The Canadian Securities Administrators (“CSA”) recently published a Staff Notice (the “Notice”) to report on the results of the reviews conducted by the CSA within the scope of its Continuous Disclosure Review Program. The goal of this program is to improve the completeness, quality and timeliness of continuous disclosure provided by reporting issuers.
The focus on this post is mainly aimed towards the Notice’s guidance for continuous disclosure in the context of the coronavirus pandemic. In order to support investors in making informed investment decisions, CSA reminds reporting issuers to provide transparent disclosure, including information about the impact of COVID-19 on their operating performance, financial position, liquidity and future prospects. The guidance builds on information disseminated by the CSA earlier this year, as we have discussed in this previous blog post.
Management Discussion & Analysis
Forward Looking Information. Issuers should avoid boilerplate language regarding COVID-19. Information should be detailed and entity-specific. Notably, the reasonability of assumptions made as Forward Looking Information should be reassessed in light of the most recent pandemic developments.
Effects of the pandemic. As the case may be, management should not incorrectly attribute the pandemic as the sole factor for negative results, but rather break-down and detail the different factors that contributed to such results. Issuer should disclose the methodology used to determine the impact of coronavirus on its operations, and present the mitigation measures that have been put in place to that effect.
Quantitative Information. Issuers are also encouraged to provide quantitative information regarding the impact of COVID-19 on their liquidities and capital resources. The following examples are given:
- subsidies and/or funding received from government programs;
- increased counterparty risk (A/R collection);
- reduced cash flow from operations as a result of decreased demand;
- delays in capital project plans;
- impact of any cost cutting initiatives (employee layoffs, reduced hours); and
- changes in the issuer’s dividend policy.
Whenever quantitative information is provided regarding the impact of COVID-19 on an issuer’s results, the calculation methodology should be disclosed as well.
In the Notice, the CSA provides examples of disclosures that are deficient, along with recommendations for correcting such deficiencies.
Non-GAAP Measures. The CSA notes that there has recently been a proliferation of the usage of Non-GAAP Measures (“NGMs”). Issuers are cautioned that NGMs should be properly labeled as such and measures ought to be taken to avoid misleading investors. For instance, the most directly comparable financial measure to the NGM should be presented with equal or greater prominence to that of the NGM.
Furthermore, issuers are cautioned about adjustments or alternative profit measures defined as COVID-19 related. Not all coronavirus effects are non-recurring and there may be limited basis for management to conclude that a loss or expense is non-recurring, infrequent or unusual. Management need to explain how the adjusted amount was specifically associated with COVID-19.
Judgments and estimates. Given the pandemic-induced uncertainty in which reporting issuers are currently evolving, drafting and publishing continuous disclosure information may be more challenging. The CSA calls for reporting issuers to use the best available information in making well-reasoned judgements. Disclosure of significant judgements and estimates should be included, as required by IAS 1 of the International Accounting Standards, Presentation of Financial Statements.
Interim Financial Statements. In the context of a rapidly changing environment, it is also advised that issuers publishing interim financial statements consider, as new information becomes available, whether the judgements and estimates disclosed in their annual financial statements need to be updated.
Impairment. Issuers should consider whether any triggers for impairment are present for non-financial assets at the end of each reporting period. Indicators of such impairment include: market value declines, volatile markets with negative trends, poor economic conditions, adverse change to laws, net assets of the company higher than its market capitalization, assets become idle, or poorer than expected performance.
Going concern. Issuers are reminded to consider events and information up to the date of authorisation of the financial statements in performing the going concern assessment.
Material Change Report
The CSA observe that some issuers fail to issue material change deports, or do not do so in a timely manner. Issuers should be cautious of additional considerations in light of COVID-19. Notably, the impact of the virus or resulting governmental and regulatory policies may prove more significant to a given issuer than others in its industry. The Notice outlines examples of potentially material information that could result in a material change:
- significant disruptions to an issuer’s workforce or operations;
- negative changes in markets, economy or laws,
- supply chain delays or disruptions that are critical to an issuer’s business;
- changes in credit arrangements;
- increased cost of goods or services; and
- suspension of exports, etc.
Other Matters Discussed in the Notice
As part of its Continuous Disclosure Review Program, the CSA publishes biennial Staff Notices containing the results of its reviews. Below are some of the key topics discussed in this year’s Notice.
Overly Promotional Disclosures. Issuers should be careful not to make false or misleading statements, or not to omit facts from a statement. Disclosure should be balanced, providing risks and contingencies associated with new information.
Insider Reporting. The CSA observes certain instances where insider reports are not filed, or not filed on a timely basis, on the System for Electronic Disclosure by Insiders (SEDI). More precisely, it is observed that reports related to securities issued under compensation arrangements are sometimes late or missing.
Early Warning Reporting. The CSA observes certain instances where security holders do not fulfil their early warning reporting requirements.
Mineral Project Disclosures. The Notice discusses National Instrument 34-101 Standards of Disclosure for Mineral Projects and, more precisely, technical reports.