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A Challenging Economy Increases Scrutiny of Continuous Disclosure


February 27, 2009

In an effort to help investors understand the risks and circumstances facing issuers in this challenging economic environment, the Canadian Securities Administrators (CSA) are asking issuers to pay increased attention to certain areas of their continuous disclosure. In the recent Staff Notice 51-328 Continuous Disclosure Considerations Related to Current Economic Conditions, the CSA expressed their view that the current economic environment presents additional challenges for issuers in preparing their financial statements and management’s discussion and analysis (MD&A) and that issuers must disclose clearly the current and anticipated impacts of market conditions on their operations, financial condition, liquidity and future prospects.

As part of their ongoing continuous disclosure review program, the CSA have indicated that they will be focusing on the following accounting and disclosure areas in reviewing continuous disclosure filings:

  • MD&A generally — In identifying and evaluating information regarding the issuer’s current and prospective financial condition and operating results, the MD&A should include a discussion of the potential effects of known trends, commitments and uncertainties that have arisen due to the current market conditions. Specific attention should be given to liquidity and capital resources, distributed cash (for income trust issuers), critical accounting estimates (for non-venture issuers), and forward-looking information.
  • Critical accounting estimates — For non-venture issuers, the MD&A should discuss the specific impact of current market conditions on critical accounting estimates, including how trends, events or uncertainties may affect the methods and assumptions used to determine critical accounting estimates; how sensitive the estimate is to a change in assumptions; the likelihood of estimates changing with evolving economic conditions; and the impact and rationale for changes made to critical accounting estimates during the period.
  • Going concern — Recent amendments to the Handbook of the Canadian Institute of Chartered Accountants (CICA) require that, for interim and annual financial statements for fiscal years beginning on or after January 1, 2008, the issuer must carefully assess and disclose in its financial statements the material uncertainties that may put into question its ability to continue as a going concern.
  • Impairment of goodwill, intangible assets and long-lived assets — The CSA are of the view that the current economic environment may affect the carrying amount of assets. If an issuer incurs an impairment charge, its MD&A should discuss the financial impact of the charge and provide insight into the reasons and business circumstances surrounding the impairment, in accordance with the CICA Handbook.
  • Financial instruments — Issuers should assess the valuation techniques used for their financial instruments to ensure that they are appropriate in the current economic environment, and provide in their MD&A a detailed discussion of related matters described in the Staff Notice. Various regulatory and accounting standards bodies have released guidance regarding the determination of the fair value of financial instruments in the absence of an active market.
  • Capital disclosures — The MD&A should include a detailed discussion of how the issuer’s objectives, policies and processes for managing capital are affected by the current economic environment.
  • Defined benefit pension plans — For issuers with a defined benefit pension plan, the MD&A should include a discussion of the anticipated impact of the funding status of the issuer’s pension plan on future contributions, cash flows and pension expense, and a discussion of the risks associated with the pension plan.

The Staff Notice also provides commentary applicable to issuers that provide non-GAAP financial measures and guidance for junior resource companies.

Perhaps as a precursor to the Staff Notice, in late 2008 the Ontario Securities Commission (OSC) sent letters to certain issuers highlighting the disclosure requirements applicable to defined benefit pension plans, and, in many cases, requesting those issuers to confirm that, if material, the issuer’s MD&A will include the following:

  • A discussion of the anticipated impact of the funding status of the issuer’s pension plan on future contributions, cash flows and pension expense.
  • A discussion of the critical accounting estimates pertaining to the issuer’s pension plan.
  • An issuer-specific discussion on the risks associated with its pension plan. The OSC noted that these potential risks may include: that there is no assurance that the pension plan will earn the assumed rate of return; that market-driven changes may result in changes to the discount rates and other variables that would result in the issuer being required to make future contributions that differ significantly from estimates; and the measurement of uncertainty incorporated into the actuarial valuation process.

In addition to confirming the above, some issuers were asked to provide, in light of the current economic conditions, an analysis of the anticipated impact of the funding status of the issuer’s pension plan on future contributions, cash flows and future pension expense.

Both the OSC’s letter campaign and the CSA’s Staff Notice serve as timely reminders of the importance of strict compliance with continuous disclosure requirements, particularly in today’s challenging economic environment. In addition to an increased focus on the disclosure areas highlighted in the Staff Notice, issuers should consider all aspects of their disclosure to identify areas that may be particularly affected by the current economic environment.