Canadian Securities Administrators recommend clarity about Covid-19 impact in disclosure

The Canadian Securities Administrators group is concerned that publicly traded companies may be too vague in writing about the impact of Covid-19 in the Management Discussion and Analysis document and other briefings they must provide shareholders.

“COVID-19 is impacting the economy and posing business challenges for some issuers, including reporting on and disclosing the effects of COVID-19,” the CSA said in a staff notice dealing with continuous activities for the fiscal years ended March 31, 2020, and March 31, 2019. The CSA comprises securities regulators from each of the ten provinces and three territories in Canada.

“To support investors in making informed investment decisions, issuers should provide transparent and entity-specific disclosures, including information about the impact of COVID-19 on their operating performance, financial position, liquidity, and future prospects.”

The CSA notice summarizes the results of its continuous disclosure review programs for the past two years. Also, it includes information and guidance in areas where the CSA has identified common deficiencies, with a particular focus on disclosures concerning the impact of COVID-19 on Canadian public companies.

Matt Merkley, a partner with Blake, Cassels & Graydon LLP ‎in Toronto, says such guidance is “particularly helpful for Canadian public companies crafting descriptions of the impact of COVID-19 in their continuous disclosure documents during these challenging times.”

He notes the CSA advises disclosure in the Management Discussion and Analysis “should not be boilerplate or simply repeat information available in financial statements.” He adds, “don’t just say in your MD&A for Q2 what you said in your Q1. Don’t just roll over commentary because you’ve come up with a good way of describing things, and just assume it’s still relevant.”

Instead, the company should be “entity specific and transparent” in its disclosure, providing a detailed explanation and breakdown of the specific period-over-period variable impacts of Covid-19 on an issuer’s operations and financial results. This should include a discussion of the methodology used and measures taken to mitigate the pandemic’s impact on a company’s business.

At the same time, the CSA acknowledges it “may be difficult for issuers to accurately determine the quantitative impact of COVID-19.” Issuers are being cautioned “not to incorrectly attribute or generally list Covid-19 as the sole reason for any period-over-period variances or other negative news.” Instead, companies should provide information about specific estimations made by management in determining the disclosed impacts.

The CSA also says that given the potentially significant impact of COVID-19, it may be necessary for issuers to include expanded disclosure in their MD&A on the current and expected effects of the pandemic on their liquidity and capital resources, including quantifying the impact where possible.

Such discussion should concern any subsidies or other government help, reduced cash flow from operations because of decreased demand and delays in capital project plans. It should also discuss cost-cutting initiatives (employee layoffs, reduced hours) and any impact and changes in the distribution of dividends.

Issuers are not generally required to interpret and promptly disclose the impact of external political, economic, and social developments on their affairs. However, the CSA notice notes that if an external event, such as COVID-19 and any associated changes in government or regulatory policies, directly impacts the business, the issuer may need to issue a press release and file a material change report concerning such development.

This may be the case when COVID-19 results in a significant disruption to an issuer’s workforce or operations or supply chain delays or disruptions that are critical to an issuer’s business. It could also include changes in credit arrangements, increased cost of goods or services, or a suspension of exports.

Merkley says that he has been dealing with draft MD&A statements submitted by clients for review. “Some issues have already done a great job of updating events, others may not have touched on [Covid-19] related events as much, but it’s early in the process.” He has been advising clients to “make sure the information is current and reflects recent developments.”

The disclosure doesn’t have to include events that don’t meet the threshold of materiality, Merkley says, such as disclosing how much is spent on personal protective equipment for employees. But it should include details related to manufacturing and supply issues and closures.

Merkley also advises that issues not make comments such as “if we had not been affected by Covid-19, our results would have been so much better,” as it adds no real value to the analysis of where the business is going.