ASC Annual Continuous Disclosure Review Program

Report Emphasizes Need to Increase Specificity of Disclosure

Written By Stephen P. Sibold, Q.C.

Last month, the Alberta Securities Commission (ASC) released the report on its 16th annual continuous disclosure (CD) review program, which involved examination by ASC staff of CD documents filed by Alberta reporting issuers (RIs). A stated objective of the program is to improve the completeness, quality and timeliness of disclosure. The comments in the report are based on 34 full reviews and 156 high-level or issue-oriented reviews, out of a total of approximately 761 Alberta-headquartered RIs. The full report can be found on the ASC's website: www.albertasecurities.com.

Overarching Theme – More Specificity of Disclosure Required

While noting that ASC staff was generally satisfied with the level of disclosure by most RIs, the ASC stated that an underlying theme of the report was the need for RIs to increase the specificity of their disclosure. The ASC noted the need for an enhanced focus by RIs on clear and useful disclosure in CD materials made available to investors.

Accounting and Disclosure Issues and Deficiencies

Of the more than 30 accounting and disclosure issues and deficiencies discussed in the report, the following are of particular interest:

• Related Party Transactions. The ASC expressed concern that related party transactions and relationships are often not adequately described in CD documents. In particular, the ASC noted the need to ensure that the minimum standards prescribed by GAAP and securities legislation are met (e.g., setting out detailed disclosure of all related party transactions, including a description of the relationship between the parties; a description of the transactions; the recognized amount of the transactions; and the measurement basis used).
• Revenue Recognition. The ASC noted that RIs should ensure that their revenue recognition policies are clear, comply with GAAP and are applied consistently. As examples of issues, the ASC noted the use by one RI of the cash basis rather than the accrual basis of accounting in recording revenue for certain periods. As well, the ASC noted the recording of revenues and expenses on a gross (rather than net) basis.
• Distributable Cash and Other Income Trust Disclosure. The ASC review of income trust CD materials indicated there is little consistency in the measure of distributable cash between RIs and even from one period to the next by the same RI. The ASC noted that revised CSA Staff Notice 52-306 – Non-GAAP Performance Measures and proposed NP 41-201 – Income Trusts and Other Indirect Offerings clarify that distributable cash is a cash flow measure, not an operational performance measure. Consequently, the distributable cash calculation should begin with cash flow from operating activities rather than any other measure. RIs must adequately support and disclose all calculations required to reconcile cash flow from operating activities to distributable cash.
• Other common issues cited included poor or boiler plate discussions of liquidity, risks and uncertainties and overall performance and results of operations; not appropriately testing goodwill for impairment in a timely manner; and not including complete disclosure of executive compensation due to the use of external management companies.
• Certificates and Conclusions about Effectiveness of Disclosure Controls and Procedure. The ASC noted a number of deficiencies in filings under MI 52- 109 – Certification of Disclosure in Issuers' Annual and Interim Filings, which required numerous Alberta RIs to restate and file both MD&A and certificates, including:
  • deficient or non-existing disclosure in annual MD&A regarding disclosure controls and procedures;
  • use of incorrect forms for CEO/CFO certificates;
  • use of incorrect dates on the CEO/CFO certificates; and
  • the failure to re-file CEO/CFO certificates when amended financial statements and/or MD&A are filed.

As well, the ASC required various RIs to correct conclusions regarding the effectiveness of disclosure controls, describe any deficiencies, discuss how the deficiencies were rectified and indicate whether the disclosure controls were effective at the date of filing the revised certificates.

• Environmental Reporting. Citing increasing interest of investors in RIs' environmental policies and results and the effect on future operations, the ASC stated that it will increase its focus on the adequacy of this disclosure in future CD reviews and encourage RIs to improve their disclosure by increasing the specificity of any environmental risks likely to affect the RI. Under Form 51-102F2 – Annual Information Form, RIs are required to disclose certain information concerning environmental policies, risks and related capital expenditures.
• Business Acquisition Reports (BARs). The ASC noted a number of common deficiencies, including:
  • failing to file a BAR at all or within the 75-day deadline;
  • filing operating statements instead of required full financial statements, without obtaining exemptive relief;
  • filing complete acquisition financial statements in a prospectus but not updating the statements in the BAR to a more current date (as required by Part 8 of NI 51-102), without obtaining exemptive relief; and
  • making adjustments to pro forma financial statements that did not fit within the limitation relating to acceptable adjustments suggested in section 8.7(5) of the Companion Policy to NI 51-102 CP 8.7(5).

Short Form Prospectus and Rights Offering Circular Deficiencies

The ASC noted a number of deficiencies in these documents, including:

• a failure to disclose the minimum proceeds required;
• not adequately explaining identified conditions to the availability of a standby commitment;
• providing a weak explanation for the use of proceeds (e.g., no details regarding projects if proceeds were to be used for capital expenditures); and
• the failure of income trusts to disclose borrowing covenants in prospectuses.

Conclusion

With increased emphasis being placed on continuous disclosure by investors and regulators and civil liability for secondary market disclosure in effect in Ontario and Alberta, directors and officers of public entities are well advised to take appropriate steps to ensure that the RIs' continuous disclosure is both complete and timely.