Effective December 31, 2007, the Canadian Securities Administrators are amending several national instruments and forms which will implement new requirements for forward-looking information, including future-oriented financial information (FOFI) and financial outlooks such as earnings guidance. The amendments are intended to improve the quality and consistency of forward-looking information and will apply to all forward-looking information (other than oral statements). All requirements for forward-looking information will be contained in National Instrument 51-102 – Continuous Disclosure (the Continuous Disclosure Instrument). Although National Policy 48 – Future-Oriented Financial Information (NP 48) will be rescinded, the amendments to the Continuous Disclosure Instrument substantially maintain the requirements for FOFI currently contained in NP 48—extending their applicability to other types of future-oriented information, such as earnings guidance and other financial outlooks—but do not require an auditor’s report to accompany FOFI in an offering document.
The CSA last attempted to re-formulate NP 48 as a national rule in July 1997. The proposed rule, which never came into force, was to apply only to the dissemination of FOFI in specified offering and disclosure documents in connection with the distribution of securities or a transaction involving an issuer. The broader scope of the amendments likely reflects the growth over the last ten years in the practice of providing financial outlooks or guidance to the secondary market.
The following is a summary of the new requirements.
AMENDMENTS TO THE CONTINUOUS DISCLOSURE INSTRUMENT AND ITS COMPANION POLICY
Definitions: There are three key definitions that are relevant to the new requirements. “Forward-looking information” is defined as “disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action and includes future-oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented as a forecast or a projection.” This definition is identical to the definition currently contained in the Securities Act (Ontario).
The term “financial outlook” means “forward-looking information about prospective results of operations, financial position or cash flows that is based on assumptions about future economic conditions and courses of action and that is not presented in the format of a historical balance sheet, income statement or cash flow statement”. Examples of financial outlooks include expected revenues, net income, earnings per share and R&D spending. A financial outlook relating to earnings is commonly referred to as “earnings guidance”.
The term “future-oriented financial information” or “FOFI” is defined to mean “forward-looking information about prospective results of operations, financial position and/or cash flows, based on assumptions about future economic performance and courses of action, and presented in the format of a historical balance sheet, income statement or cash flow statement.”
Application of the Amendments: The amendments apply to forward-looking information that is disclosed by a reporting issuer. They do not apply to forward-looking information contained in oral statements. The Companion Policy to the Continuous Disclosure Instrument (the Companion Policy) has been amended to indicate that reporting issuers should consider broadly the various instances of forward-looking information made available to the public in considering the scope of forward-looking information that is disclosed. Examples include:
- information that an issuer files with securities regulators
- information contained in a press release of an issuer
- information published on an issuer’s website
- information published in marketing or similar materials prepared or distributed to the public by an issuer.
Preparation of Forward-looking Information: Reporting issuers are required to have a “reasonable basis” for any forward-looking information they disclose. The Companion Policy indicates that, when interpreting “reasonable basis”, issuers should consider both the reasonableness of the assumptions underlying the information and the process followed in preparing and reviewing such information.
Required Disclosure Accompanying Material Forward-looking Information: Material forward-looking information will be required to include disclosure that:
- identifies the information as forward-looking information;
- cautions users that actual results may vary and identifies material risk factors that could cause actual results to differ materially from the information;
- states the material factors or assumptions used to develop the information; and
- describes the issuer’s policy for updating the information if it includes procedures in addition to those described under the heading “Updating of Material Forward-looking Information” below.
These disclosure requirements are based in part on the “safe harbour” provision contained in the December 31, 2005 amendments to the Securities Act (Ontario), which introduced statutory civil liability for misrepresentations in secondary market disclosures.
The required disclosure should be presented in a manner that allows an investor who reads the document containing the forward-looking information to be able to readily (i) understand that such information is being provided in the document, (ii) identify the forward-looking information, and (iii) inform himself or herself of the material underlying assumptions and material associated risk factors.
In determining whether forward-looking information is material, the Companion Policy states that reporting issuers should exercise judgment and suggests that if a reasonable investor’s decision whether or not to buy, sell or hold securities of the issuer would be influenced or changed if the information were omitted or misstated, then the information is likely to be material. The Companion Policy further states that it is the CSA's view that FOFI and most financial outlooks are material. Other forward-looking information (e.g., an estimate of future store openings for a retail company) may or may not be material depending upon the application of the above “reasonable investor” materiality standard.
Preparation of FOFI and Financial Outlooks and Accompanying Disclosure: In preparing FOFI or a financial outlook, a reporting issuer will be required to:
(a) use assumptions that are reasonable in the circumstances (the Companion Policy provides that management should satisfy itself that the assumptions are appropriate as at the date of disclosure of the material forward-looking information even though such information may have been prepared at an earlier time and may be based on information accumulated over a period of time;
(b) limit the period covered by the FOFI or financial outlook to one for which such information can be reasonably estimated (the Companion Policy provides that in many cases the period will not extend beyond the end of the issuer’s next fiscal year);
(c) use accounting policies that the issuer expects to use in preparing its historical financial statements for such period;
(d) disclose the date on which management approved the FOFI or financial outlook if this information is undated; and
(e) explain the purpose for the FOFI or financial outlook and caution that such information may not be appropriate for other purposes.
Updating of Material Forward-Looking Information: Reporting issuers must discuss in their MD&A disclosure events and circumstances that occurred during the MD&A period that are reasonably likely to cause actual results to differ materially from previously disclosed material forward-looking information for a period that is not yet complete. Issuers are also required to discuss the expected differences. The Companion Policy instructs issuers to consider whether the events and circumstances that trigger such MD&A disclosure also trigger the material change reporting requirements under the Continuous Disclosure Instrument. Where the required updating has been disclosed in a press release of the issuer issued and filed before the filing of its MD&A, the updating need not be repeated if the press release is referenced in the MD&A in the manner prescribed by the amendments.
Comparison of FOFI and Financial Outlooks to Actual Results: Reporting issuers must disclose in their MD&A material differences between their actual results and any previously disclosed FOFI or financial outlooks for the period to which the MD&A relates. The disclosure should cover differences for material individual items included in the FOFI or financial outlook, including assumptions. For example, if the actual dollar amount of revenue approximates forecasted revenue but the sales mix or sales volume differs materially from what the issuer expected, the differences should be explained.
Withdrawal of Forward-Looking Information: Reporting issuers must disclose in their MD&A if a decision was made during the MD&A period to withdraw previously disclosed material forward-looking information and discuss the events and circumstances that led to such decision, including any underlying assumptions that are no longer valid. The Companion Policy also instructs issuers to consider whether the events and circumstances that trigger such MD&A disclosure also trigger the material change reporting requirements under the Continuous Disclosure Instrument.
No Audit Report on FOFI in an Offering Document: The amendments remove the requirement in NP 48 that an auditor’s report must accompany any FOFI included in a prospectus or other offering document.
Exemption for oil and gas and mining issuers: The requirements for FOFI and financial outlooks and disclosure in MD&A regarding the updating, comparison to actual results and withdrawal do not apply to disclosure that is subject to the requirements of National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities or National Instrument 43-101 – Standards of Disclosure for Mineral Projects or the conditions of any exemption from those instruments.
Form 51-102F1 – Management’s Discussion & Analysis is amended to reflect that the requirements for forward-looking information are in the Continuous Disclosure Instrument. In addition, the following forms are being amended to require that forward-looking information included in an offering document (prospectus, rights offering circular or offering memorandum) comply with the preparation and disclosure requirements set out in the Continuous Disclosure Instrument:
- Form 44-101F1 – Short Form Prospectus
- Form 45-101F – Information Required in a Rights Offering Circular
- Form 45-106F2 – Offering Memorandum for Non-Qualifying Issuers
- Form 45-106F3 – Offering Memorandum for Qualifying Issuers
To access a copy of the amendments, please click here.