Where Your Disclosures Might Be Going Wrong: Looking at the CSA’s Continuous Disclosure Review Heading Into Earnings and AGM Season

After months of analysis, the Canadian Securities Administration (CSA) released a Staff Notice (Notice) reporting on results of its Continuous Disclosure Review Program conducted for the prior fiscal year. The Notice describes common disclosure deficiencies found during the review and provides examples, all with a view to helping issuers better understand the expectations and correct their deficiencies. As Companies head into earnings and/or AGM season, there is no better time to take stock of this Notice and to hone disclosure practices for compliance, while staying true to legitimate investor relation and balanced market-making initiatives.

The Continuous Disclosure Review Program

The goal of CSA’s Continuous Disclosure Review Program is to improve the quality, timeliness, and thoroughness of continuous disclosure that reporting issuers provide to the public. One goal?is to assess whether Continuous Disclosure (CD) documents comply with legislative and regulatory requirements. The program also aims to help issuers comply with the requirements of the CD rules, so investors receive quality data that enables them to make informed business decisions.

Disclosure and Financial Reporting During Times of Economic Uncertainty

The CSA recognizes that fast-changing financial circumstances have forced issuers to prepare disclosure based on more uncertainty than usual, including high energy costs, supply chain issues, rising interest rates, global financial concerns, conflict in the Ukraine, and lingering impacts of the COVID-19 pandemic. Under these conditions, the assumptions used to create disclosure can change materially at virtually any time. As such, the CSA urges issuers to thoroughly evaluate and explain the ways that economic uncertainty and changes in assumptions might impact their operations and the numbers reported in their financial statements.

Non-GAAP Financial Measures

The CSA notes that it found a number of issuers with deficiencies when resorting to use of non-GAAP financial measures, directing readers to National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure (“NI 52-112”). Specifically, CSA notes that where issuers use non-GAAP financial measures to adjust for uncertainty in the environment, they must be specific to the entity and clearly explain how those adjustments relate to the current environment and whether/how they are “unusual” or “infrequent.” The CSA also highlighted, as an example, how phrases such as “backlog”, “order book” or “order intake estimates” – all non-GAAP financial measures – are used to show demand despite not being based on firm purchase orders. Where this is the case, any material factors and or assumptions baked into use of these measures must also be disclosed (in addition to generally complying with NI 52-112).

Deficiencies Apparent Based on the Review

In the Notice, the CSA discussed deficiencies of several types. The agency described problems with:

• Financial statements that fail to comply with International Financial Reporting Standards (IFRS) requirements
• Venture and early or development state issuers failing to disclose adequate information about timing and costs associated with projects
• Disclosure of unsupported forward-looking information
• Failure to file business acquisition reports when securities of the acquired business are exchanged for the issuer’s securities
• Inconsistencies between required and voluntary disclosure documents
• Outdated information in reporting documents
• Audit committees with too few members or members who don’t meet qualifications
• Misleading claims about sustainability (greenwashing)
• Failure to follow requirements regarding disclosure of mineral projects and technical reports

Help with Disclosure

The CSA concludes the Notice by urging issuers to review their findings and determine whether they need to make amendments in their own disclosure practices. With earnings season around the corner and many companies looking to set down their annual general meetings, there is no better time to do so.

If you would like to discuss how the deficiencies pointed out in the Notice related to your upcoming disclosure obligations, or would otherwise like to discover ways to enhance your disclosure for compliance without doing a disservice to legitimate investor relations and market-making initiatives, members of our Business Law group would be happy to speak to you.