The Canadian Securities Administrators have issued CSA Notice 51-362 Staff Review of COVID-19 Disclosures and Guide for Disclosure Improvements, based on reviewing “the continuous disclosure filings of approximately 90 issuers across a broad spectrum of industries and size of operations, focusing on the disclosures of the most recent reporting period ending September 30, 2020.”
Here’s some of the executive summary:
- We were encouraged by the quality of disclosures provided by many issuers significantly impacted by COVID-19. However, we noted certain areas where boiler-plate disclosure was provided regarding the current and expected impact of COVID-19 on an issuer’s business with insufficient detail of entity-specific COVID-19 related risks, including but not limited to, the nature and extent of credit risks and liquidity uncertainties. We also observed instances of unbalanced or overly promotional disclosure and isolated noncompliance for non-GAAP financial measures and forward-looking information..
- The reviews have resulted in outcomes where no action was required, requests for prospective disclosure enhancements were made, or communication is ongoing to resolve the identified issues.
- At a high level, we emphasize the following for issuers to consider in their upcoming CD filings:
- There is no “one size fits all” model for issuers to follow when assessing the disclosure implications of COVID-19.
- Disclosures are expected to be transparent and balanced.
- Provide disclosures on COVID-19 that facilitates an understanding of:
- The current and expected impact of COVID-19 on the issuer’s operations and financial condition, including liquidity and capital resources.
- The key risks that the COVID-19 pandemic presents to the issuer.
- Known trends, demands, events or uncertainties related to COVID-19 that management reasonably believes will materially affect the issuer’s future revenues, expenses or projects.
- The operational changes and other measures taken by management in response to COVID-19.
- How COVID-19 has impacted the issuer’s capacity to meet working capital requirements, debt covenants, planned growth or funding of future development activities and capital expenditures…
Of course, for the most part, you could replace “COVID-19” (or as I prefer to write it, covid-19) in that bulleted list with anything at all (“the key risks that the alien invasion presents to the issuer…”) – there’s never a one size fits all approach for all issuers; any source of current and expected material impact on operations and financial condition should be addressed etc. etc. But through the relatively sudden and unanticipated nature of its appearance, and the sheer scope of its impacts, the pandemic has provided a good testing ground for how issuers apply these basic requirements (not that we wouldn’t have rather gone without it). The finding that some portion of issuers handled this in a boilerplate manner is no doubt largely correlated with how those issuers handle disclosure in general (although, as an aside, is there a much more tired term at this point than “boilerplate”)?
Anyway, there’s a lot of useful material in the report, including some examples of “deficient” versus “improved” disclosure. For example, here’s an instance of a deficient MD&A passage:
- Revenue decreased by 30% in Q3 2020 as compared to the prior period primarily due to the negative impact of the COVID-19 pandemic.
That’s contrasted with the following improved version:
- As described above, we shut down 25 locations country-wide in mid-September, and these locations remain closed as at the date of this MD&A. 14 locations remained open during the quarter for take-out only. In order to mitigate the impacts of store closures and reduced revenues, we have temporarily laid off certain staff. Our mitigating efforts are described in further detail in the Recent Developments section.
- Revenue decreased by 30% from Q3, 2019 due to an estimated loss of sales of $7M from restaurants negatively affected by COVID-19. The closures noted above were in effect for 2 weeks during the reporting period. Based on our estimate for each location, the loss in revenues due to store closures was approximately $3M for Q3, 2020 (based on a 2-week average sales at those stores in prior periods). A further reduction of revenue of $4M is estimated from locations that remained open as take-out only or were subject to reduced capacity limits for Q3, 2020 due to a reduction in revenue/hour from the loss of customers dining in and shorter operating times.
The superiority of the second example need hardly be explained. The sad irony, though, is that there’s little practical benefit to enhancing one’s explanation of the past, other than to enable developing superior expectations about the future, and for some industries in particular, the pandemic has consistently defeated that capacity. It’s telling that the CSA report’s example of improved entity-specific disclosure of risks and impacts can offer little more than an acknowledgment of being lost at sea…
- Consumer demand will continue to be the Company’s most significant risk due to the uncertainty in the global economy, negatively impacting our retail stores. Many of our stores are located in areas that historically have had higher densities of tourism and will experience a greater negative impact and slower recovery than perhaps other retailers. While eCommerce sales have increased, we expect to continue to incur significant sales losses as overall customer demand and consumer spending is expected to continue to decline, as compared to prior year, in response to COVID-19 and the related global economic impacts.
In that brief paragraph you have references to negative impacts (twice), a slow recovery, significant losses and a continued decline. Yep, that’s about it…
The opinions expressed are solely those of the author