• CSA's 2014 Continuous Disclosure Review Program Finds 76% of Reviewed Issuers Disclosed Insufficient Information
  • September 19, 2014 | Authors: Robert N. Black; Sarah Bode
  • Law Firm: DLA Piper (Canada) LLP - Toronto Office
  • The recently released Canadian Securities Administrators (CSA) Staff Notice 51-341 contains the conclusions from the CSA’s Continuous Disclosure Review Program for the fiscal year ended March 31, 2014. The Continuous Disclosure Review Program’s goal is to improve the completeness, quality and timeliness of continuous disclosure by reporting issuers in Canada. In general, there are two types of review under the Continuous Disclosure Review Program: a full review and an issue-oriented review. A full review is broad in scope and covers many types of disclosure. An issue-oriented review is an in-depth review focusing on specific accounting, legal or regulatory issues that the CSA believes warrants regulatory scrutiny.

    For the Fiscal 2014 review, the CSA completed a total of 991 reviews (221 full reviews and 770 issue-oriented reviews). At the conclusion of the reviews, 76% of the issuers reviewed were either (a) required to take action to improve their disclosure or (b) referred to enforcement, cease-traded or placed on the default list. This is a significant increase from the previous year, when only 47% of the issuers reviewed faced these outcomes, and should signal to all reporting issuers and their advisers that there can be severe consequences for inadequate disclosure in the public markets.

    To assist issuers in better understanding their continuous disclosure obligations, the CSA has provided guidance and examples of common deficiencies as part of the CSA Staff Notice. The areas where further guidance has been provided are:

    • Financial Statement deficiencies;

    • Management Discussion and Analysis (MD&A) deficiencies; and

    • Other regulatory disclosure deficiencies.

    Financial Statements

    In the area of Financial Statements, the CSA Staff Notice focused on the following issues:

    • Disclosure of Interests in Other Entities: New International Financial Reporting Standards (IFRS) requirements resulted in a change to the definition of control and joint control as well as the classification of, and in some cases to the accounting for, joint arrangements. New disclosure requirements were also introduced for all entities with subsidiaries, joint arrangements, associates and structured entities. For reporting issuers which were significantly affected by the changes, the CSA noted that many of these issuers had insufficient disclosure in their financial statements to explain the basis for the changes. In these cases, it was not made clear which factors led to the change, such as underlying structure, the agreements in place and/or the relevant activities.

    • Revenue Recognition: With respect to describing whether revenue was collected as agent or principal, the CSA noted that often the issuer and its various disclosure documents (i.e. financial statements, MD&A and Annual Information Form) contradicted each other or did not support the accounting treatment.

    • Impairment of Assets: Some issuers did not disclose all the information required regarding impairment of assets in their financial statements.

    Management Discussion and Analysis

    With respect to MD&A, the CSA Staff Notice focused on the following topics:

    • Non-GAAP Measures: The CSA found that the use of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was often inconsistent with the commonly understood meaning of the term and additional adjustments were often made by reporting issuers to make the figure look more positive.

    • Forward-Looking Information: The CSA noted four common areas where improvement was needed:

    (a) clear identification of forward-looking information;

    (b) disclosure of material factors or assumptions used to develop forward-looking information;

    (c) updating previously disclosed forward-looking information; and

    (d) comparison of actual results to the future oriented financial information or financial outlook previously disclosed.

    • Additional Disclosure for Venture Issuers Without Significant Revenue: For a venture issuer who did not have significant revenue from operations in either of its last two financial years, the CSA often found that its disclosure did not properly provide a breakdown of its exploration expenditures by the required material components.

    Other Regulatory Disclosure Deficiencies

    The CSA Staff Notice pointed out the following additional disclosure deficiencies:

    • Mineral Projects: There was often a lack of compliance with various requirements in Form 43-101F1 Technical Reports under National Instrument 43-101 Standards of Disclosure for Mineral Projects, including for example, a lack of disclosure regarding project-specific risks and uncertainties and insufficient discussion of social or community-related issues for a project and the status of any related negotiations.

    • Executive Compensation: Reporting issuers often failed to include a sufficient explanation in their Compensation Discussion and Analysis as to how each element of compensation was tied to each named executive officer’s performance. The CSA also reminded issuers that if disclosed performance goals are based on non-GAAP measures such as EBITDA, the issuer must explain how it calculates performance goals and similar conditions from its financial statements.

    • Filing of News Releases and Material Change Reports: News releases and/or material change reports were often filed when the timing was inappropriate and/or the content of the release or report was inadequate. Failures to file news releases and material change reports on a timely basis as well as inconsistencies with the contents of the filings were also noted.

    Although the guidance and examples that are contained in the CSA Staff Notice are illustrative only and not an exhaustive list of potential disclosure deficiencies for reporting issuers, it will no doubt be of value for all reporting issuers.