Following a review to assess the overall quality of forwardlooking information (“FLI”) of 60 Ontario reporting issuers, the Ontario Securities Commission (“OSC”) released Staff Notice 51-721 Forward-Looking Information Disclosure on June 13, 2013 (the “Staff Notice”). The Staff Notice clarifies the disclosure requirements related to FLI, provides disclosure examples and highlights common areas of non-compliance.
The OSC’s review noted four common areas where improvement of FLI disclosure is required:
- identifying FLI clearly;
- disclosing the material factors or assumptions used to develop FLI;
- updating previously disclosed FLI; and
- comparing actual results to future oriented financial information (“FOFI”) or financial outlook previously disclosed.
FLI is disclosure about possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action. FLI includes both FOFI and financial outlook. The Staff Notice breaks down the disclosure requirements related to FLI into two main parts: (a) requirements relating to the initial disclosure of FLI; and (b) requirements relating to the ongoing obligations to update, compare to actual results and, if appropriate, withdraw previously disclosed FLI.
Clear Identification of FLI
Section 4A.3 of NI 51-102 requires reporting issuers to clearly identify material FLI. The Staff Notice stresses that generic or boilerplate disclosure that identifies FLI by words such as “believes”, “may”, “likely”, “plans”, or similar words, are frequent examples of non-compliant disclosure.
The OSC indicates that disclosure of FLI should be entityspecific. The Staff Notice suggests that specific sections of the MD&A which contain FLI be identified in the disclosure. The Staff Notice also advises that specific events, activities or developments the company anticipates may occur in the future be clearly identified in the disclosure. An example of entity-specific disclosure is, “This MD&A includes, but is not limited to, forward-looking statements regarding: the ability to meet its working capital needs for the twelve-month period ending December 31, 2013…”. Here, the FLI is clearly identified so the information is understood not to be historical.
Disclosure of Material Facts or Assumptions used to Develop FLI
According to the Staff Notice, specific relevant factors or assumptions including material risk factors underlying the FLI should be disclosed. These underlying assumptions should be carefully analyzed, and they should be reasonable, supportable, entity specific and tied to FLI. Assumptions should also be quantified.
The Staff Notice notes that blanket statements such as, “In fiscal 2013, the Company anticipates meeting the following target: Total sales to increase by 5.0% to 6.0%”, is a common example of non-compliant disclosure.
The Staff Notice suggests including a description of key specific risk factors and assumptions that the expectation is based upon. A suggested improvement to the above target is, “In fiscal 2013, the Company anticipates meeting the following target: Total sales to increase by 5.0% to 6.0%. This expectation is based on same-store sales growth of between 3% and 4% and the introduction of new brands to our city centre store”.
The Staff Notice also suggests using a table format to clearly identify FLI statements and disclose relevant and specific material risk factors and assumptions. For example, the table can include the FLI statement, assumptions and risk factors, each in separate columns for easy identification.
Updating Previously Disclosed FLI
Section 5.8 NI 51-102 requires reporting issuers to discuss in the company’s MD&A or in a press release events and circumstances that are reasonably likely to cause actual results to differ materially from previously disclosed FLI. Reporting issuers must also disclose expected differences from targets. Events can include economic and market events that may cause actual results to differ materially from previous targets. Issuers should also include a quantified discussion. The Staff Notice cautions against updating previously disclosed FLI without also disclosing events or circumstances that occurred during the period and how that impacted the target. For example, instead of providing a boilerplate update such as, “Gold production target for 2013 has been increased to 70,000 to 80,000 gold ounces”, the reporting issuer should include a discussion of the event that occurred and the impact it had on the original target. Updated risks and assumptions should also be included.
The Staff Notice notes that tables can be an effective strategy to clearly communicate FLI and update the information.
Comparison of Actual Results vs. FOFI and Financial Outlook in MD&A
Subsection 5.8(4) of NI 51-102 requires reporting issuers to provide a comparison of actual results to previously disclosed FOFI and financial outlook if actual amounts differ materially. The discussion should be comprehensive, entity-specific and include both qualitative and quantitative explanations of the material differences. For instance, instead of simply providing the results such as, “ABC Company achieved sales growth of 10.5% in 2012”, the disclosure should provide a comprehensive discussion comparing actual results to those previously disclosed.
The Staff Notice provides the following practice points to assist in promoting clear, transparent disclosure for FLI:
- a. Quality of assumptions: Assumptions should be reasonable and specific to the reporting issuer. Qualitative and quantitative assumptions should be provided;
- Timely updating of ongoing progress: Affirmation of targets, disclosure of affected material differences, and updates on trends likely to impact future performance should be updated on a timely basis;
- Key Performance Indicators (“KPIs”) – financial and non-financial: KPIs should be disclosed, as they can help investors understand how well an issuer is progressing towards their objectives. Examples of KPIs include: customer retention, capital expenditures, same store sales, and exploration success rate;
- Separate Presentation: A separate section of FLI, set out in a table that identifies objectives, key specific assumptions and risks will enable investors to easily identify the information that constitutes material FLI, as well as clarify the relationship between the underlying key components and the FLI; and,
- Role of the Audit Committee and Board of Directors: The audit committee and board of directors should consider reviewing and approving all FLI disclosure before it is publicly disclosed.
Alyssa Gebert is currently a summer student at Aird & Berlis LLP.