The Canadian Securities Administrators (CSA) publish results of their issue-oriented COVID-19 disclosure review and provide guidance with respect to areas of concern. 

  • The CSA's review of reporting issuers' COVID-19 disclosures notes areas where boiler-plate disclosure about the current and expected impact of COVID-19 failed to address detailed entity-specific COVID-19 related risks and impacts.
  • Issuers are reminded that disclosure is expected to be transparent and balanced in order to facilitate a meaningful understanding of the impact of COVID-19 on the issuers' business, both from a financial and operational perspective.

On February 25, 2021, the CSA published CSA Staff Notice 51-362 Staff Review of COVID-19 Disclosures and Guide for Disclosure Improvements (the Staff Notice) which sets out the results of the CSA's recent continuous disclosure review, which specifically focused on disclosure related to the impact of COVID-19 on approximately 90 reporting issuers' businesses for the interim reporting period ended September 30, 2020. Specifically, the review looked at disclosures of the current and anticipated impacts of COVID-19 on issuers' operations, financial condition, liquidity, and future prospects.

Operational and Financial Impacts

The Staff Notice provides insight into Canadian issuers' response to the COVID-19 pandemic. In reviewing the continuous disclosure documents of reporting issuers in a wide range of industries, the Staff Notice outlines a number of the operational and financial impacts that issuers have faced over the last year, including:

  • Decreased demand for products and services.
  • Operational closures.
  • Inability to continue capital projects.
  • Decreases and increases in revenues.
  • Credit losses.
  • Material uncertainties regarding going concern status.

In an effort to mitigate these and other impacts, issuers took a number of measures, including:

  • Use of government assistance and subsidy programs (for example, the Canada Emergency Wage Subsidy Program and other rent subsidies).
  • Deferral of payment of certain expenses.
  • Decreased salaries and directors' fees.
  • Deferral of capital projects and acquisitive transactions.
  • Suspension of share buybacks and dividends.

The CSA found that most issuers provided quality disclosure, with some issuers expanding their MD&A to provide detailed operational updates and address liquidity and capital resource considerations, including working capital and debt covenants and related compliance. As noted in the Staff Notice, impairments of non-financial assets were also adequately disclosed on the whole.

Areas of Concern

Despite the generally positive characterization of issuers' COVID-19 related disclosure, the CSA note the following areas of concern, among others, in the Staff Notice and provide guidance for improvement going forward:

Area of Disclosure

Observation

Guidance

  MD&A

 Some issuers provided detailed operational updates in press releases but did not include the same level of disclosure in their MD&As.
  • A detailed and transparent discussion on the impact of COVID-19 on an issuer's industry and operations should be included in an MD&A.

 

  • Material operational updates should be included in an MD&A.

 Some issuers provided lists of measures employed to manage COVID-19 related operational and liquidity risks but without sufficient details to understand the impact on the issuer.
  • Cost savings measures, restructuring initiatives and/or realignments of operational and financial resources should be disclosed in sufficient detail.

 

  • Describe how operational responses change as conditions evolve. 

 

 Some issuers did not explain the methodology used in determining that fluctuations were isolated to COVID-19, particularly where operational issues were pre-existing.
  •  Not all negative results can be attributed to COVID-19 alone.

 

  • A basis for attributing costs to COVID-19 should be disclosed.
  • The methodology used in the calculation of COVID-19 impacts should be disclosed along with information about the judgements and estimations made by management when quantifying impacts.

The CSA commonly observed a lack of disclosure about trends or expected fluctuations in liquidity for significantly exposed issuers.
  •  Disclosure that specifies the known trends and uncertainties that are likely to impact future performance is expected, as opposed to boilerplate disclosure or disclosure that the degree of uncertainty related to COVID-19 makes it too difficult to predict overall impact.

Entity-specific COVID-19 risks were not described.
  •  Entity-specific risk factor disclosure related to COVID-19 should include sufficient detail to understand the potential impact of COVID-19 on the issuer's business.

 

  • Risks should be included in order from most serious to least serious.

Non-GAAP Measures (NGMs)

A significant minority of issuers disclosed NGMs adjusted for impacts related to COVID-19 and in some instances NGMs were potentially misleading as they adjusted for COVID-19 expenses without adjusting for government subsidies.
  • NGM adjustments should match the usefulness of the NGM and disclosure should be balanced.

 

  • Adjustments should be described in specificity rather than as a general catch-all (i.e., "other costs related to COVID").

 

  • Adjustments should be based on actual results.

Forward-Looking Information (FLI)

Issuers did not disclose sufficient assumptions to develop FLI and did not update MD&A for events and risks that could cause actual results for future period to differ materially from previously disclosed FLI.
  • There must be a reasonable basis for disclosing FLI in the current environment.

 

  • Include sufficient disclosure to allow investors to understand the risks related to FLI and how the FLI was derived.

 

  • Disclosure in MD&A (and/or in referenced press releases) is required to discuss events or circumstances that are reasonably likely to cause actual results to differ from the disclosed FLI, as applicable.

Promotional Disclosures

Some issuers in the biotech/pharma industry provided overly promotional disclosure and/or non-specific disclosure that failed to fully address the issuer's business intentions and expected milestones.
  • Positive and negative information should be disclosed with equal prominence.

 

  • Disclosure should be balanced and focused on material information.

 

  • False or misleading statements, including the omission of facts necessary to make a statement true or not misleading, are prohibited.

In addition to the above, detailed guidance regarding the preparation of financial statements is also provided in the Staff Notice. The Staff Notice also makes industry-specific observations and provides lists of items that issuers should consider when preparing their disclosure documents during the COVID-19 pandemic. Examples of deficient disclosure and improved disclosure are also provided.  

Material Change Reporting

The Staff Notice confirms that material change reports may not be required in connection with the impact of COVID-19 on an issuer. Notably, if COVID-19 has an equal effect on all issuers in an issuer's industry, a material change report is not required. Consistent with this approach, the CSA observed only a few issuers that had filed COVID-19 related material change reports, some of which described changes to the issuer's business, operations or capital that were unique to the business or more significant to the issuer as compared to industry peers. To assist issuers in making materiality determinations, the Staff Notice sets out examples of potentially material information set:

  • Material changes in distributions or dividends.
  • Changes in credit arrangements.
  • 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.
  • Increased cost of goods or services.
  • Suspension of exports.

Additional Guidance

The Staff Notice reflects guidance related to the CSA's most recent review of issuers' COVID-19 disclosure. As previously discussed, the CSA has published guidance with respect to COVID-19 disclosure in CSA Multilateral Staff Notice 51-361 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019, as well as in its May 6, 2020 presentation COVID-19 Continuous Disclosure Obligations and Considerations for Issuers (discussed here).

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.