By Michael C. DeCosimo and Jesse Collins-Swartz

Overview

On February 25, 2021, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 51-362 (the Staff Notice) that summarized the results of the CSA’s review of the continuous disclosure filings of approximately 90 reporting issuers, with a focus on the disclosures of the most recent reporting period ending September 30, 2020. Specifically, the CSA’s review consisted of assessing the “compliance of issuers’ disclosures of the current and anticipated impacts related to COVID-19 on their respective operations, financial condition, liquidity and future prospects”¹. This review also “assessed key financial reporting areas applicable to issuers that may be subject to significant judgement and measurement uncertainty in the current environment”².

This article provides: (i) a summary of the key deficiencies noted by the CSA in their above-mentioned review; and (ii) a discussion of some of the guidance that reporting issuers may find helpful when drafting continuous disclosure regarding the impact of the COVID-19 pandemic on their respective businesses.

Summary of deficiencies highlighted by the CSA

The CSA’s review focused mainly on reporting issuers’ disclosure obligations under National Instrument 51-102. However, the CSA also assessed reporting issuers’ COVID-19 disclosures against certain recognition, measurement and disclosure requirements in International Financial Reporting Standards (IFRS) and CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures.

The CSA’s review examined the following continuous disclosure: (i) Management’s Discussion and Analysis (MD&A); (ii) financial statements; (iii) non-GAAP financial measures (NGMs); (iv) forward-looking information (FLI); (v) material change reporting; and (vi) promotional disclosures. However, it is important to note that the insights from the Staff Notice may also be applicable to other continuous disclosure documents filed by reporting issuers.

In the Staff Notice, the CSA noted that “most issuers reviewed were proactive in providing quality and detailed disclosures”³ related to the impacts of COVID-19. However, the CSA identified a number of areas where reporting issuers can improve their COVID-19 related disclosures. A list of the key deficiencies highlighted by the CSA, set out by type of continuous disclosure document reviewed, is provided below:

MD&A

• Discussion of measures taken to reduce the impact of COVID-19: Many reporting issuers listed measures employed to manage operational and liquidity risks of COVID-19, but did not provide an adequate discussion to address the anticipated impact such measures would have on the reporting issuer.
• Analysis of overall performance and operations: Most reporting issuers that quantitatively disclosed variances related to COVID-19 (for example, any impact to sales) did not explain the methodology used by management in determining how such variances were isolated to COVID-19.
• Liquidity and capital resources:  Many reporting issuers with material liquidity risks did not disclose in detail their ability to meet working capital requirements, planned growth initiatives or to fund developmental activities and capital expenditures. In addition, there was a lack of disclosure regarding trends or expected fluctuations in liquidity taking into account events or uncertainties related to COVID-19.
• Risk factor disclosure: Some reporting issuers provided lists of risks without discussion or general disclosures that touched on general economic or societal impacts of COVID-19, and did not discuss any entity-specific risk factors related to the reporting issuer.

Financial statements

• General: Some reporting issuers failed to adequately disclose the impact of COVID-19 on its testing impairments of goodwill and intangible assets, measuring fair value and estimating expected credit losses.
• Significant judgements and measurement uncertainties: Some reporting issuers failed to include entity-specific disclosure for significant judgements or measurement uncertainties made by management when quantifying the impact of COVID-19. In other cases, such disclosure was only made in the MD&A, but not in a reporting issuer’s financial statements.
• Impairment of non-financial assets: Some reporting issuers did not identify reasons for impairments or just noted “negative economic impacts of COVID-19” as an impairment indicator for all cash generating units of the business, but did not elaborate on the foregoing.
• Going concern: Some reporting issuers breached financial covenants during the reporting period but did not disclose the implications of such breaches on the reporting issuer’s ability to continue as a going concern. Additionally, some reporting issuers disclosed “close call” situations but did not disclose the mitigating actions impacting the reporting issuer’s determination that there were no material uncertainties that cast significant doubt on the reporting issuer’s ability to continue as a going concern.
• Government assistance: Over half of the reporting issuers reviewed by the CSA recognized, or disclosed in subsequent events, COVID-19 related government assistance in their financial statements since the beginning of the COVID-19 pandemic. Some reporting issuers did not disclose the nature and extent of the government assistance or the accounting policy adopted (including the methods of presentation).
• Expected credit losses: Only a few reporting issuers disclosed the use of COVID-19 induced adjustments/overlays to their models of expected credit losses.
• Financial instrument risk disclosure: Some reporting issuers that experienced material adverse impacts of COVID-19 did not provide an entity-specific update to their risk disclosure in the financial statements.

Non-GAAP financial measures

• Most reporting issuers did not present NGMs that adjusted for the impact of COVID-19. However, the CSA’s review found isolated instances of potentially misleading NGMs in relation to COVID-19. For example, a reporting issuer adjusting for expenses attributable to COVID-19 without adjusting for government subsidies or “normalizing” revenue or expenses for the year-to-date period based on more positive results for one quarter.

Forward-looking information

• In certain cases, the CSA observed insufficient disclosure of assumptions used to develop FLI and failures to adequately update the MD&A for events and risks that could cause actual results for future periods to differ materially from previously disclosed FLI by such reporting issuer.

Material change reporting

• The CSA noted that if COVID-19 had an equal effect throughout a reporting issuer’s industry, a material change report may not be required. Additionally, the CSA observed that out of the reporting issuers they reviewed, only a few had filed material change reports in relation to COVID-19, despite in some instances that there were changes to the reporting issuer’s business, operations or capital that were unique or more significant than those experienced by others in its industry.

Promotional disclosure

• The CSA noted that some reporting issuers in the biotech/pharmaceutical industries provided disclosure in relation to COVID-19 that was overly promotional and/or lacked specificity.

CSA guidance on COVID-19 continuous disclosure

Appendices “A” and “B” to the Staff Notice provide detailed guidance on how reporting issuers may improve their COVID-19 related disclosure. The below provides a high-level summary of the foregoing guidance. Reporting issuers may also find the CSA’s examples of deficient and improved disclosure enumerated in Appendix “B” to the Staff Notice helpful when attempting to implement some of the CSA’s recommendations.

MD&A

• Avoid simply making statements attributing negative results to COVID-19. Instead, provide a meaningful discussion on the material impacts (both positive and negative) of COVID-19 on the reporting issuer’s operations.
• Reporting issuers must have a basis for attributing costs to COVID-19, especially when certain conditions existed prior to COVID-19. Other reasons for material fluctuations in business performance not related to COVID-19 should be disclosed with equal prominence in continuous disclosure documents.
• Reporting issuers that have material liquidity risks might consider disclosing: their most current working capital amount, significant obligations that are maturing in the short term, their cash burn rate on a monthly or quarterly basis, the period of time that they expect to be able to fund operations and how they intend to prioritize expenditures in the short term.
• The CSA encourages reporting issuers with debt covenants to discuss the terms and conditions of the debt covenants, especially when a breach of a covenant could trigger a material funding requirement or early repayment obligation. If a reporting issuer is close to breaching covenants or at risk of default in future periods, this would be considered material information that should be disclosed.

Financial statements

• When management is aware of material uncertainties in relation to COVID-19 that may cast significant doubt upon the reporting issuer’s ability to continue as a going concern, those uncertainties should be disclosed.
• Reporting issuers that operate in sectors that are significantly affected by COVID-19 are expected to update the following disclosure in their interim and annual financial statements:
• timely and entity-specific disclosure of significant judgements and measurement uncertainties pertaining to the amounts recognized in the financial statements in light of the rapidly changing environment and the extended impact of COVID-19 (e.g., estimate of credit loss and valuation of non-financial assets); and
• an explanation of the nature of uncertainty in estimates and a sensitivity analysis to help investors fully understand the potential impact of estimates made in the financial statements.

Non-GAAP financial measures

• Before presenting NGMs adjusted for COVID-19 impacts, reporting issuers may consider how this information assists investors, how management uses these measures and why management believes it is a useful and meaningful alternative to explain the impact of COVID-19.

Forward-looking information

• The reporting issuer should not rely only on generic boilerplate language. They must have a reasonable basis for providing the FLI in the current environment and provide sufficient disclosure for investors to understand how the FLI was derived and the related risks to the specific reporting issuer.

Material change reporting

• Reporting issuers should be aware of the impact of COVID-19, or resulting governmental or regulatory policies, that may be unique or more significant to them than to others in their industry.

Promotional disclosure

• Disclosure by reporting issuers should be complete, balanced and focused on material information. Both positive and negative news regarding the reporting issuer should be given equal prominence in its continuous disclosure documents.

Although this Staff Notice deals primarily with the above-mentioned types of disclosure, reporting issuers may also find the CSA’s insight and guidance from the Staff Notice useful in preparing other forms of continuous disclosure documents that address the current or potential impacts of COVID-19 on the reporting issuer’s business.

If you have any questions about this article or require assistance with your COVID-19 disclosure, please reach out to your primary contact at Dentons, Michael C. DeCosimo or Jesse Collins-Swartz.

1. Canadian Securities Administrators, Staff Notice 51-362 Staff Review of COVID-19 Disclosures and Guide for Disclosure Improvements, at Page 1, online: <https://www.osc.ca/sites/default/files/2021-02/csa_20210225_51-362_staff-review-covid19.pdf>. [“Staff Notice 51-362”] ↩
2. Staff Notice 51-362, Page 1.↩
3. Staff Notice 51-362, Page 6.↩