In March 2015, ASX released a consultation paper on proposed changes to ASX Guidance Note 8 (Continuous Disclosure) (GN 8), relating to earnings guidance, earnings surprises and analyst and investor briefings.
All of these are topical issues. Indeed since the last re-write of GN 8 in 2013, ASIC has released its findings on 'Handling of confidential information: briefings and unannounced corporate transactions' and the federal court imposed a $1.2 million penalty on an ASX listed entity arising from selective analysts briefings (about mining production levels and capital expenditure).
The latest amendments to GN 8 arose from ASX concerns that some listed entities had misinterpreted the 2013 updated guidance note around earnings surprises. ASX was concerned that some entities may try to "manoeuvre" analysts forecasts in a non-public or selective manner to align them more closely with their own internal projections (to reduce the perceived risk that they might otherwise have to give an earnings update). ASX was also concerned that some entities may have a stated policy of not giving earnings guidance to the market but were disseminating analyst forecasts or consensus estimates in a manner that could be interpreted by some as quasi earnings guidance.
Key takeaways from the updated GN 8
- ASX has confirmed that, as a starting position and provided they remain confidential, listed entities are not required to disclose their internal budgets or internal earnings forecasts - these fall within the exception to the disclosure requirement for information that is generated for "internal management purposes". ASX note that it is perfectly reasonable for an entity to have a policy of not disclosing earnings guidance to the market.
- In GN 8 ASX uses a 5 – 10% metrics regarding earnings surprises (being that, if an entity has provided earnings guidance to the market, the board will need determine whether an expected variation of 5-10% requires disclosure). GN 8 now provides a few examples of circumstances where a 5-10% variation may not be material. These are where the earnings of the entity are low (and the differential in absolute terms would be low) and where the entity has lumpy earnings (i.e. where the differential during one part of the reporting cycle may be corrected over the balance of the cycle). The ASX also emphasises that, in the case of entities that have not published earnings guidance, the ASX does not consider it appropriate to lay down general percentage guidance as to what variations may need to be disclosed to the market.
- ASX indicates that an entity does not have any obligation to correct the earnings forecast of an individual analyst, or the consensus estimate of an individual market data vendor, to bring it into line with the entity's own internal forecasts (nor do they have to publish any internal guidance just because they differ from the above). However, if a significant difference emerges between the internal forecasts and a 'significant proportion of analysts' it is incumbent on the entity to ask why. That in turn may warrant consideration as to whether any information needs to be disclosed under the continuous disclosure rules.
- ASX recommends that an entity which has published earning guidance but is also covered by sell-side analysts, also monitor analyst forecasts and consensus estimates for the useful information they may reveal. For example, if those consensus estimates are diverging materially from the entity's guidance, that may indicate that analysts no longer attach any credence to the guidance and that, in turn, may warrant inquiry as to why.
- ASX has confirmed that it is best if an entity wants to publish information about analysts forecasts that it includes all known analysts forecasts or a range showing the low, average and high earnings forecasts – if any are excluded, a reasonable explanation should be included (for example, the analyst's last forecast does not reflect a material announcement or the most recent published financial statements). Of course, excluding the outlier has its own problems. For example, it maybe seen as effectively indicating that the excluded forecast is a significant distance from the entity's internal thinking – that may run the risk of being seen as defacto earnings guidance. Any publication should be subject to a disclaimer that the entity "does not endorse, confirm, or express a view as to the accuracy of" the forecast or estimate.
- A listed entity providing periodic summaries of all analysts' forecasts (so that each analysts has an understanding where it sits compared to other analysts) may create the appearance of selective disclosure and the risk that it will be interpreted as de facto earnings guidance. The ASX suggest that if an entity wishes to provide such an analysis it would be safer to make the information available to the market at large by publishing it on its website or by a market announcement with a relevant disclaimer.
Keep in mind
The ASX has re-iterated its warning to listed entities that conversations with analysts regarding earning forecasts must be treated with care. Specifically, "ASX would caution that listed entities that choose to have conversations with analysts about their earnings forecasts need to tread very carefully so as not to breach their continuous disclosure obligations."
The updated GN 8 has now taken effect and applies this reporting season.
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