CSA Publishes Results of Continuous Disclosure Review Program for Fiscal 2023 and 2024

CSA Publishes Results of Continuous Disclosure Review Program for Fiscal 2023 and 2024

The Canadian Securities Administrators (the “CSA”) has recently published CSA Staff Notice 51-365 – Continuous Disclosure Review Program Activities for the Fiscal Years Ended March 31, 2024 and March 31, 2023 (the “Staff Notice”­), reporting on the results of the CSA’s Continuous Disclosure Review Program and identifying common deficiencies and CSA expectations.

The Continuous Disclosure Review Program aims to promote compliance and education by assessing reporting issuer disclosure, including compliance with requirements pursuant to National Instrument 51-102 – Continuous Disclosure Requirements (“NI 51-102”) and International Financial Reporting Standards (“IFRS”). Issuers are selected for review based on qualitative and quantitative factors that may increase the risk of non-compliance, including those specific to prominent industries in Canada for the relevant period.

The CSA provided two overarching comments based on their review. First, the CSA cautions that in uncertain economic times, disclosure should be prepared with careful evaluation and explanation of how economic assumptions may change and affect the disclosure of operational and financial information. This may affect financial statement and management’s discussion and analysis (“MD&A”) disclosure in areas including known trends, events and uncertainties, liquidity and capital resources, debt covenants, risk factor disclosure, impairment of non-financial assets, going concern, events after the reporting period, significant judgement and measurement uncertainties, expected credit losses, financial instrument risk disclosure, non-GAAP and other financial measures, and material change reporting.

Second, the CSA cautions issuers adopting emerging technology such as artificial intelligence (“AI”) to carefully consider the necessity and implications of disclosing the use of and risks associated with these new technologies. The CSA recommends that if an issuer has begun using AI in its product or service offerings, the issuer should (i) disclose how the issuer defines AI in sufficient detail to allow investors to understand what the issuer is referring to and (ii) provide balanced disclosure that includes discussion of both the benefits and risks of the technology. In any case, disclosure relating to the use of new technology must only be made where there is a reasonable basis for doing so, otherwise such disclosure may be considered overly promotional, as further discussed below.

Results for Fiscal 2023 and Fiscal 2024

For the fiscal periods ended March 31, 2024 (“fiscal 2024”) and March 31, 2023 (“fiscal 2023”), 425 and 466 reviews were conducted, respectively, 70% of which were specific issue-oriented reviews. In fiscal 2024, 58% (50% in fiscal 2023) of reviews resulted in substantive comments requiring improved and/or amended disclosure, with 8% of review outcomes (6% in fiscal 2023) leading to issuers being referred to enforcement, cease-traded or placed on the default list.

Financial Statement and MD&A Deficiencies

Impairment of Assets and Cash-Generating Units

The CSA observed that the use of boilerplate disclosure does not sufficiently describe the basis for key assumptions used in calculating the recoverable amount of assets or cash-generating units (“CGUs”), as required by International Accounting Standards. The events that led to an impairment and the CGUs themselves are often not clearly described, such that it is unclear why an impairment occurred and what specific group of assets are impacted by an impairment loss or reversal. Furthermore, some issuers do not describe the instances where a reasonably possible change to key assumptions would cause the CGU’s carrying amount to exceed its recoverable amount.

To address these deficiencies, the CSA recommends that issuers provide a description of the method for determining the assumptions used to derive the recoverable amount of assets or CGUs, and where appropriate, include external sources of information and describe major sources of uncertainty that have a risk of resulting in material adjustments to the carrying amounts of assets and liabilities. CGUs should be clearly described in accordance with IFRS requirements, be issuer-specific, and unless justified, be identified consistently from period to period. Where the carrying amount of goodwill or intangible assets allocated to a specific CGU is significant in comparison to the issuer’s total amounts, separate disclosure should be made relevant to that CGU including a sensitivity analysis for key assumptions, judgments management has made about the future, and other sources of estimation uncertainty. Additionally, issuers should disclose the events, circumstances and main drivers that led to any recognition or reversal of an impairment loss and an assessment of any internal or external indicators that an asset may be impaired. If any such indication exists, an issuer should provide an estimate of the recoverable amount of the asset, and in any case, this should be provided annually for intangible assets with an indefinite useful life or that are not available for use, as well as goodwill acquired in a business combination. Discussions of overall performance in the MD&A should also include an analysis of how continuing operations contributed to any asset impairment.

Business Combinations and Asset Acquisitions

The CSA noted that some issuers have exchanged significant equity for minimal assets, significant goodwill or intangible assets without sufficiently describing the basis for the excess consideration. Additionally, consideration paid for intangible assets in early stages of development is often incorrectly recognized. Acquired goodwill or intangibles have also been impaired in the same reporting period or fiscal year as the business combination or asset acquisition without explanation. Furthermore, the nature and financial effect of a business combination and the goodwill or intangible assets acquired (and in some cases, the associated impairment loss) are often not sufficiently explained.

Disclosure related to business combinations must be prepared in accordance with IFRS 3 Business Combinations, and issuers should provide a qualitative description of the factors that make up any recognized goodwill. The acquisition of intangible assets must be disclosed in accordance with IAS 38 Intangible Assets, and an intangible asset should only be recognized if it meets the relevant definition and recognition criteria. Any significant impairment loss for these items must be disclosed in accordance with IAS 36 Impairment of Assets and should be presented based on reasonable and supportable assumptions. Where the acquisition and impairment occur in the same reporting period or fiscal year, an analysis of the impairment loss should be included in the issuer’s MD&A. Since any large differences between consideration paid and fair value will likely be subject to increased regulatory scrutiny, an issuer’s MD&A should explain the rationale for acquiring these assets and provide information and assumptions about the assets themselves, including estimated development expenditures and other relevant details.

Expected Credit Losses

Some issuers have incorrectly applied the impairment requirements for the recognition and measurement of loss allowances for expected credit losses in their financial statements. Additionally, some issuers did not sufficiently disclose information relating to the nature and extent of credit risks of the related financial assets.

In addition to applying the correct method for measuring loss allowances for certain financial assets, issuers should provide in their financial statements and MD&A an explanation of inputs, assumptions, and estimation techniques used to measure expected credit losses and disclose the effects of collateral and other credit enhancements on these amounts. Additionally, the nature and extent of any risks arising from financial instruments should be described, as well as the issuer’s credit risk management practices and how they relate to these risks and expected credit losses.

Revenue from Contracts with Customers and Disaggregation of Revenues

The CSA continues to see issuers failing to disclose disaggregation of revenue into categories, which is necessary to enable investors to understand how specific revenue streams and cash flows are affected by economic factors. Issuers may need to use more than one type of category to meet the objectives of this disclosure. Furthermore, IFRS does not contain an exemption from prescribed disclosure where it is considered by the issuer to be “commercially sensitive”. The CSA also recommends that an analysis of the disaggregation of revenue be included in an issuer’s MD&A to provide a clearer picture of changes in total revenue.

Forward-Looking Information and Financial Outlooks

Issuers have been seen disclosing forward-looking information (“FLI”) without the support of reasonable assumptions or disclosure of relevant and material risk factors. Additionally, financial projections have been disclosed for unreasonably long time periods, and some issuers have failed to provide updates in their MD&A to disclose actual results against previously disclosed FLI. For context, the CSA’s position is that FLI should not generally extend to periods beyond the end of an issuer’s next fiscal year.[1]

As with all FLI, issuers must have a reasonable basis for its disclosure in the MD&A and must describe all material factors or assumptions underlying the information after considering the issuer’s financial condition, operational status, capacity, and other factors. Risks that may result in variations to FLI must be identified and disclosed if they are material and reasonably foreseeable. Furthermore, events that have occurred during the relevant period that are reasonably likely to cause actual results to differ from previously disclosed FLI or projections must be clearly discussed. Where previously disclosed FLI is withdrawn, the issuer must describe in its MD&A the events and circumstances that led to this decision, including any underlying assumptions that are no longer valid.

Discussion of Operations

The use of boilerplate disclosure has resulted in issuers failing to meaningfully describe their operations. Issuers must provide in their MD&A sufficient information to enable investors to clearly understand the company’s operations for the relevant period, including risks and uncertainties that may affect future operations, factors that led to variations in performance, key financial metrics, and significant projects that are not yet revenue-generating.

Discussion of Liquidity and Capital Resources

MD&As often lack issuer-specific details or sufficient contextual information regarding liquidity and capital resources, as issuers must provide clear explanations for how the company will satisfy both short and long-term liquidity needs and capital commitments. Any defaults or arrears (or significant risk thereof) and how the company intends to cure or address them must be discussed as required by Form 51-102F1 – Management’s Discussion and Analysis.

Other Regulatory Deficiencies

Material Contracts

The CSA noted that it often identifies material contracts (or amendments thereto) that have not been filed as required by NI 51-102, as well as material contracts that have been filed but with inappropriate redactions. The CSA encourages issuers to file material contracts as soon as they have been determined to be material. Omitted or redacted provisions must be a result of a reasonable belief that including them would be seriously prejudicial to the interests of the issuer or would violate a confidentiality provision, and disclosure obligations should be considered when negotiating material contracts with third parties. If a provision is omitted or redacted, the issuer must describe the type of information that has been omitted or redacted next to the redaction in the material contract.

Material Change Reports

Issuers have been found to have failed to identify and report material events or information as a material change as required under NI 51-102. Additionally, issuers have also not filed material change reports (“MCRs”) on a timely basis or failed to disclose sufficient information about the material change in their MCRs. The CSA notes that MCRs should explain all significant facts relating to the material change, information about the time and resources required for the change, and any obstacles or obligations associated with realizing the change. Reproducing disclosure provided in the issuer’s related news release may not be sufficient to comply with the requirements of Form 51-102F3 – Material Change Report, which should be carefully reviewed to ensure proper disclosure.

General Disclosure Deficiencies

Overly Promotional Disclosure: “AI Washing” and “Greenwashing”

The CSA has observed over recent years that promotional activities have led issuers to disclose information that is either untrue or unbalanced, resulting in the potential misleading of investors. This is particularly prominent with “AI Washing” and “Greenwashing”, which describe the making of false, misleading or exaggerated claims regarding the implementation of AI systems or environmental/sustainability efforts, respectively. These statements seek to capitalize on increased investor interest in these topics and often can be unsubstantiated. Statements regarding the use of AI and environmental, social, and governance (“ESG”) efforts must include supportable metrics and additional details regarding the extent to which they are implemented in particular aspects of the issuer’s business, as well as how they are or will be measured and evaluated. Where statements regarding AI and ESG are forward-looking, issuers must have a reasonable basis for this information and include relevant risk factors, assumptions, and policies for updating the information as required with respect to FLI in general. Issuers should be cautious in using broad language such as “leading”, “ethical”, and “green” as these terms and their underlying factors must be clearly defined so as to not mislead investors.

For more details on greenwashing, please see our previous bulletin on the topic, Reporting Issuers Need to be Factual and Balanced, Striving for Accurate and Comprehensive ESG Reporting.

Mineral Project Disclosure Deficiencies – Form 43-101F1 Technical Reports

In fiscal 2024 and 2023, CSA reviews resulted in 8% of all technical reports (115 reports) filed pursuant to NI 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) being (i) refiled due to material non-compliance with NI 43-101 and Form 43-101F1 – Technical Reports or (ii) filed for the first time as no technical report was filed to support an issuer’s technical disclosure. The CSA noted a number of common deficiencies, including, among others, reliance on technical information prepared by third parties beyond allowable limits, inadequate data verification, and insufficient disclosure regarding sample preparation and analysis.

Moving Forward

The Staff Notice provides examples comparing inadequate disclosure with appropriate, issuer-specific disclosure to illustrate many of its observations as described above. To improve compliance with continuous disclosure obligations, issuers are encouraged to review their disclosure policies and practices with reference to the CSA’s recent findings.

For any questions regarding continuous disclosure requirements, please contact a member of our Capital Markets and Securities Group.

[1] Companion Policy 51-102CP – Continuous Disclosure Obligations, section 4A.8.

by Jeffrey Gebert and Zach Lechner-Sung

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024