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As a result of continuous disclosure reviews in respect of compliance with forward-looking information (“FLI”) requirements found in National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”), the Canadian Securities Administrators (the “CSA”) published guidance on the subject in CSA Staff Notice 51-330 (the “Notice”).
The purpose of the Notice was to identify how reporting issuers can address deficiencies and enhance disclosure of FLI, as well as to remind issuers of the potential impact of the transition to International Financial Reporting Standards (“IFRS”) in January, 2011 on disclosure of future-oriented financial information (“FOFI”) and on disclosure of “financial outlooks”.
The disclosure reviews that gave rise to the Notice were based on the CSA examining a wide range of continuous disclosure documents. The reviews resulted in CSA staff suggesting future improvements to issuers in their disclosure going forward; they did not result in any issuers being required to re-file continuous disclosure documents to redress disclosure deficiencies.
Identification of FLI
The CSA observed that, while NI 51-102 does not prescribe a specific way in which a reporting issuer is required to identify material FLI as such, the companion policy to NI 51-102 (“51-102CP”) states that disclosure should be presented in a manner that allows an investor who reads any material containing FLI to be readily able to identify the material FLI.
Issuers took different approaches to identify material FLI as such. The CSA noted that a common method was to identify material FLI solely by way of a cautionary paragraph at the beginning or end of a disclosure document. Where issuers have chosen to take this approach to disclosure, the CSA encourages such issuers to provide readers with an indication of the nature of the material FLI contained in the document. A suggested method of making this disclosure is to state:
Forward-looking statements included or incorporated by reference into this document include statements with respect to: [insert a list of the topics covered in the disclosure document giving rise to material FLI].
The CSA feels that disclosure by issuers that identifies FLI as being essentially any disclosure related to the future or that identifies FLI by referring to the types of words that could potentially be found in FLI is insufficient. For example:
All statements, other than statements of historical fact, that address activities, events or developments that the issuer expects or anticipates will or may occur in the future are forward-looking statements.
This document may contain forward-looking statements. Forward-looking statements are often, but not always, identified by words such as “believes”, “may”, “likely”, “plans” or similar words.
The CSA takes the view that the disclosure above would not enable a reader to readily identify material FLI included in a document if such disclosure were not also accompanied by additional, more specific information identifying the material FLI.
Other issuers included disclosure throughout the document and identified material FLI each time FLI was used. In other cases, issuers consolidated the material FLI in a particular section of the document and labelled that section “Outlook” or provided a table identifying the information contained in the section or table as material FLI. These two latter approaches were preferred by the CSA.
The CSA also occasionally noted that issuers stated FLI was included in a particular disclosure document where this was not the case. The Notice encourages issuers to avoid making disclosure of the existence of FLI in a document where this is not the case.
Material Risk Factors and Material Factors or Assumptions
During the course of its review, the CSA noted several instances where issuers who have complied with Section 4A.3 of NI 51-102 in disclosing material risk factors in connection with FLI that could cause actual results to differ materially from the FLI, then fail to go on to disclose the material factors and underlying assumptions that were used to develop material FLI.
Section 4A.4 of NI 51-102CP stipulates that an investor reading a disclosure document should be able to readily inform him or herself of both the underlying material assumptions and the material risk factors associated with the FLI.
The CSA expressed concern that issuers were non-compliant with Section 4A.3 of NI 51-102 in either failing to discuss the underlying factors or assumptions, or in referencing the existence of material factors or assumptions but failing to elaborate on same.
Incorporation by Reference of Relevant Material Risk Factors, Material Factors and Assumptions
Issuers are permitted to include material risk factors, material factors and assumptions by reference in disclosure documents. However, the CSA cautions that issuers should consider whether such incorporation by reference enables the reader of a document to readily inform him or herself of the material risk factors, material factors or assumptions associated with the material FLI.
Avoidance of Boilerplate
As always, the CSA advises against so-called “boilerplate” disclosure of risk factors, factors and assumptions in respect of FLI. The CSA urges issuers to disclose and discuss material risk factors, material factors and assumptions that are germane to the FLI in question.
To ensure that readers can readily identify material FLI, the CSA recommends that issuers present material in a user-friendly format that clearly links specific material risk factors as well as material factors and assumptions to particular FLI. A suggested method of presentation is to create a table as follows:
The following table outlines forward-looking information included in this [insert document name]
Forward-Looking Information Key Assumptions Most Relevant
The CSA critiqued issuers whose policies for updating FLI were not in compliance with Section 5.8(2) of NI 51-102 which sets out the requirements for issuers to update previously disclosed material FLI in certain circumstances.
The CSA noted that statements such as the following are inappropriate in light of Section 5.8(2) of NI 51-102:
The issuer does not assume any obligation to update forward-looking statements if management beliefs, expectations or opinions should change.
Explanation of the purpose of, and cautionary language related to FOFI
Issuers that disclose FOFI or a financial outlook are required by Section 4B.3(b) of NI 51-102 to also disclose the purpose of such information and to caution readers that the information may not be appropriate for other purposes. The CSA takes the view that disclosure of material risk factors and material factors or assumptions contained in a cautionary paragraph at the beginning or end of a document generally will not satisfy this disclosure requirement.
Disclosure of Goals or Targets
In order to constitute FLI, the achievement of a goal or a target should be “possible” based on assumptions about future economic conditions and courses of action. If an issuer discloses a goal or target which constitutes FLI and is material, the disclosure in respect of such goal or target must be in compliance with the FLI disclosure requirements. Such disclosure would encompass the disclosure required under Part 4B of NI 51-102 in the circumstances that a disclosed goal or target also constitutes a “financial outlook”.
Should management determine that a material target or goal disclosed in a public document is not material FLI, management should consider including disclosure to explain the purpose of the information.
Impact of Transition to IFRS
The transition to IFRS will require that issuers ensure that FOFI or financial outlooks that cover the issuer’s 2011 fiscal year be based on an appropriate accounting system. Section 4B.2(2)(b) of NI 51-102 requires that FOFI or a financial outlook be based on the accounting policies that the issuer expects to use to prepare its historical financial statements for the period covered by such FOFI or financial outlooks.