Canada: Improving Your Continuous Disclosure

Last Updated: August 30 2016
Article by Stewart L. Muglich

Recently, the Canadian Securities Administrators (the "CSA") released the results of their Continuous Disclosure Review Program Activities for the Fiscal Year that ended March 31, 20161. The goal of the program is to improve the completeness, quality and timeliness of continuous disclosure provided by reporting issuers ("issuers") in Canada. In fiscal 2016, 62% of the reviews conducted by the CSA required issuers to take some sort of action to improve their disclosure or resulted in the issuer being referred to enforcement, cease traded or placed on the default list. The following sets out some of the more common deficiencies noted by the CSA.

Financial statement disclosure

The first area where the CSA identified deficiencies was with the financial statement disclosure provided by issuers. Some of the more prevalent deficiencies include:

Market risk sensitivity analysis:  Some issuers do not present a sensitivity analysis which is reflective of the possible changes in the relevant risk at the date of the financial statements. An issuer's obligation is to disclose a sensitivity analysis of each type of market risk to which the issuer is exposed.

Contingent consideration in business combinations:  Some issuers fail to accurately account for contingent consideration. An issuer must recognize contingent consideration at fair value as of the acquisition date.

Goodwill and intangible assets recognized in business combinations:  Many issuers allocate the entire purchase price to one intangible asset and many do not explain how they determined the useful lives for finite lived intangible assets. Issuers must separately recognize intangible assets and must distinguish the indefinite lived intangible asset from those with a finite life.

Functional currency:  Some issuers change their functional currency when the timing does not correspond to the timing of the change in the underlying circumstances. Generally, the functional currency must not change unless there is a change in the underlying transaction, events or circumstances.

Operating segments:  Issuers often aggregate several operating segments into a single operating segment. An issuer should ensure that the relevant aggregation criteria have been met before aggregating operating segments. Issuers must disclose any judgements made by management in applying the aggregation criteria. Even if operating segments do not meet the quantitative thresholds, they still may be considered reportable if management believes that information about the segment would be useful to investors.

MD&A deficiencies

The second area where the CSA identified deficiencies was with the MD&A disclosure provided by issuers. Some of the more prevalent deficiencies include:

Liquidity and capital resources:  Many issuers continue to provide boilerplate disclosure or simply reproduce amounts from their statements of cash flows without providing any analysis. The issuer should be discussing its ability to generate sufficient financial resources in the short and long term. If a working capital deficiency is expected, then it should discuss its ability to meet such obligations as they come due.

Forward looking information (FLI):  While many issuers disclose FLI, it is not always updated as required. An issuer must discuss the events and circumstances that occurred that are reasonably likely to cause actual results to differ materially from material FLI that has been previously disclosed.

Overall performance: Issuers continue to identify segments in their MD&A that are inconsistent with their financial statements. At a minimum, the discussion should be based on the operating segments as disclosed in the financial statements and should provide an analysis of the issuer's financial condition, financial performance and cash flows, and it should address operating segments. Non-GAAP measure can be used but they should not be more prominent than the GAAP measure.

Other regulatory disclosure deficiencies

The third area where the CSA identified deficiencies was with certain other regulatory disclosure provided by issuers. Some of the more prevalent deficiencies include:

Material contracts:  Issuers continue to make prohibited redactions and fail to provide a description of the type of information redacted. Redactions are permitted if the issuer reasonable believes that disclosure would be seriously prejudicial to the interests of the issuer or would violate confidentiality issues. Certain redactions are not permitted (i.e. debt covenants and ratios events of default, etc.). There are also inconsistencies between material contracts filed on SEDAR and those listed as material contracts in the issuer's continuous disclosure record.

Audit committee composition – Venture issuers:  Some venture issuers have not met the audit committee composition requirements. An audit committee of a venture issuer must be composed of a minimum of three directors with a majority of whom must not be executive officers, employees or control persons.

Management information circular:  Some issuers fail to provide prospectus level disclosure where a restructuring is to occur under which securities are to be changed, exchanged, issued or distributed. The required disclosure is to include financial statements, executive compensation disclosure, risk factors and a detailed description of the business subject to or resulting from the restructuring.

Annual information form:  Issuers often do not provide a sufficient description of their business or the applicable risk factors.

Insider reporting:  The most common deficiencies of insiders who are required to report include: missing SEDI profiles, a failure to file insider reports within the required time periods or at all, and a failure to amend SEDI profiles when necessary. Issuers also have failed to amend their profile supplements on SEDI to reflect changes that may have occurred.


1 See CSA Staff Notice 51-346 dated July 18, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Stewart L. Muglich
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