Streamlining continuous disclosure – reduce this, improve that!

Canadian regulators seek comment on proposal to streamline continuous disclosure requirements, announces a recent news release

Here’s the summary:

  • The Canadian Securities Administrators (CSA) is proposing changes to the continuous disclosure requirements for non-investment fund reporting issuers that will streamline and clarify their annual and interim filings.  
  • “We have identified areas where we can reduce regulatory burden on issuers’ continuous disclosure obligations, without compromising investor protection or the integrity of Canada’s capital markets,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. “The proposed amendments are expected to streamline reporting requirements and enhance reporting efficiency for issuers, and increase the quality and usefulness of the information investors receive.”
  • The proposed amendments:
  • Streamline and clarify certain disclosure requirements in the management’s discussion and analysis (MD&A) and the annual information form (AIF) for non-investment fund reporting issuers.
  • Eliminate certain requirements that are redundant or no longer applicable.
  • Combine the financial statements, MD&A and, where applicable, AIF into one reporting document called the annual disclosure statement for annual reporting purposes, and the interim disclosure statement for interim reporting purposes.
  • Introduce a small number of new requirements to address gaps in disclosure.

The issues being addressed are by no means new ones. From the initial introduction of the continuous disclosure requirements in their current form, almost twenty years ago, it’s been evident for example that the MD&A and the financial statements contained a certain amount of overlap. But the CSA emphasized in 2004:

  • Information specifically required by (the MD&A form) must be included in the MD&A, and simply cross-referencing to a note in the financial statements would not be sufficient. For example, although the various notes to the financial statements may include information about contractual obligations, (the form) requires an issuer that is not a venture issuer to include in the MD&A a summary, in tabular form, of contractual obligations. In this example a cross-reference would not meet the (form) requirement.

As we’ve covered on this blog various times in the past, such thinking never made any psychological or behavioural sense – a reader could only extract full value from the MD&A by reading it in close conjunction with the financial statements, a point that would be encouraged rather than undermined by a high degree of interweaving between the two. A format that’s occasionally seen – although not very often in Canada – allows the statements and MD&A to share the same space: for example, the right side of the page might provide the discussion and analysis of the financial statement note presented on the left. I’ve heard concerns that such a presentation might be confusing, for example in blurring the distinction between what’s audited and what isn’t, but if done well, it seems to me that the benefits far outweigh such possible risks. Unfortunately, it’s not clear to me that the CSA proposal would even allow such an approach, let alone encourage it, as it envisages a new annual and interim disclosure document in which the financial statements constitute part 1 and the MD&A part 2. It does state that the company “may use innovative approaches to disclosure (including, for greater certainty, use of hyperlinks to reference a disclosure in the annual disclosure statement and creative use of charts, tables and graphs) in a manner consistent with the requirements of this Form and other applicable requirements of securities legislation.” But I’m not sure whether the innovation might allowably extend to effectively collapsing parts 1 and 2 into one.

Anyway, the broad underlying thinking of all this, as indicated, is to “reduce burden by fostering streamlined reporting and increasing reporting efficiency for reporting issuers” and “(improving) usability for investors and analysts.” It goes without saying that the investors and analysts in question are envisaged as human beings, with all the constraints and limitations that implies (including, as we’ve also noted before, the possibility that the things they say to standard-setters and regulators don’t accurately represent their real practices). But what about the recurring notion that the primary consumer of financial information in the foreseeable future might not be of flesh and blood? Here’s what outgoing IASB Chair Hans Hoogervorst had to say a while back:

  • …the more information becomes available, the more need there is for comparability, standardization and quality control. Accounting standards aim to achieve this, based on sound economic principles. Just think about the current diversity in accounting practices for insurance activities. No artificial intelligence in the world would be able to make heads or tails from information that is in many cases inherently flawed.
  • This is why I do not see the advent of Big Data and Artificial Intelligence as a challenge to the relevance of accounting standards.  They can provide useful supplemental information—certainly in terms of speediness, but they will not replace the financial statements.

That’s may be true with regard to the essential credibility of the numbers, but seems far less so as a reason for continuing to fuss about matters of formatting, or the location of information within the statements. Measured against the capacity of a future non-flesh and blood primary consumer, the notion of presenting a nicely linked part 1 and 2 might seem as quaint as insisting that satellite navigation always be backed up by a paper map….

The opinions expressed are solely those of the author

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