Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, January 2009
The global economic downturn of the past few months has led to increased scrutiny of public disclosure by reporting issuers, as investors seek to understand and quantify the effects of the current economic conditions. An issuer preparing its annual continuous disclosure filings for the 2009 meeting season should be aware that Canadian disclosure requirements will require partic-ular focus in light of the troubled markets. Thoughtful and accurate disclosure on these issues will not only satisfy relevant securities law requirements, it may also help mitigate investor anxiety and pre-empt surprises.
On January 8, 2009, the Canadian Securities Administrators (CSA) issued Staff Notice 51-328 – Continuous Disclosure Considerations Related to Current Economic Conditions (the Notice) to highlight specific items of disclosure in issuers' management's discussion & analysis (MD&A) that the CSA believe are likely important to helping investors understand the risks and circumstances facing issuers. In the Notice, the CSA indicate they will focus on these areas during continuous disclosure reviews to ensure issuers have clearly identified the impacts of current market conditions on operations, financial condition, liquidity and future prospects.
The following summarizes the CSA's more noteworthy views on MD&A disclosure contained in the Notice.
According to the CSA, MD&A should identify and evaluate information that would give investors an accurate understanding of the issuer's current and prospective financial position and operating results. This would include the potential effects of known trends, commitments and uncertainties that have arisen due to the current market conditions.
Overall Performance and Results of Operations
The discussion of overall performance and results of operations should include details of the specific economic factors currently affecting or anticipated to affect the issuer's industry and performance. Disclosure should provide a qualitative and quantitative discussion of how market conditions have affected the issuer's performance, taking into account information available up to the date of the MD&A.
To the extent actual results are different from forecasted results in prior forward-looking information, issuers are required to disclose the events and circumstances that lead to such difference.
Liquidity and Capital Resources
The liquidity and capital resources sections of MD&A require an analysis of the issuer's ability to generate sufficient cash and to access financial resources to meet operating needs in the current market environment. "Boilerplate" statements are not sufficient. Disclosure should include and quantify, among other items, the cash necessary to fund current operations, the ability to satisfy obligations (including debt maturities), commitments or planned expenditures to meet growth objectives and performance targets, future cash require-ments associated with known trends and uncertainties due to current market conditions, liquidity risks associated with financial instruments that have declining trading volumes and risks of default. Income trust issuers are required to provide disclosure that compares cash distributions paid to cash flow from operating activities and net income, including a discussion of how any shortfall will be funded and whether cash distributions will be suspended in the near future.
Critical Accounting Estimates
Current market conditions may require an issuer to disclose additional critical accounting estimates from the prior year. MD&Ashould discuss the impact of market conditions on critical accounting estimates, including insightful information on the rationale for any changes made to critical accounting estimates during the period, the issuer's assessment of trends, events or uncertainties that may affect the methods and assumptions used to determine critical accounting estimates going forward, the sensitivity of estimates, and the likelihood of any changes to estimates based on evolving economic conditions.
An issuer should carefully assess and disclose in its financial statements, in accordance with the CICA Handbook, the material uncertainties that may put into question its ability to continue as a going concern. Examples of material uncertainties include continued and expected operating losses, negative operating cash flows, a failure to obtain or renew financing, a significant decline in the demand for the issuer's products, declining prices, substantial refinancing requirements and an inability to make scheduled debt payments.
If an issuer faces material uncertainties about its ability to continue as a going concern, the MD&A should provide further insight into management's reasons for determining that the company will be able to continue as a going concern and any planned strategies or known events that may mitigate the uncertainties.
Other Financial Matters
If an issuer incurs an impairment charge relating to goodwill, intangible assets or long-lived assets, its MD&A should not only discuss the financial impact of the charge but also provide meaningful insight into the reasons and business circumstances surrounding the impairment. Impairment indicators include a significant decrease in the issuer's share price, a significant adverse change in the issuer's industry, operating or cash flow losses and the accumulation of costs significantly in excess of the amount originally expected for an acquisition or construction.
Adequate disclosure regarding financial instruments is required to help investors understand the significance, impact and risks of financial instruments to the issuer's financial position, operations and cash flow. Financial instrument disclosure should include, among other things, a detailed discussion of the credit, liquidity and market risks associated with the instruments, financial assets that are past due (but not treated as impaired) and the methodology and assumptions used to determine fair market value.
Additional areas noted by the CSA in the Notice as requiring particular focus include capital disclosures, impacts on defined benefit pension plans and the use of non-GAAP financial measures. The CSA also identify additional considerations for junior resource companies, including asset impairments and specific oil and gas disclosures.
The CSA note that the topics covered in the Notice do not include all accounting and disclosure issues and instruct each issuer to consider the accounting and disclosure issues specific to its own circumstances in the current economic environment when preparing its continuous disclosure filings.
- CSA Notice highlights MD&A disclosure to help investors understand effects of the current economic conditions
- Requires qualitative and quantitative discussion of impact on performance
- Disclose issuer's ability to generate cash and access financing sufficient to meet needs
- Address issuer's ability to continue as a going concern
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.