Lessons to be Learned from Recent CSA Continuous Disclosure Review
The Canadian Securities Administrators (CSA) have summarized the results of their annual continuous disclosure (CD) review program of reporting issuers (other than investment funds) for fiscal year 2010 in CSA Staff Notice 51-332 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2010. Issuers should review the staff notice and take note of the deficiencies identified by the CSA when preparing their own filings.
Under its CD review program, the CSA conducts both "full reviews" and "issue-oriented reviews." This year, the number of full reviews conducted increased by 13 per cent from fiscal 2009, and the number of issue-oriented reviews increased by 31 per cent. The increase in the latter is largely a result of International Financial Reporting Standards (IFRS) transition disclosure reviews and compliance reviews. (See our related article, "CSA Staff Conduct IFRS Transition Disclosure Review.") There are approximately 4200 reporting issuers in Canada. For fiscal 2010, 527 full reviews and 824 issue-oriented reviews were conducted. (See our article for last year’s review and our presentation material from last year’s CD review, the latter of which includes information on what to do if you receive a CD review letter.)
Pursuant to its full review, the CSA have listed examples of the more common deficiencies found in, inter alia, financial statements and management’s discussion and analysis (MD&A):
- In financial statements: failure to measure financial instruments correctly in accordance with appropriate standards; lack of clarity in explaining revenue recognition policy; inadequate disclosure of the methodology used to conduct goodwill impairment testing; and inadequate disclosure on the objectives, policies and processes for managing capital.
- In MD&A: lack of meaningful analysis and discussion of operating results, financial condition and liquidity; insufficient analysis of the ability to generate sufficient cash flow to allow investors to determine if adequate financial resources are available to meet operating needs; the business purpose of related party transactions; and the methodology and assumptions used in determining critical accounting estimates.
This year’s issue-oriented reviews were conducted in the following areas: certification (see CSA Staff Notice 52-325), IFRS transition disclosure (see OSC Staff Notice 52-718), executive compensation (see CSA Staff Notice 51-331), mining technical disclosure, oil and gas technical disclosure, going concern, asset impairment, forward-looking information, press releases, defined benefit pension plans, and complaints.
This CSA review is a useful reminder to reporting issuers of common deficiencies in continuous disclosure documents, and will assist issuers in avoiding such pitfalls. Several areas of focus for issuer-oriented reviews in fiscal 2011 are also noted and should be kept in mind by issuers. These include IFRS transition disclosure, material contracts, corporate governance, and follow-up review of certification requirements as required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings.
To view the CSA Staff Notice, click here.