Just in time for the 2021 proxy and continuous disclosure season, the Canadian securities regulators have published guidance for improved disclosures related to COVID-19. One year into the pandemic, boilerplate disclosure and descriptions of the impacts of COVID-19 without analysis will no longer pass muster with the regulators.

The February 25 publication is an update from disclosure guidance published in October 2020. Once again, the securities regulators set out in detail disclosure inadequacies in issuers' MD&A and financial statements. They also highlight issues common to specific industries.

Common themes

While issuers have been impacted in different ways by the COVID-19 pandemic, there are some common themes in the disclosure improvement guidance provided by the securities regulators:

  • Avoid boilerplate: Avoid using generic phrases and risk factors that are not specific to the issuer and its performance and particular circumstances.
  • Be specific and detailed: Vague disclosures do not provide investors with the information they need to make an informed investment decision. Provide specific information about the current and expected impacts of COVID 19 on operations and the issuer's financial condition. Also be specific regarding COVID-19-related risks, including credit and liquidity risks, and the measures taken to manage the impact of COVID-19.
  • Be transparent: Be transparent about the assumptions underlying estimates and impairments. Clearly explain any impacts on the ability to meet working capital requirements or to fund planned development activities, as well as the implications of any breaches of financial covenants. 
  • Consider the future: Disclose the known trends, demands, uncertainties and events likely to affect future performance. One year into the pandemic, it is not sufficient to state that it is too difficult to predict the overall impact of COVID-19 on future performance.
  • Explain the analysis: Provide information about the inputs, judgements and estimations made by management when quantifying the impacts of COVID-19. Explain the methodology used to determine that period-over-period variances were due to COVID-19 (as opposed to other factors). Describe the accounting policy used for recognizing any government grants and the method of assessing any impairment of non-financial assets.
  • Be balanced: Not all impacts of COVID-19 have been negative. That said, issuers that have seen positive impacts should avoid disclosure that is overly promotional. Likewise, issuers that have been negatively impacted by COVID-19 should be careful to disclose any other reasons for material period-over-period variances with equal prominence (rather than attributing all negative results to COVID-19).
  • Consider form: Including a separate "COVID-19" section in the MD&A preceding the discussion of financial results may help a reader better understand the issuer's discussion and analysis of its financial performance and condition. Likewise, disclosing risks from most to least serious helps a reader understand how management assesses the risks (and is the required format for risk factors in the annual information form).

Other areas of disclosure

While much of the focus of the securities regulators' guidance relates specifically to financial statements and MD&A, the regulators also highlighted several broader areas of disclosure that are routinely singled out as requiring improvement: 

  • Non-GAAP financial measures (NGMs): Only present NGMs adjusted for COVID-19 impacts if it is a useful and meaningful alternative to explain the impact of COVID-19. Be specific in describing adjustments and ensure that the disclosure is balanced (i.e., that both positive and negative components are disclosed). 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. All adjustments should be based on actual results and "adjustments that attempt to estimate or forecast results as if the pandemic had not occurred are not appropriate." 
  • Forward-looking information: Disclose the assumptions used to develop forward-looking information and the risks associated with such information. In addition, if actual results for future periods are likely to be materially different from what was disclosed in past forward-looking information, the issuer must update the forward-looking information in its MD&A by describing the cause and anticipated extent of those differences.

In addition to the more general guidance highlighted above, the notice from the securities regulators includes specific disclosures examples, industry-specific observations and lists of issues to consider when preparing the annual disclosure documents. The publication is accessible here.

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
nortonrosefulbright.com

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.