Financial highlights in Canadian annual reports: a preliminary study

Abstract

This paper examines the information presented in the Financial Highlights section of non-cross listed Canadian public companies’ Annual Reports from 2000 to 2006. The study yields the following primary findings: first, the sample Canadian companies typically report GAAP earnings, various non-GAAP or pro forma earnings, and a wide range of other financial information and non-financial information in the Financial Highlights. Furthermore, the companies are more likely to report pro forma earnings and non-financial information if their GAAP earnings are negative or decreasing. Since pro forma earnings are generally greater than GAAP earnings, this finding is consistent with the notion that the use of these non-GAAP earnings is motivated to create the impression of a positive performance and better outlook when GAAP earnings are disappointing. Finally, similar to recent US studies, we also find a slight decline in the frequency of pro forma earnings being reported by the sample Canadian companies post Bill 198. The findings should be helpful to investors and creditors who, to certain extent, rely on the corporate annual reports to make their investment decisions. The findings should be also of interest to policy makers in their effort to improve the accuracy and reliability of corporate disclosure and to rebuild investors’ confidence.