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.