The Canadian Securities Administrators publishes guidance for issuers on improving COVID-19 disclosure

On February 25, 2021, the Canadian Securities Administrators (CSA) published Staff Notice 51-362 – Staff Review of COVID-19 Disclosures and Guide for Disclosure Improvements (CSA Notice). In October 2020, the CSA had published Staff Notice 51-361 – Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019, which provided guidance on how to report the impact of COVID-19 in continuous disclosure filings (the 2020 CSA Notice). The full 2020 CSA Notice is available here and our article on the 2020 CSA Notice is available here. The CSA Notice provides the results of the recently completed continuous disclosure review conducted by the CSA staff on disclosures related to the impacts on businesses of COVID-19 and provides recommendations for improved disclosures. The full CSA Notice is available here.

Review process

The CSA reviewed the continuous disclosure filings of 90 reporting issuers of different sizes from a variety of different industries. The issuers selected for review were identified based on a "risk-based" focus for issuers that may be materially impacted by COVID-19 in their operations or financial performance and those with a higher risk of impairment and/or financial distress.

Key findings and guidance

Overall, the CSA Notice summarizes key observations and disclosure considerations for different continuous disclosure focus areas including management's discussion and analysis (MD&A), financial statements and disclosure pursuant to other regulatory requirements. The full CSA Notice provides the CSA's detailed analysis of their observations and considerations for improved disclosure and is available here. The following provides a summary of certain findings and guidance from the CSA Notice.

MD&A

Ensure that an adequate discussion of the actual and anticipated future impacts that the COVID-19 pandemic (including the impacts of the measures taken to manage operational and liquidity risks) may have on the issuer is included in the MD&A – The CSA noted that many issuers provided "lists" of measures employed to manage operational and liquidity risks associated with the COVID-19 pandemic but did not provide an adequate discussion to address the anticipated impacts to the issuer.

Ensure that the methodology used to determine variances in overall performance and operations that were specifically related to the COVID-19 pandemic is discussed in the MD&A – The CSA noted that several issuers quantitatively disclosed variances related to COVID-19 (e.g., impact to sales) but did not explain the methodology used by management in determining that fluctuations were isolated to the COVID-19 pandemic.

Provide disclosure of known trends and events related to the COVID-19 pandemic that are likely to affect future performance  – The CSA noted that the disclosure provided by some issuers on known trends and events related to COVID-19 that are likely to affect future performance was very limited.

Ensure that disclosure on liquidity and capital resources includes sufficient detailed disclosure on an issuers' ability to meet working capital requirements and to fund developmental activities and capital expenditures – The CSA noted that many 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, the CSA noted a lack of disclosure by issuers regarding trends or expected fluctuations in liquidity taking into account events or uncertainties related to COVID-19 pandemic.

Ensure that risk factor disclosure includes entity specific COVID-19 related risks – The CSA noted that some issuers provided "lists" of risks (without discussion) or general disclosures that touched on general economic or societal impacts of COVID-19 but did not describe entity-specific COVID-19 related risks. This guidance may be more pertinent for the risk factor disclosure in an annual information form for those issuers that file annual information forms.

One very useful recommendation from the CSA Notice is for issuers to include a separate "COVID-19" section in the MD&A preceding the discussion of financial results, which would serve as a framework to understand the issuer's analysis of the impacts of the COVID-19 pandemic on financial performance, financial condition and liquidity.

Financial statements

In the context of testing impairments of goodwill and intangible assets, measuring fair value and estimating expected credit losses, issuers should ensure that disclosure and assumptions are adequately updated for the impacts of the COVID-19 pandemic  – The CSA noted that some issuers failed to adequately update their disclosures and assumptions impacted by COVID-19 in the context of testing impairments of goodwill and intangible assets, measuring fair value and estimating expected credit losses.

Ensure to identify entity-specific significant judgements and measurement uncertainties related to COVID-19 in the financial statements  – The CSA noted that several issuers failed to include entity-specific disclosure for significant judgements or measurement uncertainties or only included this disclosure in their MD&A but not in their financial statements.

Include disclosure of the reasons for impairment of non-financial assets – The CSA noted that numerous 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 but did not elaborate on those impacts.

Ensure that disclosure related to risks of the issuers' going concern status are disclosed  – The CSA noted that some issuers breached financial covenants during the reporting period but did not disclose the implications of breaches on the issuer's ability to continue as a going concern. It was also noted that some issuers disclosed "close call" situations but did not disclose the mitigating actions that impacted their determination that there were no material uncertainties that cast significant doubt on the issuer's ability to continue as a going concern (e.g. successful negotiation of credit facilities subsequent to period end).

Ensure that sufficient disclosure is included relating to COVID-19 government assistance received  – The CSA noted that over half of the issuers they reviewed recognized, or disclosed in subsequent events, COVID-19 related government assistance in their financial statements since the outbreak of the COVID-19 pandemic; however, some issuers did not disclose the nature and extent of the government assistance or the accounting policy adopted, including the methods of presentation.

Include entity specific risk disclosure related to financial instruments in the financial statements – The CSA noted that some issuers that experienced material adverse impacts of COVID-19 did not provide an entity-specific update to their risk disclosure in the financial statements.

Ensure adequate disclosure of any rent concessions related to COVID-19 under IFRS 16 Leases for Lessees – The CSA noted that certain issuers did not sufficiently disclose whether they applied the practical expedient to either all or some of their rent concessions.

Other continuous disclosure requirements

Avoid misleading adjustments of non-GAAP financial measures (NGMs) – The CSA found that most issuers did not present NGMs that adjusted for the impact of COVID-19 and noted a few instances where issuers made misleading adjustments to NGMs relating to COVID-19. The examples that the CSA provided were of issuers 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 results that are more positive for one quarter.

Ensure that assumptions used for forward-looking information (FLI) related to COVID-19 are adequately disclosed - The CSA noted that they observed insufficient disclosure of assumptions used to develop COVID-19 related FLI and also observed 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.

Key takeaways

Overall, the CSA has provided specific COVID-19 related guidelines for issuers to consider in their upcoming continuous disclosure filings. Broadly speaking, disclosures should be transparent and balanced. The CSA also emphasized that there is no "one size fits all" model for issuers to follow when assessing their disclosure impacts of COVID-19 and hopes that by issuers following the guidance in the CSA Notice it would facilitate a better understanding by investors of the expected impacts, risks, trends and uncertainties related to COVID-19 on issuers' businesses, operations and financial results.

Edward (Ted) Brown and Lindsay Cox are partners at Burnet, Duckworth & Palmer LLP (BD&P). Michael Akins is a student at BD&P.