The ASX has just released updated Guidance Note 8 (Updated GN8) on continuous disclosure in connection with the operation of ASX Listing Rules 3.1 – 3.1B. The updated guidance note provides listed entities with more fulsome guidance on earnings surprises and post-balance date events, providing earnings guidance, analyst forecasts and consensus estimates, and investor briefings. The Updated GN8 clarifies the different approaches to be taken by listed entities that have provided earnings guidance and those who have not.
Following the extensive re-write of Guidance Note 8 in 2013, there was concern that some entities had misinterpreted the updated guidance note and were under the misapprehension that small differences between internal earnings projections and analyst forecasts may give rise to an obligation to provide disclosure under LR 3.1. The new Updated GN8 incorporates feedback on the consultation draft released in March, and seeks to address these concerns over misinterpretation. The final version of the Updated GN8 is largely consistent with the consultation version, which was well-received by industry.
In light of the final publication of the Updated GN8, we have highlighted seven key points for listed entities heading into the new financial year and the lead up to the reporting season in dealing with disclosure issues related to earnings guidance, earnings surprises and investor and analyst briefings.
- Treat internal budgets and earnings forecasts with caution
- Remember that you have discretion regarding providing earnings guidance
- Assess materiality before providing any updated earnings guidance
- Note that there is no general obligation to correct analyst forecasts and consensus estimates
- Beware of providing de facto earnings guidance
- Don’t forget that any information provided at selective briefings should first be provided to the ASX
- Consider a review of your continuous disclosure policies and systems
Treat internal budgets and earnings forecasts with caution
Entities are not required to release internal budgets or earnings projections to the market. The ASX has confirmed that as these documents are generated for internal management purposes only, providing they remain confidential, they clearly fit within the carve-outs to immediate disclosure under LR 3.1A.
As a corollary, entities should guard the confidentiality of internal budgets and earnings projections. Entities may disclose management accounts and internal budgets and forecasts to bankers, insurers or rating agencies without having to disclose that information to the market, provided the information remains confidential.
Therefore, entities should have adequate and effective arrangements in place to ensure that advisors and other third parties who selectively receive internal budgets or earnings projections are subject to confidentiality obligations. This is especially important if a listed entity does not provide earnings guidance. This will safeguard and preserve the confidentiality of the information and ensure that entities are not required to disclose internal management accounts or earnings projections by the loss of confidentiality of such information.
Entities have discretion regarding providing earnings guidance
A listed entity may decide whether or not it will provide any earnings guidance. The ASX has stated that it is perfectly acceptable for a listed entity to have a policy of not providing earnings guidance to the market.
Regardless of whether or not a listed entity has provided earnings guidance for the current reporting period, however, the entity will need to monitor the market expectations of its earnings in order to respond appropriately to any earnings surprises in the market and post-balance date events.
Assess materiality before providing any updated earnings guidance
The ASX has clarified that earnings surprises and post-balance date events will only need to be disclosed under LR 3.1 if they are deemed to be market sensitive. That is, where reported earnings are expected to differ so significantly from market expectations that a reasonable person would expect information about its reported earnings to have a material effect on the price or value of its securities.
In determining what is market sensitive, the ASX has noted that an entity should consider the extent of any earnings surprise, and whether it relates to earnings guidance published by the entity or to some other measure of expected earnings (e.g. analyst forecasts, which are seen as less reliable than earnings guidance provided by the entity itself).
The ASX has provided guidance as to how a listed entity should respond where market expectations of earnings differ to the entity’s own assessment. The test for whether a variation is a market sensitive difference will depend on whether the entity has published earnings guidance or not.
Where an entity has published earnings guidance for the current reporting period, the ASX recommends that the entity consider updating its published earnings guidance for the current reporting period only if and when it expects there to be a material difference between its actual or projected earnings for the period and the guidance that it has given to the market to date. The ASX suggests the following materiality levels:
- an expected variation of equal to or greater than 10% between market expected earnings and the entity’s published guidance should be treated as material and entities should provide updated earnings guidance; and
- an expected variation of equal to or less than 5% in market expected earnings and the entity’s published guidance should be treated as not being material and accordingly guidance therefore does not need updating,
unless, in either case, there is evidence or convincing argument to the contrary. Where the expected earnings variation is between 5% and 10%, entities need to form a judgment as to whether or not the variation is material taking into account all relevant factors.
The test for when an earnings surprise is market sensitive for entities which have not published earnings guidance is more fluid. The ASX did not consider it appropriate to set out a general rule of percentages on when a difference in actual or project earnings compared to market expectations are to be considered to be market sensitive.
The fact that the actual or projected earnings at a point in time of these entities may differ (if they are covered by sell-side analysts, by 5 – 10% from analyst forecasts or, if they are not covered by sell-side analysts, by 5 – 10% from their earnings for the prior corresponding period) will not necessarily be market sensitive and therefore will not necessarily require disclosure to the market under LR 3.1.
The Updated GN8 sets out the following queries to assist listed entities that have not published earnings guidance in determining whether the difference is market sensitive:
- in determining whether an earnings surprise is market sensitive, officers of listed entities should consider whether the information would influence their decision to buy or sell securities at their current price; and
- whether they would feel exposed to an insider trading action if they were to buy or sell securities knowing the undisclosed information.
No general obligation to correct analyst forecasts and consensus estimates
Although the ASX recommends that entities monitor analyst forecasts and consensus estimates to help gauge market expectations, the ASX has confirmed than an entity does not have any obligation to correct the earnings forecast of any individual analyst, or the consensus estimate of any individual market data vendor, to bring it into line with the entity’s internal earnings projections. Further, an entity does not have any obligation to publish its internal earnings projections just because they differ from an analyst’s forecast or consensus estimate.
An exception to this is where an entity has not issued earnings guidance for the period, and has become aware that earnings for current reporting period are likely to differ so significantly from market expectations that information about that difference is market sensitive.
Beware of providing de facto earnings guidance
With very few exceptions, single analyst forecasts and consensus estimates are not required to be published as ASX announcements. In fact, the ASX suggests that generally such information should not be published as an ASX announcement, as the act of publishing an analyst forecast or consensus estimate constitutes an implied endorsement, and therefore is de facto earnings guidance.
Market expectation as to earnings may also be influenced by outlook statements published in annual reports and results, as well as other public disclosures made by the entity. Entities should consider the market expectations these disclosures set.
As for broker research reports, the ASX warns that entities are not to use announcements under LR 3.1 as a guise to publish material about the entity and its securities that is promotional. So, with very few exceptions, entities should not submit to the ASX broker research report about themselves. In any case, any market sensitive fact-based material in such a report should have already been released to the ASX.
The ASX cautions that there are also risks associated with publishing analyst forecasts and consensus estimates, as well as discussing particular analyst forecasts and consensus estimates. In particular, the risk that there is a tacit representation that certain forecasts and estimates represent an entity’s own assessment of its earnings. This risk is heightened if the entity has selective discussions with analysts or investors referring to the estimates.
However, should an entity wish to publish analyst forecasts and consensus estimates, the ASX provides guidance as to the appropriate method for doing so to avoid the implication that the entity is providing de facto earnings guidance. The ASX advises that entities should publish either a list of all analyst forecasts known to be covering the entity’s securities, or a range showing the low, average (or consensus) and high earnings forecasts of the known analysts. This information should be accompanied with a disclaimer that the entity does not endorse, confirm or express a view as to the accuracy of the forecasts nor does it make any representation that its earnings will fall within the range of forecasts provided.
Any information provided at selective briefings should first be provided to the ASX
The ASX has cautioned that entities must be careful not to disclose at analyst or investor briefings any market sensitive information that has not been disclosed to the market as an ASX announcement.
In fact, even if an entity thinks that such a briefing does not contain market sensitive information that has not already been released, entities are advised to give the briefing information to the ASX first to avoid any dispute about whether the information is market sensitive.
Next steps – consider a review of your continuous disclosure policies and systems
Continuous disclosure and selective disclosure of earnings and results has been an area of focus for the ASX and ASIC.
This is a timely reminder for entities to be aware of their obligations to monitor market expectations of earnings, to be cognisant of any representations made as to earnings and results, and to update the market when market sensitive earnings surprises arise. Entities should review their existing continuous disclosure policies and practices to ensure that they are laying a strong foundation for providing all relevant information to the market.