On November 20, 2009, the Canadian Securities Administrators (“CSA”) published NI 51-330 (the “Guidance”) regarding the forward-looking information (“FLI”) requirements in National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”). The Guidance focuses on areas where CSA identified deficiencies, as well as areas where they think disclosure of FLI can be enhanced. In addition, the Guidance also provides a reminder to issuers of the potential impact of the transition to International Financial Reporting Standards (“IFRS”) on disclosure of future-oriented financial information (“FOFI”) and “financial outlooks”. The following is a synopsis of the Guidance.
1. Identification of FLI
Section 4A.3 of NI 51-102 requires reporting issuers to identify material FLI as such. NI 51-102 does not prescribe the manner in which an issuer is required to identify material FLI. Section 4A.4 of the Companion Policy to NI 51-102 (“51-102CP”) provides guidance that the disclosure should be presented in a manner that allows an investor who reads the document or other material containing the FLI to be able to readily identify the material FLI.
Issuers take different approaches to identification. Many issuers identify the material FLI solely through a cautionary paragraph at the beginning or end of the disclosure document. Some issuers included disclosure throughout the document identifying material FLI as it was used. In some cases, issuers consolidated most of their FLI in a particular section such as an “Outlook” section or in a table and then included, in the introduction to this section or table, disclosure identifying the material FLI as such.
Where issuers identify material FLI through a cautionary paragraph at the beginning or end of a disclosure document, the Guidance encourages issuers to give readers an indication of the nature of the material FLI covered in the document. In CSA’s view, this type of disclosure allows an investor to more readily identify material FLI when it is encountered in the document. General statements that the document contains FLI is not considered by the Guidance to be sufficient to allow readers to identify the FLI.
The following is an example of an effective method of identifying material FLI in that it identifies the nature of the material FLI included in the document:
Forward-looking statements included or incorporated by reference in this document include statements with respect to:
- the Company’s acquisition strategy, including acquisition criteria and acquisition benefits;
- the Company’s goal to sustain or grow production and reserves through prudent management and acquisitions;
- expectations regarding the ability to raise capital and continually add to reserves through acquisition and development;
Some issuers add to each disclosure document a statement that FLI is included when in fact no FLI is included. The Guidance encourages issuers to avoid including statements that a document contains FLI when to the issuer’s knowledge that is not the case.
2. Disclosure regarding material risk factors and material factors or assumptions
(a) Identification of material risk factors and material factors or assumptions
Section 4A.3 of NI 51-102 requires reporting issuers that disclose material FLI to include disclosure that identifies material risk factors that could cause actual results to differ materially from the FLI. The disclosure must also include material factors or assumptions used to develop material FLI. Section 4A.4 of 51-102CP provides guidance that this disclosure should allow an investor who reads the document or other material containing the FLI to be able to readily inform himself or herself of the material assumptions underlying the FLI and the material risk factors associated with it.
(b) Incorporation by reference of relevant material risk factors and material factors or assumptions
The NI 51-102 FLI requirements do not preclude an issuer from incorporating by reference material risk factors and material factors or assumptions contained in another document. However, issuers should consider whether incorporation by reference, in the circumstances, enables a reader to readily inform himself or herself of the material risk factors, and material factors or assumptions, associated with the material FLI.
(c) Avoiding “boilerplate” disclosure
Issuers often include identical or nearly identical risk factor/factors and assumptions disclosure in each of their disclosure documents or other material despite differences in the nature of the FLI contained in the particular document or material. Issuers should avoid “boilerplate” disclosure and should disclose material risk factors and material factors and assumptions that are relevant to the FLI (see sections 4A.5(1) and 4A.6 of 51-102CP).
(d) User-friendly presentation
Issuers should consider using tables and other methods of presentation that clearly link specific material risk factors and material factors and assumptions to the particular FLI. For example:
The following table outlines forward-looking information included in this MD&A:
|Forward-looking Information||Key Assumptions||Most Relevant Risk Factors|
|2009 capital spending program|
|Ability to finance announced projects|
3. Updating practices
Some issuers included a statement similar to the following in their disclosure:
The Company does not assume any obligation to update forward-looking statements if management beliefs, expectations or opinions should change.
This type of statement is inappropriate as section 5.8(2) of NI 51-102 provides that issuers must update previously disclosed FLI in certain circumstances. Issuers should ensure that their policy for updating FLI is in compliance with the NI 51-102 FLI requirements.
4. Explanation of purpose of, and cautionary language related to, financial outlook or FOFI
Section 4B.3(b) of NI 51-102 requires reporting issuers that disclose FOFI or a financial outlook, to also disclose the purpose of the information and caution readers that the information may not be appropriate for other purposes. This requirement is in addition to the material risk factors and material factors or assumptions disclosure required by section 4A.3 of the Rule. Disclosure of material risk factors and material factors or assumptions contained in a cautionary paragraph at the beginning or end of a document generally will not satisfy this requirement.
5. Disclosure regarding goals or targets
Under securities legislation in all Canadian jurisdictions, FLI means “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 either as a forecast or a projection”.
In order to constitute FLI, the achievement of the target or goal would have to be “possible” based on assumptions about future economic conditions and courses of action. A reporting issuer should disclose a target or goal only if it is possible to achieve. Consequently, a disclosed target or goal can constitute FLI and, if material, the document containing the FLI should include disclosure regarding this goal or target that complies with the FLI requirements. This would include disclosure required under Part 4B of NI 51-102 in the circumstances that a disclosed target or goal also constitutes a financial outlook.
If management determines that a material target or goal that is disclosed does not constitute material FLI, management should consider including additional disclosure explaining the purpose of the information.
6. Impact of the transition to IFRS on FOFI or financial outlooks
Section 4B.2(2)(b) of NI 51-102 requires that FOFI or a financial outlook be based on the accounting policies that the reporting issuer expects to use to prepare its historical financial statements for the period covered by the FOFI or the financial outlook. In light of the fact that the Canadian Accounting Standards Board has confirmed that IFRS will replace Canadian Generally Accepted Accounting Principles for publicly accountable enterprises for fiscal years beginning on or after January 1, 2011, issuers should ensure that FOFI or financial outlooks that cover their 2011 fiscal year are based on the appropriate accounting policies.
If you have questions about disclosure of forward looking information, contact any member of Clark Wilson LLP’s Corporate Finance / Securities Group.