Flexible reporting standards mean investors know little about when companies used emergency wage subsidies, announces the title of a recent Globe and Mail article by David Milstead
This is how it starts off:
- Canada’s three major telecommunications companies took tens of millions of dollars from Canada’s Emergency Wage Subsidy program. For most of the pandemic, their investors knew very little about it.
- While acknowledging they were participating in CEWS during the peak of the pandemic, BCE Inc. and Telus Corp. both failed to disclose to shareholders just how much CEWS money was boosting their bottom lines.
- In filing its annual report this spring, Rogers Communications Inc. finally told shareholders it participated in 2020, and that its CEWS tally was $91-million. BCE, in response to a query from The Globe and Mail, said it received $122.85-million in CEWS, but did not reveal that number in its shareholder reports. Telus, which did not answer the Globe’s queries, reported $41.5-million in payments from Canada Revenue in an obscure Alberta lobbying filing.
- The CEWS program, created by the federal government to help protect jobs during the COVID-19 pandemic, allowed employers to receive a 75-per-cent subsidy for payroll costs, with a significant revenue decline among the conditions for receiving it. Citing privacy restrictions protecting tax filers, Ottawa has refused to release a full accounting of CEWS subsidies paid. A Globe and Mail investigation that compared the skimpy federal disclosure with multiple other databases and information sources found nearly 400 publicly traded companies that received CEWS.
- Many of those companies acknowledged receiving the subsidy, but did not say how much. Some didn’t acknowledge receiving CEWS at all. And that failure of disclosure shows that it’s not just taxpayer advocates who aren’t getting the full CEWS picture: Investors in Canada’s biggest public companies have struggled to understand just how much government largesse has propped up corporate profits.
One issue highlighted in the article is the diversity in accounting for the subsidies, flowing from the following portion of IAS 20:
- Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.
- Supporters of the first method claim that it is inappropriate to net income and expense items and that separation of the grant from the expense facilitates comparison with other expenses not affected by a grant. For the second method it is argued that the expenses might well not have been incurred by the entity if the grant had not been available and presentation of the expense without offsetting the grant may therefore be misleading.
- Both methods are regarded as acceptable for the presentation of grants related to income. Disclosure of the grant may be necessary for a proper understanding of the financial statements. Disclosure of the effect of the grants on any item of income or expense which is required to be separately disclosed is usually appropriate.
A casual reader of the article might come away with the impression that this choice derived from a statement by the Canadian Accounting Standards Board in May, 2020. I’m not sure exactly what’s being referred to there, although the IFRS Discussion Group discussed the issue in September 2020 and acknowledged that such alternative approaches are acceptable. It should be emphasized though the underlying requirement goes back to 1984, when international accounting standards were much more of a theoretical exercise than they are now – it’s safe to assume the writers never imagined those passages being used to justify variant methods being used within the same jurisdiction for the same kind of highly pervasive, socially and politically prominent grant. If they had imagined it, they might have hoped that preparers and auditors and regulators and others would come together to agree on a consistent approach, rather than coming together to agree that it was fine to disagree…
The other big issue highlighted in the article is materiality. For example, it observes:
- Canadian companies also have latitude in deciding what is “material,” or important enough to disclose to investors. The national policy from the Canadian Securities Administrators (CSA) that governs disclosure standards notes a fact is material when it significantly affects the market price or value of a security, or would reasonably be expected to affect it. Companies that took tens of millions of dollars, and in some cases hundreds of millions of CEWS, apparently decided that failure to disclose the amount of subsidy wouldn’t affect the share price, including Suncor Energy Inc. , which received $358.2-million in CEWS in 2020, and Canadian Natural Resources Ltd. , which collected $192.6-million.
The article implies that some companies took an overly technical approach to the issue in concluding they needn’t disclose the amounts. But in a panicked pandemic environment where government money was being distributed at an unprecedented pace and magnitude, it’s probably not that hard to substantively argue that such information indeed wouldn’t significantly affect a security’s market price, given its one-off nature and lack of predictive value. Of course, it would probably be “better” if the information were more clearly available on an entity-by-entity basis. But then, as other Globe and Mail articles (like the one titled Wage subsidies were meant to preserve jobs. In many cases, the $110.6-billion response padded bottom lines) explored further, the originators of the amounts may have bigger questions to answer than the recipients of them…
The opinions expressed are solely those of the author