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Wednesday, November 25, 2020

On October 29, 2020, the Canadian Securities Administrators (the “CSA”) released CSA Staff Notice 51-361 – Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019 (the “Notice”). The Notice provides useful guidance for reporting issuers in drafting continuous disclosure documents that describe the impacts of COVID-19 on their businesses. It also outlines the results of the CSA’s Continuous Disclosure Review Program (the “Program”) for the previous two years, with a focus on how COVID-19 has impacted reporting issuers’ continuous disclosure obligations.

The Notice highlights three common deficiencies identified by the CSA as part of the Program. Specifically, the CSA observed shortcomings in (i) financial statements, (ii) management’s discussion and analysis (“MD&A”) and (iii) other regulatory disclosure deficiencies of many reporting issuers, resulting in them being required to enhance their disclosure or refile continuous disclosure documents.

Although the Notice also comments on disclosure deficiencies that are unrelated to COVID-19, this update focuses specifically on COVID-19 related disclosure issues as they pertain to financial statements, MD&A and other regulatory disclosures. Furthermore, we have supplemented the observations made by the CSA with our firm’s own experience with COVID-19 related continuous disclosure matters.

The Impact of COVID-19

COVID-19 has introduced significant unpredictability and volatility into the global business environment. Its impact has varied from country to country, industry to industry, and company to company. As a result, reporting issuers must keep in mind that in order to assist investors in making informed decisions, they should provide transparent and entity-specific disclosures. This includes disclosures relating to the impact of COVID-19 on the entity’s operating performance, financial position, liquidity, and future prospects.

Financial Statements

The CSA observed that the uncertainty created by the COVID-19 pandemic may require reporting issuers to update significant judgements and estimates used in financial statements – even after continuous disclosure filings have been made. Specifically, the Notice identifies the following six significant judgements and estimates that may need to be revisited:

  1. going concern assessments;
  2. impairment assessments;
  3. fair value calculations;
  4. government assistance;
  5. revenue recognition; and
  6. deferred tax recoverability.

When making any significant judgements or estimates in financial statements, the CSA stress that reporting issuers must use the best available information and provide the required disclosure as mandated by IAS 1, Presentation of Financial Statements. Furthermore, reporting issuers must also remember that detailed entity-specific disclosure in annual or interim financial statements is important, as similar companies may still make use of different judgements and estimates in their financial statements.

Reporting issuers must carefully consider the disclosures that are made in interim financial statements. Under IAS 34, Interim Financial Statements, reporting issuers are required to include explanations of significant changes in financial position and performance since the last annual reporting period. However, during these unpredictable and rapidly evolving times, reporting issuers must be cautious when condensing or omitting disclosures from interim financial statements since information disclosed in the most recent annual financial statements may no longer be relevant. In other words, reporting issuers must not assume that disclosures do not need to be made simply because they were previously raised in the most recent annual financial statements. As a result, the management of reporting issuers must consider whether the judgements and estimates used in interim financial statements need to be updated. The CSA also remind the management of reporting issuers that they should consider relevant information up to the date of authorization of financial statements when performing a going concern assessment.

Management’s Discussion and Analysis

Discussion of Operations and the Impact of COVID-19

The Notice specifies the importance of entity-specific information in MD&A as opposed to mere boilerplate disclosure. Discussion of operations and the impact of COVID-19 should describe the specific impact that COVID-19 has had on the reporting issuer, given that impacts may vary significantly among different industries and issuers. For example, retailers may have decreased sales from their brick and mortar locations resulting from emergency orders to shut down their businesses, whereas manufacturers may be impacted by issues in the supply chain or operating with reduced staffing. Providing entity-specific disclosure will help investors understand the effect of COVID-19 on operations and the mitigation measures that have been implemented. 

Our firm has also identified boilerplate disclosure as a recurring issue among issuers. Due to the nature of COVID-19’s impact, which is often broad and pervasive, issuers have a natural tendency to address disclosure at a high level and in somewhat general terms. An inability to predict all potential impacts on customers, clients, service providers and suppliers until they materialize exacerbates this issue, which leads to some reporting issuers simply duplicating disclosures from other reporting issuers, whether or not those disclosures are an accurate depiction of the likely effects on their specific business. We recommend that reporting issuers take a critical look at how their business has been or is likely to be affected by COVID-19 having regard to their specific circumstances, and resist the urge to create overly general disclosure, or disclosure largely duplicated from other reporting issuers.

The CSA also recommend that reporting issuers explain the methodology used in their calculations and provide information in their MD&A about the judgements and estimates made by management in determining COVID-19 impacts. It may be difficult for a reporting issuer to determine with accuracy the quantitative impact of COVID-19 on its financial performance. Providing disclosure on methodologies used, rather than precise quantitative information in isolation, will help issuers to avoid misleading investors.

Non-GAAP Financial Measures and Appropriate Use of Adjustments

The CSA caution investors on using adjustments or alternative profit measures that are defined as COVID-19 related. In particular, it may be misleading to describe an adjustment as COVID-19 related if management does not explain how the adjusted amount is specifically associated with COVID-19. The CSA also remind reporting issuers that there may be a limited basis for management to conclude that a loss or expense is non-­recurring, infrequent or unusual and therefore management should carefully assess the nature of a specific loss or expense before classifying it as non-recurring. An obvious example of this would be where the impact of COVID-19 crosses over multiple reporting periods.

Forward-Looking Information

In light of the uncertainty surrounding COVID-19, the Notice encourages reporting issuers to consider whether there remains a reasonable basis for previously announced forward-looking information (“FLI”) to be disclosed in prospective filings. If outlooks can no longer be supported by reasonable assumptions and there is no longer a reasonable basis for the projected achievement, issuers may be required to either update or withdraw conclusions, forecasts or projections in the FLI.

Material Change Reporting

The CSA instruct issuers to be alert to material changes due to COVID-19 that may necessitate disclosure. The Notice provides examples of potential material information that may result in a material change, including significant disruptions to a reporting issuer’s workforce or operations, negative changes in markets, economy or laws, supply chain delays or disruptions that are critical to a reporting issuer’s business, changes in credit arrangements, increased cost of goods or services, and a suspension of exports.

Additional Advice for Reporting Issuers

In addition to the guidance provided by the CSA, some additional experiences our firm has had when dealing with securities regulators regarding continuous disclosure during COVID-19 are highlighted below.

Consistency of Tone in Disclosure

Reporting issuers should ensure that their COVID-19 related disclosures are uniform throughout their filings. Otherwise, securities regulators may request that additional disclosure be provided if there has been a change in tone between subsequent continuous disclosure documents regarding a subject that has a material impact on the reporting issuer. For example, regulators may request additional disclosure where an issuer has originally disclosed a minimal impact from COVID-19, but then subsequently claims that COVID-19 has had a material impact on its business. Indeed, regulators will be concerned with what has caused this change in tone during the period between disclosures. Predicting whether additional disclosure will be needed is a fact-driven exercise that will vary from reporting issuer to reporting issuer and business to business.

Reporting Issuers’ Investment Portfolios

Reporting issuers that hold investment portfolios should consider disclosing the different types of industries within their investment portfolios that are exposed to additional risk because of COVID-19 and how those industries have been impacted by the pandemic. For example, reporting issuers that hold investments in the retail property industry, an industry significantly impacted by COVID-19, may consider disclosing the number of its investee companies involved in that industry and the percentage of fair value of its investment portfolio represented by those investee companies. Furthermore, reporting issuers may wish to include a discussion of how the subject industry has been impacted by the pandemic. Regulators have taken the view that providing the number (and percentage of aggregate portfolio fair value) of investments which are in industries positively, negatively or unaffected by COVID-19, is helpful to investors.

Reporting issuers that are uncertain about how to approach their COVID-19 disclosures are encouraged to seek legal advice.

If you have any questions with respect to the matters discussed above, please contact Peter Volk at, Troy Pocaluyko at, or any other member of our Corporate Finance & Securities practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.