CSA Publishes Guidance on Continuous Disclosure Obligations in the Context of COVID-19

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On May 6, 2020, the Canadian Securities Administrators published a presentation (the “CSA Presentation”) with guidance on the application of continuous disclosure obligations and considerations for issuers in the context of COVID-19.

The presentation focuses on three main areas of continuous disclosure: management’s discussion and analysis (MD&A), financial information and material change reporting. Each section considers how to discuss the effects of COVID-19 and sets out key questions for issuers to consider when assessing the impacts of COVID-19 on their business and their disclosure.

Management’s Discussion & Analysis

The MD&A section of the CSA Presentation touches on discussion of operations, liquidity and capital resources, forward-looking information and risk factors, and includes the following guidance:

  • Discussion of Operations: The MD&A should include any issuer-specific impacts of COVID-19 on the issuer’s operations, including any changes in revenue, cost of sales and gross profit. The MD&A should also quantify the impact of each material factor (ex. store closures or cancelled contracts) causing variance in financial performance metrics, where possible.
  • Liquidity and capital resources: The MD&A should discuss (a) the issuer’s ability to generate sufficient amounts of cash to maintain the issuer’s capacity and to meet the issuer’s planned growth, (b) trends or expected fluctuations in the issuer’s liquidity, taking into account relevant factors, and (c) defaults or arrears or significant risks thereof in debt covenants or other payments, including dividend payments, lease payments and interest or principal payments, and how the issuer intends to remedy the defaults and arrears or address the risks.
  • Forward-looking information (“FLI”): Updates to or notification that FLI is being updated or withdrawn must be included in the MD&A or in a news release. The disclosure and discussion of material differences between actual results and previously disclosed future oriented financial information or financial outlook must be included in the MD&A. Issuers are reminded to consider whether, in the context of COVID-19, there is still a reasonable basis for previously disclosed FLI.
  • Risk factors: Issuers should keep in mind that specific risk factors will differ based on industries and are reminded to avoid boilerplate. Depending on the issuer, possible risk factors in the context of COVID-19 include disruptions to day-to-day operations, volatility of capital markets, disruptions to supply chains, import/export restrictions, delays in payment or availability of money, and reliance on major customers whose activities have been disrupted as a result of shutdown of non-essential services.

Financial Information

The Financial Information section of the CSA Presentation addresses significant judgments and estimation uncertainty, impairment considerations for non-financial assets and Non-GAAP financial measures.

  • Significant judgments and estimation uncertainty: Issuers should provide detailed entity-specific disclosure based on the best available information and well-reasoned judgments. This disclosure should be updated in interim financial statements as required if new or updated significant judgments are made. The CSA Presentation provides a list of areas that may be subject to significant judgment and estimation uncertainty, including impairment assessment, government assistance and going concern assessment.
  • Impairment considerations for non-financial assets: Non-financial assets, including goodwill and other intangible assets, should be tested for impairment whenever there is an indicator of impairment, including market value declines, negative changes in markets, economy or laws, if net assets of the issuer are higher than market capitalization, if assets are idle, part of a restructuring or held for disposal, or if the economic performance is worse than expected.
  • Non-GAAP Financial measures: The CSA reminds issuers that a loss or expense should not be qualified as “non-recurring, infrequent or unusual” if it is reasonably likely to occur within the next two years or if it occurred during the prior two years. Additionally, an adjustment should only be described as COVID-19 related if management explains how the adjustment amount is specifically associated with COVID-19. An adjustment should not be described as COVID-19 related if indicators of impairment existed prior to the pandemic.

Material Change Reporting

The CSA Presentation reminds issuers that material changes that have an equal effect throughout an issuer’s industry may not need to be reported. Issuers should be aware of impacts of COVID-19 that are unique or more significant to them than to others in their industry. Examples of potential material information resulting from 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 agreements;
  • increased cost of goods or services;
  • suspension of exports.

Following its publication, the CSA Presentation was customized by the Autorité des marchés financiers (“AMF”) (see here) and the Ontario Securities Commission (“OSC”) (see here for the presentation and here for a webinar published on the subject) to include a section on COVID-19 related blanket relief orders. See here for our publication on the blanket orders.

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