CHAPMAN TRIPP SUBMISSION ON IMPROVING FINANCIAL INFORMATION IN AN EQUITY PDS 1 The Financial Markets Authority (FMA) proposes to publish a guidance note regarding
disclosing financial information in equity PDSs in a clear, concise and effective manner. 2 We have set out our submission as a response to the questions asked in the
consultation paper. In summary, we think the guidance could go further to ensure unnecessary footnotes are removed. 3 Please contact us should you wish to discuss our submissions and the reasoning behind them.
Where do you agree with our guidance?
We agree that the financial information section has been unnecessarily complicated in a number of PDS, but we suspect that we have a different view on the reasons why this is the case. We've outlined this in more detail below.
We agree that the focus of the PDS needs to be on providing user-friendly information for the prudent, but non-expert, investor and this underpins a number of our comments below.
Where do you disagree with our guidance?
We disagree that the FMA's proposed guidance will remove crowded financial tables and complex footnotes. A number of these footnotes have been included to reflect current FMA guidance around the use of non-GAAP financial information, and including statements about which measures are non-GAAP and where reconciliations can be found and so on.
Going back to the purpose of the PDS, we query whether these footnotes actually add anything to the prudent, but non-expert, investor. As we submitted on the non-GAAP guidance consultation, we think a far better approach is to include a single cross reference to a document on the Disclose Register that includes full non-GAAP and/or pro forma reconciliations. This would make the financial information section of the PDS more clear and concise, while still providing an easy way for investors to access more detailed financial information if this is of interest to them (and is something that they are able to make their own assessment of).
Including reconciliations on the Disclose Register also avoids cutting across the FMC Regulations. In particular, clause 39(i)(ii) and (m)(iv) explicitly require the PDS to refer to where GAAP reconciliations can be found on the offer register. If this information is also included in the PDS, there is a duplication of information, which may make investors less likely to read the full financial information on the offer register and is also inconsistent with the FMC Regulations.
The FMA's proposed guidance would therefore have the effect of changing regulatory decisions made in enacting the FMC Regulations. We think the regulations get the position right.
For example, the regulatory impact statement at the time the regulations were approved noted that "Given the limited capacity of most retail investors to process financial information, we do not consider that adding more detailed financial information to the PDS means that retail investors are likely to be better informed about the financial condition of the issuer".
Do you think our guidance will result in high quality information for investors?
No. For the reasons we have outlined above, we think that the likely result of the FMA's guidance is to be a proliferation of additional explanatory footnotes, the repetition of non-GAAP reconciliations in both the PDS and the Disclose Register and limited changes that will provide any practical benefit to the target audience for a PDS.
Are there situations where you think our guidance would lead to information that was not appropriate for investors?
Yes see our earlier comments.
Do you agree with our interpretation of when to add and/or substitute information?
No see below.
If you disagree, please outline what you would consider the appropriate interpretation to be?
The main issue we have the FMA's interpretation is that it does not address the interaction between cl 39(f) and (l) of schedule 3. In particular, cl 39(l) allows pro forma financial information to be substituted for financial information for a period (without placing any limit on what financial information can be substituted). On the other hand, cl 39(f) only allows EBITDA or debt to be substituted. We are aware that the FMA has previously taken the view that cl 39(f) means that an issuer cannot rely upon cl 39(l) to, for example, replace GAAP net profit with pro forma net profit.
This interpretation is not readily apparent from the face of the regulations, nor from the FMA's proposed guidance, so if this is still the FMA's position it should be expressly spelled out that, notwithstanding the wording of cl 39(l), the FMA's view is that pro forma financial information cannot be substituted for GAAP net profit or total debt. We note that restricting issuers from substituting GAAP net profit or total debt would have the effect of increasing the length of the financial information section, as any issuer that wished to use pro forma financial information would also have to include GAAP financial information (in circumstances where the issuer has already formed the view that there are factors that materially affect the comparability or usefulness of the information).
We also disagree with the FMA's interpretation of factors that would "materially affect the comparability or usefulness of the information". We think that the word "usefulness" does not necessarily require a "fundamental change" to the issuer's business. Financial information may well be materially more useful to investors if it has appropriate pro forma adjustments made to it, even if there is not a "fundamental change" to the issuer's business.
Finally, we note that the sentence "However, if an issuer wants to substitute EBITDA or debt, they must reasonably consider that the replacement measure is more useful than EBITDA or debt (as applicable)" is missing the words "likely to be" that appear in the FMC Regulations. The FMA's guidance appears to impose a higher standard than is required under the wording of the FMC Regulations.
Again, we note that the FMA should not be purporting to contradict or supersede the FMC Regulations through guidance notes.
Are there additional areas or specific examples where you think we should provide guidance?
We think the FMA could provide guidance around the manner in which issuers designate pro forma financial information, prospective financial information and actual financial information.
In this respect, we noted that a recent PDS included a defined term of "PF", which noted that the inclusion of "PF" after a reference to a financial period is an indication that it is a "Pro forma" period.
We think this is likely to lead to confusion for example, the recent PDS that we saw had at least one table which did not have any "PF" headings listed in the heading (but included pro forma financial information and referred to "PF" in footnotes), and equally had at least table which included "statutory NPAT per security" for a "PF" period. It is impossible for a reader to determine whether they should be taking the "PF" or the "statutory" as being the determining factor.
After reading the FMA's guidance, we suspect that this may have been an attempt to comply with the FMA's comments about including pro-forma information "for a period". However, we do not think this is the most helpful way of presenting this to investors instead, it makes sense to make the necessary pro forma adjustments consistently and appropriately across all of the financial information for a period, and then label those measures that have been adjusted as "pro forma". If adjustments are not necessary to a specific measure, then it should not be labelled as "pro forma".
Any confusion is only heightened where an issuer has separately defined "F" as indicating a forecast period, as it becomes very unclear whether information is forecast, pro forma or both. It makes more sense to include "F" after a year, as this relates to the timing of the information, whereas pro forma financial information can be historic or prospective, so it is confusing to put an identifier as to whether it is pro forma immediately following the year.
As such, we think that the FMA should put out guidance that issuers should not use "PF" after a financial year to signal pro forma financial information, as this has the potential to be easily confused with the more commonly used "F".