The Canadian Securities Administrators (CSA) have published
their latest continuous disclosure review report, which
includes guidance on reporting the impacts of COVID-19.
The CD review report identifies key observations from the CSA's review for the fiscal years ended March 31, 2020, and March 31, 2019, including with respect to a number of financial statement, MD&A and other regulatory disclosure deficiencies that resulted in issuers needing to enhance their disclosure or refile their CD documents. The report describes common deficiencies and provides some specific disclosure examples to help issuers understand the CSA's expectations and to correct these deficiencies. In many ways, the report represents a continuation of the regulators' comments and themes provided in prior years' reports.
As it relates to the impact of the COVID-19 pandemic on issuers, the central theme of the CSA guidance is the need to provide meaningful, detailed, transparent and issuer-specific information about how the pandemic is impacting the issuer's operating performance, financial position, liquidity and future prospects.
Guidance includes the following:
- Be specific: COVID-19 has impacted issuers in different ways. Avoid boilerplate disclosure and provide information that relates specifically to the issuer's particular situation.
- Review previous forward-looking information (FLI): Issuers have an obligation under securities regulations to include an update in their MD&A of previous material FLI where actual results are likely to differ materially. Issuers should review previous FLI and consider whether any updates are required or whether the assumptions underlying the information are no longer valid and therefore previous guidance or financial outlooks should be withdrawn.
- Carefully consider any new FLI: Issuers are prohibited from disclosing FLI unless there is a “reasonable basis” for it. Likewise, any financial outlooks must be based on assumptions that are “reasonable in the circumstances.” Given the uncertainties resulting from COVID-19, issuers should carefully consider the FLI they include in their upcoming filings.
- Update judgements and
estimates: Given the changes and uncertainties
wrought by COVID-19, issuers may need to update their judgements or
estimates in their interim financial reports (and not simply rely
on information disclosed in the latest annual financial statements)
- going concern assessments
- impairment assessments
- fair value calculations
- government assistance
- revenue recognition
- deferred tax recoverability
- Consider whether triggers
for impairment are present for non-financial assets:
Issuers should consider whether any triggers for impairment are
present for non-financial assets at the end of each reporting
period (and not just annually). Examples of impairment indicators
- market value declines
- volatile markets with negative trends
- poor economic conditions
- adverse changes to laws
- net assets of the company higher than market capitalization
- assets becoming idle
- poorer than expected performance
- Accurately describe factors contributing to changes in operations and financial position: Issuers should not only provide a detailed explanation of the impact of COVID-19, but should also be clear about any other factors that may have contributed to period-over-period variances.
- Explain the methodology used: Issuers should explain the methodology used to calculate the quantitative impact of COVID-19 on their financial performance, including the judgements and estimations made by management in determining those impacts.
- Quantify the impact on
liquidity and capital resources: It is important for
issuers to provide a comprehensive discussion on the
pandemic's current and expected effects, including
quantifying the impact wherever possible. Examples of items
requiring disclosure may include:
- any material subsidies and/or funding received from government programs
- increased counterparty risk (A/R collection)
- reduced cash flow from operations as a result of decreased demand
- delays in capital project plans
- impact of any cost-cutting initiatives (employee layoffs, reduced hours)
- changes in the issuer's dividend policy
- Be careful with non-GAAP financial measures: The CSA maintain their focus on ensuring issuers do not provide misleading non-GAAP financial measures and disclosures and that the presentation of such measures complies with existing regulatory guidance, and they caution issuers about defining certain adjustments or measures as COVID-19 related. Not all COVID-19 effects are non-recurring and there may be a limited basis for management to conclude that a loss or expense is non-recurring, infrequent or unusual.
Material change reports
- Consider whether a
material change has occurred: Where the direct
impacts of COVID-19 or resulting governmental or regulatory
policies have resulted in a change in the business, operations or
capital of the issuer that would reasonably be expected to have a
significant effect on the market price or value of the
issuer's securities, a material change report should be
filed. Examples of potentially material information that may result
in a material change due to COVID-19 include:
- 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
- changes in credit arrangements
- Increased cost of goods or services
- suspension of exports, etc.
Originally Published By Norton Rose Fulbright, November 2020
About Norton Rose Fulbright Canada LLP
Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.
Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.
Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.
For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.
Law around the world
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.