The Canadian Securities Administrators (CSA) publish results of their issue-oriented COVID-19 disclosure review and provide guidance with respect to areas of concern.
- The CSA's review of reporting issuers' COVID-19 disclosures notes areas where boiler-plate disclosure about the current and expected impact of COVID-19 failed to address detailed entity-specific COVID-19 related risks and impacts.
- Issuers are reminded that disclosure is expected to be transparent and balanced in order to facilitate a meaningful understanding of the impact of COVID-19 on the issuers' business, both from a financial and operational perspective.
On February 25, 2021, the CSA published CSA Staff Notice 51-362 Staff Review of COVID-19 Disclosures and Guide for Disclosure Improvements (the Staff Notice) which sets out the results of the CSA's recent continuous disclosure review, which specifically focused on disclosure related to the impact of COVID-19 on approximately 90 reporting issuers' businesses for the interim reporting period ended September 30, 2020. Specifically, the review looked at disclosures of the current and anticipated impacts of COVID-19 on issuers' operations, financial condition, liquidity, and future prospects.
Operational and Financial Impacts
The Staff Notice provides insight into Canadian issuers' response to the COVID-19 pandemic. In reviewing the continuous disclosure documents of reporting issuers in a wide range of industries, the Staff Notice outlines a number of the operational and financial impacts that issuers have faced over the last year, including:
- Decreased demand for products and services.
- Operational closures.
- Inability to continue capital projects.
- Decreases and increases in revenues.
- Credit losses.
- Material uncertainties regarding going concern status.
In an effort to mitigate these and other impacts, issuers took a number of measures, including:
- Use of government assistance and subsidy programs (for example, the Canada Emergency Wage Subsidy Program and other rent subsidies).
- Deferral of payment of certain expenses.
- Decreased salaries and directors' fees.
- Deferral of capital projects and acquisitive transactions.
- Suspension of share buybacks and dividends.
The CSA found that most issuers provided quality disclosure, with some issuers expanding their MD&A to provide detailed operational updates and address liquidity and capital resource considerations, including working capital and debt covenants and related compliance. As noted in the Staff Notice, impairments of non-financial assets were also adequately disclosed on the whole.
Areas of Concern
Despite the generally positive characterization of issuers' COVID-19 related disclosure, the CSA note the following areas of concern, among others, in the Staff Notice and provide guidance for improvement going forward:
Area of Disclosure |
Observation |
Guidance |
MD&A |
Some issuers provided detailed operational updates in press releases but did not include the same level of disclosure in their MD&As. |
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Some issuers provided lists of measures employed to manage COVID-19 related operational and liquidity risks but without sufficient details to understand the impact on the issuer. |
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Some issuers did not explain the methodology used in determining that fluctuations were isolated to COVID-19, particularly where operational issues were pre-existing. |
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The CSA commonly observed a lack of disclosure about trends or expected fluctuations in liquidity for significantly exposed issuers. |
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Entity-specific COVID-19 risks were not described. |
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Non-GAAP Measures (NGMs) |
A significant minority of issuers disclosed NGMs adjusted for impacts related to COVID-19 and in some instances NGMs were potentially misleading as they adjusted for COVID-19 expenses without adjusting for government subsidies. |
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Forward-Looking Information (FLI) |
Issuers did not disclose sufficient assumptions to develop FLI and did not update MD&A for events and risks that could cause actual results for future period to differ materially from previously disclosed FLI. |
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Promotional Disclosures |
Some issuers in the biotech/pharma industry provided overly promotional disclosure and/or non-specific disclosure that failed to fully address the issuer's business intentions and expected milestones. |
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In addition to the above, detailed guidance regarding the preparation of financial statements is also provided in the Staff Notice. The Staff Notice also makes industry-specific observations and provides lists of items that issuers should consider when preparing their disclosure documents during the COVID-19 pandemic. Examples of deficient disclosure and improved disclosure are also provided.
Material Change Reporting
The Staff Notice confirms that material change reports may not be required in connection with the impact of COVID-19 on an issuer. Notably, if COVID-19 has an equal effect on all issuers in an issuer's industry, a material change report is not required. Consistent with this approach, the CSA observed only a few issuers that had filed COVID-19 related material change reports, some of which described changes to the issuer's business, operations or capital that were unique to the business or more significant to the issuer as compared to industry peers. To assist issuers in making materiality determinations, the Staff Notice sets out examples of potentially material information set:
- Material changes in distributions or dividends.
- Changes in credit arrangements.
- 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.
- Increased cost of goods or services.
- Suspension of exports.
Additional Guidance
The Staff Notice reflects guidance related to the CSA's most recent review of issuers' COVID-19 disclosure. As previously discussed, the CSA has published guidance with respect to COVID-19 disclosure in CSA Multilateral Staff Notice 51-361 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019, as well as in its May 6, 2020 presentation COVID-19 Continuous Disclosure Obligations and Considerations for Issuers (discussed here).
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