The CSA’s continuous disclosure review report – nope, everything’s not fixed yet

The Canadian Securities Administrators have issued Staff Notice 51-346 Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2016.

The report highlights a motley selection of apparently recurring deficiencies in IFRS financial statements:

Market Risk Sensitivity Analysis “Some issuers present sensitivity analysis that is not reflective of the reasonably possible changes in the relevant risk at the date of the financial statements and/or is not meaningful in light of the current economic environment.” The report notes: “An appropriate percentage change in the relevant risk should be used. For example, presenting a 1% change instead of a more reasonably higher percentage would not provide investors with meaningful information.” It also observes: “Issuers should consider disclosing whether the impact of the sensitivity analysis yields a proportional or nonproportional result. This information will provide investors with an understanding of the impact of the risk on the issuer should there be a significant downturn.” In all honesty though, readers might consider the accompanying “better example of disclosure” to be somewhat overblown in the circumstances set out.

Contingent consideration in business combinations “Some issuers fail to identify and account for contingent consideration and inappropriately account for settlements as a measurement period adjustment.” From the description given, this just seems like a straightforward misapplication of IFRS 3 – as such, it’s odd it would happen on any kind of common basis, but there you are.

Goodwill and Intangible Assets Recognized in Business Combinations “We continue to see issuers that allocate the entire purchase price to one intangible asset. However, the disclosure indicates the presence of other identifiable intangible assets or goodwill. Some issuers do not explain how they determined the useful lives for finite-lived intangible assets, or why an intangible asset has an indefinite useful life. Some issuers inappropriately determine an indefinite useful life for an intangible asset that has a finite useful life.” As the reference to “continue to see” indicates, this is one of the older issues in these reports. There’s no doubt that the frequent fuzziness of the concepts (how much of an acquisition’s value belongs to this brand name versus that trademark versus this intellectual property) and of the attendant valuations doesn’t make for the most rigorous playing field. Not to mention the absence of any corresponding mechanism for recognizing internally-generated intangible assets (a new book apparently identifies this as a primary harbinger of “The End of Accounting”).

Functional currency “Some issuers change their functional currency when the timing of that change did not correspond to the timing of the change in the underlying circumstances.” Of course, that’s hardly the only issue that might attach to the selection of functional currencies. I drafted a blog post on this quite a while ago, but haven’t got round to posting it yet. One day soon though…

Operating segments “Issuers often aggregate several operating segments into a single operating segment for reporting purposes. This is particularly prevalent in certain industries such as the retail industry, for example, where retailers have several different distinct operations that offer a broad range of products (for example, home furnishings, personal care, and clothing) that are all considered to be part of one operating segment for reporting purposes.” Actually, that’s written more as an observation than as the identification of a problem, but the implication is that the aggregation criteria may not be appropriately applied or adequately disclosed.

Anyway, the document observes that this isn’t an exhaustive list, not that anyone would think it could be. One imagines that its seemingly rather whimsical nature might be the very point, to convey that material problems could come from virtually any aspect of the financial statements. Elsewhere, the document briefly notes that the list of issues causing financial statements to be refiled “included, but was not limited to, impairment, accounting for acquisitions, revenue, going concern disclosures, and significant judgements”: indeed, some of those areas seem more likely to yield recurring material problems than the items it describes in greater detail.

The report also sets out various observations on MD&A and other regulatory deficiencies. Prominent among these is non-GAAP measures (NGMs), for instance:

  • “We continue to see issuers that fail to disclose and discuss the most directly comparable GAAP measure as presented in the financial statements when they present and discuss NGMs in their MD&As or news releases. We often see issuers that highlight the NGM, sometimes in bold print and mention the most directly comparable GAAP measure in a less prominent location in the disclosure, most often when the GAAP measure is less favourable than the positive NGM….”

If you’re in the business of regulating disclosure, I suppose that after a while, finding and commenting on such deficiencies in non-GAAP measures becomes second nature, like complaining about the weather (and just as unlikely ever to undergo any permanent change, or not for the better anyway)…

The opinions expressed are solely those of the author

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