SECURITIES REGULATION & IR

Since the early days of the COVID-19 pandemic, securities regulators have emphasized the need for high quality public disclosure to keep investors informed amidst the considerable uncertainty facing issuers worldwide. While it was initially unclear how that should manifest in practice, the benefit of hindsight and a full reporting cycle have enabled the Canadian Securities Administrators to publish clear guidance for Canadian issuers to follow in order to satisfy their disclosure obligations in a COVID-19 world. The overarching message is that all disclosure must be tailored to convey the entity-specific impact and risks of COVID-19 – boilerplate language is not sufficient. In some cases, this may require an issuer to alter or expand disclosure significantly and continue to do so for as long as COVID-19 affects its business.

Management's Discussion and Analysis

An issuer’s management's discussion and analysis (the MD&A) provides an issuer with an opportunity to give context to its financial results. An issuer is required to provide transparent and detailed discussion of the trends and risks facing its business. It may be useful to include a separate ‘COVID-19’ section at the beginning of the MD&A that provides the context for the subsequent analysis. In drafting such a section (or however the issuer chooses to present the COVID-19-related discussion), management must consider the specific impact COVID-19 has had on the issuer’s business, operations and financial condition, answering questions such as:

• How have health and safety measures and government-imposed closures disrupted day-to-day operations?
• Does the issuer have operations or partners in regions that were particularly hard-hit by the pandemic? How has this affected the issuer’s supply chain?
• What human resource/staffing constraints have arisen, e.g. in response to evolving employee expectations or vaccination policies?
• How has consumer demand for the product or service changed? Is the change expected to be sustainable?
• How has the issuer’s liquidity position been affected?
• What steps has the issuer taken or is the issuer planning to take to mitigate the impact, including specific cost-saving measures, restructuring initiatives or realignment of operational and financial resources?
• Has the issuer received any government support or insurance recovery?
• Were there any breaches of material contracts as a result of COVID-19?

The MD&A must also include discussion of the risks going forward related to any of the above. There may be additional risks relevant to an issuer, including:

• volatility in global capital markets that will adversely impact the issuer’s ability to access capital;
• litigation risk in relation to contract breaches or response to government policies; and
• increased cybersecurity risk if the business has shifted to an online model or adopted work-from-home practices.

The above considerations will also be relevant for an issuer that prepares an annual information form (AIF).

Financial Statements

Financial statements are reliant upon reasonable and supportable assumptions regarding an issuer’s business. Management should carefully review and consider how COVID-19 has impacted the following key aspects of financial statements:   

• Impairment of Non-Financial Assets: identify reasons for impairment, such as government-imposed closures or supply chain disruptions, and disclose the assumptions used in estimating the recoverable amount.
• Going Concern: disclose the factors that were used to conclude that the issuer will continue as a going concern and, if there were any ‘close call’ situations, discuss the mitigating action taken by the issuer and why management ultimately concluded there were no material uncertainties that might cast significant doubt on the issuer’s ability to continue as a going concern.
• Estimated Credit Losses (ECL): explain the inputs and assumptions that went into calculating ECL, including why the issuer believes there is no reasonable expectation of recovery in the specific circumstances and how forward-looking information has been incorporated into that determination. Forward-looking information should take into account the macroeconomic impacts of COVID-19.

Previously justifiable assumptions must be updated in light of the actual and expected impact COVID-19 has had on an issuer’s business, operations and financial condition. It is possible and acceptable that issuers in similar circumstances make different assumptions, so long as they each provide the entity-specific reasoning.

With more businesses benefitting from government programs throughout the pandemic, it bears reminding that any government assistance received during a reporting period must be sufficiently disclosed. This includes describing the nature and extent of any grants (e.g. the amounts and programs under which they were received), any conditions or contingencies on the assistance and the accounting policy adopted for recognizing the grants in the financial statements.

Other Disclosure Issues

(a)  Non-GAAP Financial Measures

A commonly used non-GAAP financial measure is ‘earnings before non-recurring, infrequent, or unusual items’. Losses or expenses may be described as non-recurring, infrequent or unusual only when a similar loss is not reasonably likely to occur within the next two years or has not occurred during the previous two years. While losses or expenses arising from COVID-19 may initially have been characterized as such, the extended duration of the pandemic makes this description inappropriate for certain items going forward.

If management judges that it is appropriate to disclose COVID-19 adjustments, the nature of such adjustments and how they are related to COVID-19 must be sufficiently explained. For example, rather than stating ‘increased costs due to COVID-19 pandemic’, meaningful disclosure could indicate ‘restructuring costs related to COVID-19’ and proceed to explain how the restructuring is directly linked to the pandemic and why similar costs are not expected to reoccur. Government subsidies from a COVID-19-related assistance program may also be properly included in non-GAAP financial measures if the assistance will not be ongoing.

(b)  Forward-Looking Information

An issuer must only disclose forward-looking information (FLI) if it has a reasonable basis for that FLI. This means the assumptions underlying the FLI must be reasonable, which was difficult to argue in the rapidly changing early stages of the pandemic. Accordingly, many issuers chose to withdraw FLI from their disclosure.

If an issuer chooses to continue to include FLI in its disclosure, it should have a good understanding of the general impact COVID-19 will have on its future performance. This understanding must be evidenced through disclosing the assumptions that have been used to derive the FLI and any risk factors that could cause actual results to materially differ from the stated FLI. These assumptions and risk factors must be entity-specific and reviewed by an issuer on an ongoing basis. As conditions continue to evolve, it is best practice for an issuer to implement internal processes to monitor the changes and update FLI to ensure it remains reasonable and meaningful.

An issuer must provide notification of withdrawal of or update to FLI, either in the MD&A or a news release (which is subsequently referred to in the MD&A).

(c)  Material Change Reporting

Though COVID-19 has materially changed how many issuers do business, it does not necessitate a material change report when the effect is felt equally throughout an issuer’s industry. When an issuer believes that COVID-19 or a resulting government policy has a unique or significant impact on it, the issuer must file a news release and a material change report in accordance with Part 7 of National Instrument 51-102 Continuous Disclosure Obligations. This may arise, for example, when COVID-19 has caused:

• significant disruptions to the issuer’s workforce;
• changes in a credit arrangement;
• material changes in an issuer’s distributions or dividends;
• increased costs of goods or services; or
• supply chain disruptions or delays that are critical to the issuer’s business.

Canadian securities regulators have made it clear that generic boilerplate disclosure language related to the impact of COVID-19 on an issuer’s business, operations and financial condition is no longer sufficient. An issuer should carefully consider the impact of the COVID-19 pandemic on its businesses when preparing its public disclosure. In particular, as the COVID-19 pandemic continues, it is important for an issuer to continuously review and consider whether its disclosure addresses the disclosure guidance provided by the Canadian Securities Administrators.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Thomas Fung (Associate) and Kara Bodie (Articling Student) at McCarthy Tétrault LLP.