiples when
comparing entities in the same industry.
There are well-known limitations in the measure, the most obvious being that
it ignores the costs of capital assets consumed in the generation of operating
income, and it does not reflect the implications of the entitys capital structure
for equity investors. In addition, many entities use variants of EBITDA
or an adjusted EBITDA that omit further items to illustrate aspects of
their performance. Such adjusted measures may be relevant for a particular
purpose; for example, loan covenants often use an adjusted EBITDA to focus
on a specific aspect of performance relevant for assessing an individual entitys
ability to repay a loan.
The widespread use of EBITDA supports its disclosure by entities as an
additional GAAP measure in IFRS financial statements or as a non-GAAP
financial measure outside of the financial statements. But the lack of an
authoritative definition, the use of many adjusted variants, and its known
weaknesses indicate that its use in any context should be carefully considered
and should be accompanied by clear and transparent disclosure.
Faithful Representation and Verifiability of EBITDA

EBITDA, literally calculated as the sum of its components, is, in the case
of IFRSs, the profit or loss defined under IFRSs plus the amounts reported
for interest, taxes, depreciation and amortization.9 As literally defined, this
measure should meet the conditions set out for faithful representation and
verifiability of an additional GAAP measure discussed in Part I of this
guidance. Faithful representation should exist as the measure is simply the
sum of the components in its title. Verifiability exists as these components
are each separately determined under IFRS in a manner that can be readily
corroborated.
The above-noted calculation does not consider the effects of discontinued
operations or business combinations. In this regard, much of the Net Free
Cash Flow discussion in Part II of this material related to excluding operating
cash flows from discontinued operations and including pre-acquisition oper9
32
Depletion is another form of depreciation and amortization.

Draft for Comment
ating cash flows of business acquisitions applies equally as well to the treatment
of the corresponding incomes or losses in EBITDA. Adjusting for such
factors may provide a more complete representation of the phenomenon being
reported, depending on the purpose for which the measure is to be used. If
discontinued operations are excluded, however, the title of the measure should
be likewise amended to preserve its representational faithfulness.
When EBITDA is adjusted for items other than discontinued operations, the
faithfulness of the measure from a GAAP perspective may be less clear. For
example, adding back restructuring costs incurred in business combinations
but not adjusting for the additional income or costs from that acquisition
would not generally give a faithful representation of the business combination
event in the financial statements. However, in the context of the MD&A, in
which the objective is to provide managements perspective on the results of
operations, such adjustments may be a faithful representation of the information used by management. It may therefore be appropriate to employ EBITDA
adjusted only for restructuring costs as a non-GAAP financial measure in the
MD&A if that is how management measures performance.
III.3 EBITDA as an Additional GAAP Measure

or a Non-GAAP Financial Measure
EBITDA as an Additional GAAP Measure
EBITDA and adjusted EBITDA measures reflect a spectrum of qualitative
characteristics that vary with the extent to which the components are relevant,
representationally faithful and verifiable. The presentation of a particular measure as an additional GAAP measure in IFRS financial statements should only
occur when those qualities are highly evident. When they are less evident, the
measure may nonetheless qualify for presentation as a non-GAAP financial
measure in an entitys financial reports but outside the financial statements.
In EBITDA measure that is described as such and that is literally computed
as profit or loss defined under IFRSs, adjusted for IFRS definitions of interest,
taxes, depreciation and amortization expense should be considered relevant
when it is used by managements chief decision makers, representationally
faithful when its elements are consistent with its literal definition, and
33

sufficiently verifiable when it comprises IFRS-defined elements reported in

the financial statements. An EBITDA measure that meets these tests should
qualify as an additional GAAP measure or alternatively could be presented as a
non-GAAP financial measure.
Alternative or Adjusted EBITDA Measures

It may be possible in specific circumstances to demonstrate that the relevance,
representational faithfulness and verifiability of another measure of EBITDA
are sufficiently established that it can be used as an additional GAAP measure.
In so doing, however, any other EBITDA-based additional GAAP measure
should have its components literally identified by its title to preserve its
representational faithfulness. This will dispel any possibility that it is misleading because it includes or excludes amounts that are not identified in its title.
Verifiability for financial statement purposes would also generally require that
the adjustments comprise elements that are defined by IFRSs.
Sometimes EBITDA may not have the qualitative characteristics necessary for
inclusion in IFRS financial statements. The relevance of EBITDA to the entity
may not be established when, for example, the entitys internal processes do
not use EBITDA, as in the case of many financial institutions. Alternatively,
some adjustments to the measure may not meet the tests of representational
faithfulness and verifiability, for example, when an entity adjusts EBITDA for
subjective non-IFRS components.
These circumstances would not necessarily prevent an entity from presenting
EBITDA adjusted for such components as a non-GAAP financial measure
in other areas of the entitys financial reports, such as the MD&A and press
releases where the tests for faithful representation and verifiability may be less
rigourous. In these circumstances, the test for relevance is met when the entity
uses the measure internally or knowledgeable investors or analysts request the
measure.
Whether an adjusted EBITDA measure is verifiable and constitutes a faithful
representation of a relevant phenomenon sufficient for presentation as a nonGAAP financial measure would have to be considered in conjunction with
disclosure about the purpose for the adjustment, the clarity of the measures
34

Draft for Comment
description and calculation, and discussion of its implications. These points

are considered further in the discussion of entity-specific EBITDA below.
III.4 The Presentation and Disclosure of

EBITDA
The specific disclosure recommendations for entities that disclose an EBITDA
measure either in IFRS financial statements or in the MD&A are set out
below.10 These consist of:
general considerations;
a standardized and adjusted EBITDA measure;
discussions that provide context; and
additional presentation and disclosure considerations when reporting
EBITDA in IFRS financial statements.
General Considerations
When an entity reports EBITDA, it should follow the general considerations
for presentation and disclosure set out in Part I of this guidance. These
include:
disclosure of the definition of the measure;
managements purpose for providing the measure; and
a reconciliation to the closest GAAP number.
Additional aspects of this disclosure for EBITDA are discussed below.
A Standardized and Adjusted EBITDA Measure

Users have indicated that a degree of standardization in the definition of
EBITDA is desirable for the measure to be comparable across entities, but that
non-standardized entity-specific information can also be useful. Accordingly,
to facilitate users understanding of the measure, an entity reporting any version of EBITDA should also report a standardized measure, with any entityspecific measure presented as an adjustment to the standardized measure.
10 The CPRB believes that following this guidance will comply with the specific application guidance
for reporting EBITDA as an additional GAAP measure set out in the CSA Staff Notice.
35

Standardized EBITDA
Standardized EBITDA is defined as profit or loss, adjusted for interest, taxes,

depreciation and amortization, all determined in accordance with GAAP.
The basis for this definition of Standardized EBITDA can be found in the
CSA Staff Notice although the CSA does not use the term standardized. As
well, that notice makes several observations that illustrate how six practices for
reporting additional GAAP measures apply to reporting EBITDA as an additional GAAP measure. It states that presenting EBITDA as a subtotal in the
statement of comprehensive income would only be appropriate if the amounts
of interest, taxes, depreciation and amortization are clearly identified on that
statement and presented below the subtotal. In addition, the Staff Notice states
that in calculating EBITDA it would be misleading to exclude amounts for
items such as restructuring expenses, fair value changes, or impairment losses.
To avoid confusion, a measure of EBITDA that varies from the above-noted
definition should not be described as Standardized EBITDA.
Adjusted EBITDA
An entitys definition of EBITDA may exclude or include adjustments,

identified here as entity-specific items, for example, other non-cash charges or
non-recurring items that are not in the standardized EBITDA definition. If so,
the EBITDA measure should be reported as Adjusted EBITDA to stand in
contrast to Standardized EBITDA.
The following disclosures should facilitate users understanding of an entitys
Adjusted EBITDA measure:
i. the adjusted amount, reported as Adjusted EBITDA, or the
Standardized amount, if no adjustments are made;
ii. the definition of the EBITDA measure and why it provides insight;
iii. a reconciliation, incorporating Standardized EBITDA, separately
disclosing each adjustment, between the reported Adjusted
EBITDA and the closest GAAP measure;
iv. the definition and purpose for each adjustment, including the basis
for subjective determinations and judgments, for example, nonrecurring expenses; and
v. for each adjustment, the identification, location and quantification
of the corresponding item in the financial statements.
36

Draft for Comment
The entitys EBITDA definition should be accompanied by an explanation of

how management uses the measure. The following is an example of such an
explanation for a non-GAAP financial measure:
Adjusted EBITDA is defined as the entitys net income before discontinued operations, excluding the costs of financing in the form of
interest, income taxes, and the depreciation of property, plant, equipment, and intangible assets, as each of these is measured by GAAP. It
also excludes restructuring charges incurred as the result of a business
combination and reflects the acquirees EBITDA since acquisition.
Adjusted EBITDA is employed internally by the entitys chief decision
makers to evaluate the performance of continuing operations excluding
the costs of consuming capital assets which are in the nature of sunk
costs, the financing costs which do not affect the value of the entitys
assets, and restructuring costs which are not representative of continuing operational costs.
As noted in Part I, adjustments should be applied consistently, both across
the components of the EBITDA measure and for comparative amounts. For
example, when an adjustment is made for non-recurring costs, there should
also be an adjustment for any non-recurring income that is not part of normal
operations. If not, the limited scope of the application of the adjustments
should be specifically disclosed, i.e., it should be made clear to readers that the
application of non-recurring is limited to certain forms of expenses and not
to gains or revenues.
When a change is made to the components of the entity-specific measure, users
understanding is generally enhanced if the reason for the change is explained
and comparative amounts are presented in accordance with the new basis.
Discussions that Provide Context

Reporting EBITDA in the context of the entity as a whole
Once an entity discloses EBITDA as a supplementary measure in its IFRS

financial statements or in the MD&A, the issue then becomes how to discuss
the implications of period-to-period movements in the measure. For example,
assume EBITDA improved for the period compared to the prior year because
earnings decreased but depreciation increased, while amortization, interest and
37

tax expense remained the same. The substantive issue is the meaning that can
be attached to such a change in EBITDA.
One characterization is that the short-run profitability of the enterprise rose
in the period, measured before the costs of consuming capital assets and
financing. However, it would be difficult to characterize this as an unequivocally positive message in the absence of an explanation for the increased
costs of capital assets as reflected in increased depreciation. For example, the
increased EBITDA may simply reflect a shift of expenses from labour costs to
depreciation incurred by using labour-saving but capital-intensive technologies. Likewise, there may be no period-to-period change in reported EBITDA
even though the entity reported increased interest costs and lower net income.
The increased interest costs may reflect the assumption of additional debt
and leverage as the result of poor liquidity, and reflect the entitys inability to
produce sufficient liquidity to satisfy the entitys needs even though EBITDA
is positive and stable. In each instance, context is relevant to the interpretation
of EBITDA.
In short, to identify the significance of a change in EBITDA, the MD&A
should consider not only the change in the measure, but also changes in
those items that are excluded from the measure yet have significance for its
interpretation, namely the state of the entitys costs of productive capacity and
the entitys financing strategy. This should include insights as to the relative
cost and productivity of existing capacity compared to that envisioned in the
future and how the financing strategy is expected to affect the costs of interest
and taxes and any changes in policies that might affect the disposition of the
amounts reported as EBITDA. Insights on both of these factors are needed in
order to provide context for the measure, which excludes costs related to these
activities. In some circumstances, these discussions may best be placed with
the EBITDA discussion. In others, they may be best discussed in some other
area of the MD&A, for example, the liquidity discussion.
Information about an entity specific adjustment
An entity reporting an Adjusted EBITDA should discuss in the MD&A how

specific activities related to that adjustment are expected to affect the revenues
or costs of the entity and any changes in policies that could affect the amounts
included in or excluded from EBITDA. This discussion should include
insights as to the implications of such items for the future.
38

Draft for Comment
Additional Presentation and Disclosure Considerations

when Reporting EBITDA in IFRS Financial Statements
When EBITDA is reported as an additional GAAP measure in the income
statement, it is presented as a subtotal, which should exclude from earnings
only the precise components excluded in the definition. It is self-evident that
this presentation will provide information on the depreciation, amortization,
interest and tax expenses excluded from EBITDA. However, even in this case,
an understanding of the relevance of EBITDA should be communicated to
users by including in the entitys MD&A the above noted contextual discussion that addresses the significance of the items omitted from EBITDA as an
earnings measure.
Sometimes the amounts constituting the entitys measure of EBITDA may not
be disclosed on the face of the income statement. For example, an entity may
present income from certain assets (usually financial assets) or expenses from
non-financial liabilities such as interest on pension obligations together with
interest expense. It is then difficult if not impossible to arrange the elements
of the financial statement so that they subtotal to EBITDA. Similarly, an
entity that classifies expenses by function would not be in a position to
report EBITDA on the face of the income statement. In these situations, note
disclosure is the only viable location for presentation of EBITDA within the
financial statements. When this is the case, disclosure in the financial statements should be similar to that for EBITDA measures reported as non-GAAP
financial measures discussed above, including, for example, a reconciliation
between EBITDA and profit or loss for the period, separately disclosing each
adjustment.
39
APPENDIX
Differences from Previous CPRB guidance
2013 GUIDANCE
PREVIOUS GUIDANCE
General Principles
A non-GAAP financial measure is
relevant when requested by knowledgeable investors, even if it is not used by
management.
The previous guidance noted that in

determining relevance in the context of
a non-GAAP financial measure, consideration should be given to whether it is
used internally, in the industry, and by
investors, and whether it provides an
additional perspective that management
believes is important to understanding
performance.
An additional GAAP measure is relevant

when it is used by the entitys chief decision makers in explaining value drivers,
liquidity, or performance.
The previous guidance noted that to be

relevant for reporting in financial statements, a measure should be consistent
with the financial statement in which it is
reported as well as meeting the abovenoted relevance test for a non-GAAP
financial measure.
A non-GAAP financial measure should

be a faithful representation when it
comprises the components used by
management or components that
management believes investors need.
As well, to be a faithful representation,
the measure should be accompanied by
assumptions, judgments, and estimates
used in calculating the measure and
other information necessary to understand any limitations in the measures
completeness or neutrality.
The previous guidance noted that a nonGAAP financial measure should have
an appropriate caption, be consistent
between periods, and should be consistent in the components it omits.
41

2013 GUIDANCE
PREVIOUS GUIDANCE
An additional GAAP measure should be

described in terms that:
The original guidance noted that all

supplementary financial measures
should use appropriate captions.
distinguish it from minimum IFRS

disclosure requirements;
are meaningful given its composition;
and
clearly explain which IFRS components it includes and excludes.
An additional GAAP measure is verifiable when knowledgeable users can
identify the components of a measure
and understand that they are defined by
IFRSs.
Verifiability was not addressed in the

earlier guidance. Both the current and
previous guidance, however, note that
to be representationally faithful, an
additional GAAP measure should be
comprised of components defined by
IFRSs.
A non-GAAP financial measure is verifiable when it provides a reconciliation

to the nearest GAAP measure, showing
each adjustment, and its purpose,
together with the above noted disclosures about estimates, assumptions,
completeness, and neutrality.
Verifiability was not addressed in the

earlier guidance. The need for a reconciliation was discussed, however, as part of
the discussion of faithful representation.
Net Free Cash Flow

The guidance uses the term Net Free
Cash Flow to distinguish the measure
from the term Free Cash Flow that is
discussed in various texts as a measure
of cash flow before taking into account
the impact of interest costs, and used in
estimating enterprise value.
The original guidance used the term

Free Cash Flow, although its definition
reflected the after-tax cost of interest.
The definition of Standardized Net Free

Cash Flow now includes a deduction
from cash flows from operating activities
for all cash-funded asset acquisitions.
The original guidance deducted capital

expenditures in arriving at Free Cash
Flow, but treated cash outflows for
business combinations as uses of Free
Cash Flow.
42
APPENDIX
Draft for Comment
2013 GUIDANCE
PREVIOUS GUIDANCE

Cash Flow excludes cash provided or
consumed by discontinued operations
as this will not be relevant in estimating
future cash flows.
The original guidance included cash

from operating activities of discontinued
operations as part of Free Cash Flow.

Cash Flow deducts preferred dividends
from cash flows from operating activities
to enable valuations of common equity.
The original guidance deducted stipulated dividends in arriving at Free Cash

Flow as they were more in the nature of
interest than dividends.
When an Adjusted Net Free Cash Flow

is presented, the definition and purpose
for each adjustment should be disclosed,
including the basis for subjective
determinations and judgments.
The original guidance did not specifically

advocate disclosure of the basis for subjective determinations and judgments.
EBITDA
The guidance notes that there is no
definition of EBITDA within accounting
standards and there is no theoretical or
conceptual basis for its use in security
valuation. The guidance also recognizes,
however, that EBITDA is extensively used
in the investment community.
The original guidance, while noting the

limitations of EBITDA, explained that it
was often used to facilitate an enterprise
valuation.
To align with the CSAs views on EBITDA

as an additional GAAP measure, Standardized EBITDA is defined as profit or
loss, adjusted for interest, taxes, depreciation and amortization, all as determined
in accordance with the entitys GAAP.
In its definition of Standardized EBITDA,

the original guidance eliminated income
from discontinued operations and
deducted impairment charges for capital
assets.
When an Adjusted EBITDA is presented,

the definition and purpose for each
adjustment should be disclosed, including the basis for subjective determinations and judgments.
The original guidance did not specifically

advocate disclosure of the basis for subjective determinations and judgments.
43
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Draft for Comment

Improved Communication with

2013 Chartered Professional Accountants of Canada

In the terminology of the Canadian Securities Administrators, supplementary financial measures

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

The adoption of the International Accounting Standards Boards (IASB) International

IAS 1, paragraphs 55, 85, and 112 (c).

by a jurisdictions securities regulations and within financial statements prepared in

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

Nature and Objective of Supplementary Financial

Relationship of CPRB Guidance to Securities

Qualitative Characteristics of Useful Financial Information ...... 2

I.4 Interpreting the Qualitative Characteristics

Categorization as an Additional GAAP Measure

I.6 Supplementary Financial Measure Presentation

PART II: Application to Specific Measures: Net Free Cash Flow

Free Cash Flow and Net Free Cash Flow.............................................15

II.2 Applying the Qualitative Characteristics

Net Free Cash Flow as an Additional GAAP Measure

II.4 The Presentation and Disclosure of Net Free Cash Flow.......... 24

PART III: Application to Specific Measures: EBITDA

III.2 Applying the Qualitative Characteristics

PART I: General Guidance

Nature and Objective of

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

subjective assumptions, judgments, and estimates that are not required by an

Relationship of CPRB Guidance to

I.3 Qualitative Characteristics of Useful

PART I: General Guidance on Supplementary Financial Measures

(Conceptual Framework). The IASB states that the qualitative characteristics in

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

The following are extracts from the IFRS Conceptual

PART I: General Guidance on Supplementary Financial Measures

These fundamental qualitative characteristics are necessary for financial

Interpreting the Qualitative

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

PART I: General Guidance on Supplementary Financial Measures

comparable, by being prepared on a consistent basis from entity to entity

Categorization as an Additional GAAP

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

To be relevant, a measure needs to have the potential to affect users decisions

PART I: General Guidance on Supplementary Financial Measures

should exist when knowledgeable users can identify the components of a

IAS 1, paragraph 17(b).

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

internally by management, should comprise the same components as that

PART I: General Guidance on Supplementary Financial Measures

Supplementary Financial Measure

Presentation and Disclosure Guidance for

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

disclose the definition of any supplementary financial measure it presents;

When an additional GAAP measure is reported, the financial statements

An entity-specific measure should be reconciled to the standardized measure

PART I: General Guidance on Supplementary Financial Measures

of the calculation of such subjective amounts. When a change is made to the

Selectivity generally applies when a supplementary financial measure

IMPROVED COMMUNICATION WITH SUPPLEMENTARY FINANCIAL MEASURES

estimates and judgments should also be disclosed, for example, judgments

The MD&A should provide context for supplementary financial measures by

When an additional GAAP measure is to be reported on the face of an IFRS

PART II: Application to

Free Cash Flow and Net Free Cash Flow

Present Value of Dividends

Present Value of Free Cash Flow