SecuritiesSecurities e-LERT: Canadian Securities Administrators Release Continuous Disclosure Review ResultsPublished: 08/19/2010 The Canadian Securities Administrators (“CSA”) recently released the results of their continuous disclosure review for the year that ended March 31, 2010. The CSA conducts an annual continuous disclosure review program designed to identify material disclosure deficiencies that affect the reliability and accuracy of a reporting issuer’s disclosure record. The purpose of the CSA review is to ensure compliance with disclosure requirements and to educate issuers by alerting them to common deficiencies. The CSA will often require issuers subjected to these reviews to re-file or commit to prospective disclosure changes. Further, while not common, regulators do take enforcement actions for disclosure deficiencies. Persistent deficiencies, particularly for matters that the CSA have specifically flagged to the issuer community, may be at greater risk of such action. The publication of these results provide helpful guidance to all issuers as to what the regulators view as deficient. As many issuers look to peers or “market practice” for disclosure guidance, these CSA reviews can help provide a helpful “independent” view or “second opinion” as to the sufficiency of disclosures. Of particular benefit to those drafting disclosure, the CSA has, in many cases, provided contrasting examples of deficient and satisfactory disclosure. We have reproduced certain of these examples with respect to MD&A, which is the area wherein many issuers have room for improvement. Issuers are encouraged to review these examples for a sense as to the substantive changes that may be necessary to bring disclosure up to a standard that will satisfy the regulators. Common Deficiencies The CSA identified a number of common deficiencies relating to:
MD&A Deficiencies The CSA determined that MD&A is the area with the most compliance issues. Generally, the CSA cautions against the use of boilerplate disclosure. Again, issuer-specific disclosure is the key to better disclosure. Reporting the simple facts, even if issuer specific, may still not be enough. The forward-looking nature of MD&A also requires a candid assessment of the issuer and its future. Issuers need to provide real insight into their business. This, of course, is easier said than done. The five sections of MD&A where the CSA found the most common deficiencies were operations, liquidity-working capital deficiencies, risks, related party transactions, and critical accounting estimates. Operations The CSA found that common deficiencies in the MD&A continue to result from a lack of meaningful analysis and discussion of operating results, financial condition, and liquidity. The CSA identified some circumstances where issuers fail to provide a quantitative and qualitative explanation of material movements in their income statement. Issuers should describe the reasons behind material variances to assist investors in determining if past performance is indicative of future performance. Liquidity – Working Capital Deficiency Where an issuer has or is expected to have a working capital deficiency, they are required to discuss their ability to meet obligations as they become due and how they expect to remedy the deficiency. The MD&A should provide an analysis of the ability to generate sufficient cash to allow investors to determine if adequate financial resources are available to meet operating needs. The CSA found it was common that issuers that had a working capital deficiency failed to provide plans to remedy this deficiency. Risks Issuers are required to disclose material risks and uncertainties that could cause reported financial information not to be indicative of future operating results or future financial position. This information enables investors to analyze important trends and risks that are reasonably likely to impact an issuer. The CSA reminded issuers to include, if relevant, a discussion of the effects of the current economic environment on financial condition, operations and liquidity. Related Party Transactions The CSA cautions that many issuers do not disclose the business purpose of related party transactions as required in the MD&A, which is incremental to the disclosure requirements under Canadian generally accepted accounting principles. Disclosure of both the quantitative and qualitative aspects of related party transactions in the MD&A is necessary for investors to understand the economic substance and business purposes of the transactions. Critical Accounting Estimates The CSA also reminded issuers that MD&A should provide a discussion of the methodology and assumptions used in determining critical accounting estimates. This includes information such as assumptions underlying accounting estimates that relate to highly uncertain matters at the time the estimate was made, known trends, commitments, events or uncertainties that will materially affect the methodology or the assumptions used, why the accounting estimate is reasonably likely to change from period to period and why it may have a material impact on the financial presentation. Financial Statements The CSA found that certain financial statement deficiencies continue to occur on a regular basis. These generally relate to the disclosure of accounting policies and measurement issues. It is clear from the review that deficiencies can generally be avoided by taking the time to ensure that disclosure is specific to the issuer and that it provides sufficient detail for a reader to understand the issuer’s particular circumstances and approach to their financial reporting. The four main areas in which the CSA has identified financial statement deficiencies include financial instruments, revenue recognition, goodwill, and capital disclosure. Financial Instruments The CSA has found that many issuers continue to measure incorrectly financial instruments in accordance with appropriate standards and that issuers continue to fail to disclose the following:
Valuation techniques used to measure financial instruments (e.g., fair value) must be based on factors and assumptions that are appropriate in the current economic climate. The CSA emphasized that appropriate measurement and disclosure about financial instruments is critical, as it enables investors to evaluate the significance of financial instruments for the issuer’s financial position and performance and to evaluate the nature and extent of risks arising from financial instruments. Revenue Recognition As revenue recognition generally has a significant impact on an issuer’s financial results, issuers should be disclosing a revenue recognition policy that is clear and concise. The CSA advised that, where appropriate, revenue disclosure should clearly set out triggers for recognition and the basis for revenue from each product or service, including disclosure of any credit terms, rights of return, or conditions. Goodwill The CSA found that inadequate disclosure of the methodology used by issuers to conduct goodwill impairment testing is an ongoing issue. Proper impairment testing and disclosure of the methodology used is necessary to allow investors to consider the methodology and assumptions used. Capital Disclosure Finally, the CSA found that issuers often fail to provide summary quantitative data about how they manage capital and fail to discuss if they specifically have met their objectives for managing capital. The CSA reminded issuers to disclose information that enables investors to evaluate their objectives, policies and processes for managing capital. Other Specific Reviews The CSA also made specific reference to the results of certain issue-oriented reviews: Mining Technical Disclosure The CSA found the following common problems with mining disclosure:
Each of these areas are easily dealt with and issuers are urged to take the time to review each disclosure to ensure that any scientific or technical information complies with the provisions of NI 43-101 and, when in doubt, to seek advice regarding their technical disclosure. Going Concern Disclosure Of issuers reviewed for going concern issues, the majority did not provide complete disclosure in their financial statements and MD&A of the risk that the issuer would not be able to continue as a going concern. Asset Impairment In light of market conditions at the time, the CSA completed a targeted review of issuers in certain industries with a higher risk of triggering an asset impairment. The main deficiency the CSA identified was insufficient disclosure of asset impairments, specifically disclosure of critical accounting estimates used in the impairment analysis. Areas of Focus for Fiscal Year 2011 Issues should be aware that the CSA will be continuing their full review for the 2011 year and will be conducting an issue-oriented review in the following areas:
Full details of the review can be found on the Ontario Securities Commission website and on various securities commission websites. Click to view:
For further information regarding your continuous disclosure requirements, the results of the CSA’s review or general information on securities matters for issuers, please contact: Greg Hogan Philip Long |