CSA Staff Notice 51-337
Continuous Disclosure Review Program Activities for the fiscal
year ended March 31, 2012
July 19, 2012
Purpose of this Notice
Reliable and accurate information by reporting issuers (issuers) is critical for investor
confidence and to promote efficient capital markets. The CSA’s continuous disclosure
(CD) review program is designed to identify material disclosure deficiencies that affect
the reliability and accuracy of an issuer’s disclosure record, and has two fundamental
objectives: education and compliance. The objectives of this notice are to:
•
help issuers understand and comply with their obligations;
•
summarize the results of the CD review program for the fiscal year ended March
31, 2012 (fiscal 2012); and
•
provide examples of areas of common deficiencies.
To assist issuers in better understanding their continuous disclosure obligations, we have
provided guidance and examples of common deficiencies in the following areas:
•
Appendix A – Financial Statement Deficiencies
•
Appendix B – Management’s Discussion and Analysis (MD&A) Deficiencies
•
Appendix C – Other Regulatory Deficiencies
For further details on the program, see CSA Staff Notice 51-312 – (Revised) Harmonized
Continuous Disclosure Review Program.
International Financial Reporting Standards
Most issuers are now required to prepare financial statements in accordance with
International Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board (IASB) for fiscal years beginning on or after January 1,
2011.
Bulletins and IFRS-related content were provided on many jurisdictions’ websites to
assist issuers in their transition to IFRS. These jurisdictions updated this IFRS-related
content during the year by proactively communicating with issuers and their advisors on
IFRS-related securities law changes and transition issues.
In fiscal 2012, we conducted reviews that focused on issuers’ first IFRS interim financial
reports. The results of the IFRS transition reviews were generally positive. Compliance
was better than expected based upon the results of earlier IFRS targeted reviews.
Approximately 5% of issuers were required to refile financial statements due to basic
transition issues.
Year in Review – fiscal 2012
There are approximately 4,200 issuers in Canada
1
. We use a high level screening system
that considers risk factors to select issuers for review and to determine the type of review
to conduct (full or issue-oriented). We apply both qualitative and quantitative criteria in
determining the level of review required. The criteria are updated as market conditions
change. We focus on accounting and disclosure issues where either non-compliance is
probable or a need for increased compliance is foreseen.
Reviews Completed
1,248
1,351
1,400
1,200
795
915
1,000
800
453
436
600
400
200
0
Full
Issue-Oriented
Total
2012
2011
The above chart illustrates the composition of the type of reviews we conducted in fiscal
2012 compared to fiscal 2011. The number of full reviews conducted in fiscal 2012
increased by 4% from the previous year. The number of issue-oriented reviews decreased
by 13%. The decrease in issue-oriented reviews is primarily the result of the fact that we
concentrated our resources on IFRS by:
•
conducting full reviews;
•
focusing on IFRS issue-oriented reviews that were more complex and
comprehensive than those done in fiscal 2011; and
•
communicating more frequently with issuers to assist them in their IFRS
transition.
Outcomes for fiscal 2012
Given our high level screening system that considers risk factors for the selection of
issuers, we select issuers with higher risk of non-compliance. In fiscal 2012, 56% of our
review outcomes required issuers to take action to improve disclosure, compared to 70%
in fiscal 2011.
1
Excluding investment funds and issuers that have been cease-traded.
2
Review Outcomes 2012
50%
44%
40%
40%
28%
30%
30%
17%
20%
16%
9% 10%
10%
2% 4%
0%
Referred to
Refilings
Prospective
Education and
No action
Enforcement/
changes
awareness
required
Cease-traded/
Default list
2012
2011
The increase of outcomes in the no action required category is mainly due to the increase
in the number of issue-oriented reviews conducted that did not result in a letter being sent
to the issuer. These issue-oriented reviews were completed to gather information on the
IFRS transition, to identify industry trends and to identify differences between pre
changeover Canadian Generally Accepted Accounting Principles (GAAP) and IFRS that
resulted in adjustments to reported results and disclosures.
We classified the outcomes of the full and issue-oriented reviews in the five categories
described in Appendix D. More than one category of outcome could have been generated
by a CD review. For example, an issuer could be required to refile certain documents as
well as make certain changes on a prospective basis.
Issue-oriented reviews
An issue-oriented review is an in-depth review focusing on a specific accounting, legal or
regulatory issue that we believe warrants regulatory scrutiny.
Issue-Oriented Reviews 2012
CSA IF
RS
24%
The “Other” category includes reviews of:
Other
• Auditor Review of Interim Reports;
41%
• Complaints;
• Environmental disclosure;
• Press releases;
• Executive compensation;
• Audit Committee;
• Certification;
IFRS Other
• MD&A; and
29%
• Cash Flow.
Oil & Gas
Technical Disclosure
6%
In fiscal 2012, 64% of the reviews (as compared to 68% of the reviews in fiscal 2011)
were issue-oriented reviews. The following issue-oriented reviews were completed by
one or more of the jurisdictions:
3
CSA IFRS Issue-oriented Review
The CSA conducted a CSA IFRS issue-oriented review. We reviewed the financial
statements of selected issuers in addition to their MD&A. We examined these reports to
determine whether the issuers provided information to enable readers to analyze and
understand how the transition to IFRS affected the issuers’ financial position, financial
performance and cash flow.
We reviewed 164 issuers and noted that compliance was generally positive.
o
72% of reviews required no action.
o
When we noted deficiencies, we sent comment letters asking issuers for
clarification.
o
The most common MD&A deficiency was issuers not clearly labelling and
identifying the accounting principles used when they presented a mix of financial
information in accordance with pre-changeover Canadian GAAP and IFRS. We
reminded issuers of this requirement and asked them to comply in future MD&A.
o
We found that issuers commonly did not include a statement of changes in equity
for the comparative interim periods as required by subsection 4.3 (2) (b) of
National Instrument 51-102, Continuous Disclosure Obligations.
IFRS Other Issue-oriented Reviews
a.
Education IFRS Transition
In early fiscal 2012, we continued conducting education reviews to assess the
level of readiness of issuers to file their first IFRS interim financial report. We
reviewed the IFRS transition disclosure provided by issuers in their third interim
and/or last annual MD&A before their first IFRS filings. Only a few issuers
needed to be followed up with due to their risk of not being ready to file their first
IFRS interim financial report on time.
b. IFRS Transition Disclosure
In addition to the CSA IFRS issue-oriented reviews performed, certain
jurisdictions carried out further reviews of disclosure provided by issuers in their
first IFRS interim financial report, including both the financial statements and the
MD&A. The objective of the review was to gather insights on the extent and
nature of the disclosures provided by issuers. Information was tracked to provide
insight on industry trends, differences between pre-changeover Canadian GAAP
and IFRS that resulted in adjustments to reported results, and disclosures. No
letters were sent to issuers as a result of this review.
c.
Decommissioning Provision
Staff conducted a review of issuers engaged in oil and gas activities to assess
appropriate compliance with recognition, measurement and disclosure rules for
decommissioning provisions under IAS 37, Provisions, contingent liabilities and
contingent assets (IAS 37). Based on differences between pre-changeover GAAP
and IAS 37, we expected to see IFRS transition adjustments in most cases. While
a few issuers failed to appropriately recognize a provision, most complied with
the recognition and measurement rules. We did note some general disclosure
deficiencies in the following areas:
o
inappropriate disclosure of material estimates and assumptions (e.g.
discount rate, expected timing of outflows);
4
o
over 50% of issuers reviewed did not disclose the requirement to re-
measure the provision at each reporting period in order to reflect rates in
effect at the time; and
o
over 50% of issuers reviewed provided no disclosure of the discount rates
applied on transition to IFRS or in the comparative quarter.
Oil and Gas Technical Disclosure Issue-oriented Review
Annually, staff conducts reviews on issuers engaged in oil and gas activities to assess
compliance with requirements set out in National Instrument 51-101, Standards of
Disclosure for Oil and Gas Activities (NI 51-101). Overall, we were satisfied with the
results of our fiscal 2012 reviews. However, areas where we noted deficiencies and
expect to see future improvements include:
•
disclosure on significant factors and uncertainties as per sections 5.2 and 6.2.1 of
Form 51-101F1, Statement of Reserves Data and Other Oil and Gas Information;
•
use proper terminology set out in the Canadian Oil and Gas Evaluation Handbook
(COGEH);
•
include all required signatures on Form 51-101F3, Report of Management and
Directors on Oil and Gas Disclosure, as instructed on subsection 2.1.3(e) of NI
51-101;
•
consistently comply with section 5.9 of NI 51-101 and guidance in Revised CSA
Staff Notice 51-327, Guidance on Oil and Gas Disclosure, concerning the
disclosure of resources other than reserves;
•
provide appropriate cautionary language concerning the 6:1 boe conversion ratio
of natural gas to oil so as to clearly discern between the energy equivalency and
the market price equivalency; and
•
be consistent and accurate in the use of units of measurement and disclosure of
reserves within and between disclosure documents.
Full Reviews
A full review is broad in scope and covers many types of disclosure. It covers the issuer’s
most recent annual financial statements and interim financial reports (pre-changeover
Canadian GAAP) or at least the issuer’s first IFRS interim financial reports (IFRS),
MD&A, and other disclosure documents
1
.
The following table provides a breakdown of these full reviews that have been conducted
in fiscal 2012.
Type of review
Total
Total
2012
2011
Full – pre-changeover Canadian GAAP
120
436
Full – IFRS
333
-
Total Full
453
436
1
Other disclosure documents are: technical disclosures, including technical reports for oil and gas, and
mining issuers; annual information forms (AIF); annual reports; information circulars; press releases,
material change reports and business acquisition reports (BARs); websites; certifications; and material
contracts.
5
Common deficiencies identified
Our reviews focus on identifying material deficiencies and disclosure enhancements. To
help issuers better understand their disclosure obligations, we have provided guidance
and examples of common deficiencies:
Appendix A: Financial Statement Deficiencies
1.
First-time adoption of International Financial Reporting Standards
a.
Reconciliations
b.
Explanations of material adjustments
c.
Accounting policies
2.
Classification of a liability as current
3.
Business combinations
4.
Flow-through shares
Appendix B: MD&A Deficiencies
1.
Discussion of Operations
2.
Liquidity
3.
General Provisions
Appendix C: Other Regulatory Deficiencies
1.
Standards of Disclosure for Mineral Projects
2.
Statement of Executive Compensation
a.
Summary compensation table
b.
Compensation discussion and analysis
3.
Disclosure of corporate governance practices
This is not an exhaustive list of deficiencies noted in our reviews, issuers should be
reminded that their CD record must comply with all relevant securities legislation and
lengthy disclosure does not necessarily equal full compliance. Examples do not include
all requirements that could apply to a particular issuer’s situation.
Areas of focus for fiscal year 2013
During fiscal 2013, our focus will be on the first annual IFRS report. We will continue to
use a high level screening system that considers risk factors to determine the issuers we
will select for review and the type of review required. Some of the topics that may
receive greater attention by our CD program include:
•
judgments and sources of estimation uncertainty disclosure;
•
asset impairments; and
•
business combinations.
Results by jurisdiction
The Alberta Securities Commission, the Ontario Securities Commission and the Autorité
des marchés financiers publish reports summarizing the results of the CD review program
in their jurisdictions. See the individual regulator’s website for a copy of its report:
•
www.albertasecurities.com
•
www.osc.gov.on.ca
•
www.lautorite.qc.ca
6
APPENDIX A
FINANCIAL STATEMENT DEFICIENCIES
We provided examples of deficient disclosure and presentation contrasted against more
robust, entity-specific disclosure and presentation. The most notable financial statement
deficiencies concerned requirements for first-time adoption of IFRS (IFRS 1, First-time
adoption of International Financial Reporting Standards (IFRS 1)), presentation of
financial statements (IAS 1, Presentation of financial statements (IAS 1)), business
combinations (IFRS 3, Business combinations (IFRS 3)) and flow-through shares.
1.
First-time adoption of International Financial Reporting Standards
In the first annual report and each interim financial report in the period covered by its
first financial statements prepared in accordance with IFRS, issuers are required to apply
IFRS 1. In accordance with IFRS 1, issuers must provide reconciliations and explain the
effect of identified differences or changes in accounting policies resulting from the
transition from their pre-changeover GAAP to IFRS.
a.
Reconciliations
Some issuers omitted to provide all required reconciliations.
b. Explanations of material adjustments
Many issuers did not provide explanations for all material adjustments (including cash
flows), or did not sufficiently explain the nature of the adjustment.
c.
Accounting policies
We noted that some issuers did not change all their accounting policies to comply with
IFRS, or that no reconciling items were identified for changes in accounting policies.
Issuers must present coherent and complete information in their financial statements.
We also noted that some issuers provided boilerplate and nonspecific accounting policy
disclosure. Users are faced with new accounting standards and in certain cases there may
be accounting policy choices. Issuers must ensure they provide clear and entity-specific
accounting policy disclosure.
For information about the disclosure of accounting policies used in the interim and
annual MD&As in the changeover year to IFRS, see CSA Staff Notice 52-328 –
Disclosures about Accounting Policies in the Year of Changeover to International
Financial Reporting Standards (IFRS).
2.
Classification of a liability as current
Liability classification under IFRS differs from pre-changeover Canadian GAAP. In
accordance with paragraph 69 of IAS 1, an issuer shall classify a liability as current only
when it expects to settle the liability in its normal operating cycle; it holds the liability
primarily for the purpose of trading; or the liability is due to be settled within twelve
months after the reporting period or it does not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period. Some
issuers were required to reclassify debt that was classified as non-current under pre
changeover Canadian GAAP to current under IFRS. However, when a refinancing or
7
rolling over of the obligation is not at the discretion of the issuer (for example, when
there is no arrangement for refinancing at the reporting date), many issuers incorrectly
classified the obligation as non-current.
Example of incorrect classification (Long-term debt classified as non-current instead
of current)
Consolidated Statements of Financial Position filed on March 19, 2012
IFRS line items
December 31 December 31 January 1
2011
Assets
25,561
Liabilities
Current liabilities:
Trade and other payables
3,772
Current portion of long-term debt
1,515
5,287
Long-term debt (note 10)
8,302
Shareholders’ Equity
11,972
25,561
Note 10:
As at December 31, 2011, the Company did not meet a financial ratio on the long-term
debt. In February 2012, a waiver was obtained allowing the Company to not meet this
financial ratio for more than twelve months. Therefore, no reclassification has been
made.
Example of entity-specific classification
Consolidated Statements of Financial Position filed on March 19, 2012
IFRS line items
December 31 December 31 January 1
2011
Assets
25,561
Liabilities
Current liabilities:
Trade and other payables
3,772
Current portion of long-term debt
9,817
13,589
Long-term debt (note 10)
-
Shareholders’ Equity
11,972
25,561
Note 10:
As at December 31, 2011, the Company did not meet a financial ratio on the long-term
debt. In February 2012, a waiver was obtained allowing the Company to not meet this
financial ratio for more than twelve months. Thus, in accordance with IAS 1, the
Company has reclassified an amount of $8,302 of long-term debt to current liabilities as
the waiver was not obtained before the reporting date.
2010
2010
24,372
25,269
11,908
4,046
838
1,390
12,746
5,436
326
9,060
11,300
10,773
24,372
25,269
2010
2010
24,372
25,269
11,908
4,046
838
1,390
12,746
5,436
326
9,060
11,300
10,773
24,372
25,269
8
3.
Business combinations
The adoption of IFRS 3 introduced a number of changes in accounting for business
combinations. This has impacted the amount of goodwill recognized, the results in the
period that an acquisition occurs and subsequent periods. Also, there are significant
disclosure requirements concerning business acquisitions in annual financial statements
and interim financial reports. In particular, we noted that some issuers have omitted the
following required information:
•
the amounts of revenue and profit or loss of the acquiree since the acquisition date
included in the consolidated statement of comprehensive income for the reporting
period (paragraph B64 (q) (i));
•
the revenue and profit or loss of the combined entity for the current reporting
period as though the acquisition date for all business combinations that occurred
during the year had been as of the beginning of the annual reporting period
(paragraph B64 (q) (ii));
•
for a business combination done after the end of the reporting period but before
the financial statements are authorized for issue, the information required by
paragraph B64 of IFRS 3 unless the initial accounting for the business
combination is incomplete at the time the financial statements are authorized for
issue (paragraph B66);
•
the primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree (paragraph B64 (d));
•
a qualitative description of the factors that make up the goodwill recognized, such
as expected synergies from combining operations of the acquiree and the acquirer,
intangible assets that do not qualify for separate recognition or other factors
(paragraph B64 (e));
•
for each contingent liability recognized, the information required in paragraphs 85
and 86 of IAS 37 (paragraph B64 (j));
•
in a bargain purchase, a description of the reasons why the transaction resulted in
a gain (paragraph B64 (n) (ii)); and
•
for acquired receivables, the gross contractual amounts receivable and the best
estimate at the acquisition date of the contractual cash flows not expected to be
collected.
9
Furthermore, we have noted that some issuers have not disclosed the required
information separately for each significant business combination or did not aggregate the
required information for individually immaterial business combinations that are material
collectively.
Example of deficient disclosure
On February 28, 2011, the Company acquired ABC Ltd. for an amount of $1.6 million
which was funded from cash generated from the Company’s operations. The acquisition
has been accounted for using the purchase method with operating results included in the
Company’s earnings from the date of acquisition. The purchase price allocation is as
follows:
Accounts receivable
Inventories
Prepaid expenses
Property, plant and equipment
Goodwill
Accounts payable and accrued liabilities
Net assets acquired
Consideration
Cash
Contingent consideration and distributions
Balance of sale receivable
Example of entity-specific disclosure
On February 28, 2011, the Company acquired 100% of the shares and voting interests in
ABC Ltd., a leading manufacturer and erector of structural steel products operating
across Canada, for an amount of $1.6 million using cash generated from the Company’s
operations. The acquisition costs related to this transaction amounted to $152,070 and
have been accounted as such in the consolidated statement of earnings in 2011 under
“General and Administrative expenses”. The acquisition has been accounted for using the
acquisition method with operating results included in the Company’s earnings from the
date of acquisition. The purchase price allocation is as follows:
At fair value
Accounts receivable
Inventories
Prepaid expenses
Property, plant and equipment
Goodwill
Accounts payable and accrued liabilities
Net assets acquired
Consideration
Cash
Contingent consideration
Balance of sale receivable
578
483
27
620
250
(328)
1,630
1,239
500
(109)
1,630
(in 000’s)
578
483
27
620
250
(328)
1,630
1,239
500
(109)
1,630
10
The acquisition of ABC Ltd. is consistent with the Company’s acquisition strategy of
identifying strategic opportunities within its existing core business segment and acquiring
well-established companies with complementary strengths to achieve meaningful
synergies. The synergies are expected to consist primarily of cost savings relating to raw
materials and reduction of overhead expenses, and represent the goodwill. Goodwill from
this business combination is not expected to be deductible for tax purposes.
Since the acquisition, the acquired company has contributed a total of $200,341 to the
Company’s sales of goods and $3,546 to earnings. Management estimates that, if the
acquisition had occurred on January 1, 2011, additional sales of goods would have been
$40,743 and additional operating earnings would have been $785 from January 1, 2011 to
February 28, 2011.
The gross contractual amount of accounts receivable amounts to $600,058. At the
acquisition date, the best estimate of contractual cash flows that is not expected be
recovered is $22,111. An initial amount of $50,000 was withheld as a provision for
adjustments, of which $25,000 was paid on September 1, 2011 and $25,000 on February
2, 2012.
At the acquisition date, the amount recognized as contingent consideration represent the
fair value which was the discounted maximum amount indicated in the purchase
agreement based on ABC’s financial projections (see note 4 for disclosure on business
acquisition significant estimates and the range of estimated amounts).
4.
Flow-through shares
IFRS do not specifically address the accounting for flow-through shares or the related tax
consequences arising from such transactions. Pre-changeover Canadian GAAP, however,
addressed the accounting for flow-through shares in Section 3465, Income taxes and EIC-
146, Flow-through shares, that cannot anymore be used. We have noted that many
issuers have not identified any IFRS transition impact in their reconciliations from pre
changeover Canadian GAAP to IFRS. We expected that issuers would have made some
changes in their flow-through shares accounting policy.
Example of deficient disclosure
Flow-through shares:
Proceeds received upon the issue of common shares that transfer the exploratory expense
deductions to investors are credited to the share capital and the related exploration costs
are charged to deferred exploration costs. The estimated tax benefits transferred to
shareholders are recorded as a future income tax liability at the time of filing of the
renouncement documents with the tax authorities with a corresponding reduction in share
capital.
11
Example of entity-specific disclosure
Flow-through shares
1
:
Issuance of flow-through shares represents in substance an issue of common shares and
the sale of right to tax deductions to the investors when the flow-through shares are
issued. The sale of the right to tax deductions is deferred and presented as other liabilities
in the statement of financial position. The proceeds received from flow-through
placements are allocated between share capital and any warrants issued and liability using
the residual method which means that the shares are valued at the fair value of existing
shares at the time of issuance and the residual proceeds are allocated between warrants
and other liability. The liability component recorded initially on the issuance of shares is
reversed on renouncement of the right to the tax deductions to the investors and when
admissible expenses are incurred and recognized in profit or loss as a reduction of
deferred income tax expense and a deferred tax liability is recognized for the taxable
temporary difference that arises from the difference between the carrying amount of
admissible expenditures capitalized as an asset and its tax basis.
1
The entity-specific disclosure for flow-through shares is not the only allowable treatment.
12
APPENDIX B
MD&A DEFICIENCIES
The quality of MD&A disclosure continues to be an area where we see deficiencies.
MD&A is a narrative explanation through the eyes of management of how the issuer
performed during the period covered by the financial statements, and what the issuer’s
financial condition and future prospects are. We often find boilerplate disclosure that
does not change from period to period. Issuers frequently replicate disclosure from the
financial statements without any analysis. Entity-specific disclosure provides investors
with information that complements the financial statements so they are able to assess the
current financial condition of the issuer and its future prospects. Under the requirements,
the MD&A should:
•
help current and prospective investors understand what the financial statements
show and do not show;
•
discuss important trends and risks that have affected the financial statements, and
trends and risks that are reasonably likely to affect them in the future; and
•
provide information about the quality, and potential variability, of the issuer’s
earnings and cash flow, to assist investors in determining whether past
performance is indicative of future performance.
There are three important areas where we continue to see boilerplate disclosure in the
MD&A: discussion of operations, liquidity, and general provisions. For each, we have
provided examples of deficient disclosure contrasted against more robust entity-specific
disclosure.
1.
Discussion of Operations
Issuers are required to analyze their operations during the most recently completed
financial year, including a comparison against the previously completed financial year.
The analysis should discuss and quantify all material variances. Common deficiencies
include: discussion of immaterial information without inclusion of information that may
be material to investors; and insufficient analysis of why changes have occurred. Issuers
are reminded that the MD&A should contain a balanced discussion of their operations.
Issuers should quantify how volume and price changes affected revenue, and discuss why
changes occurred. If other elements affected revenue, such as the introduction of a new
product or new competitors, the MD&A should also address these factors. Issuers should
not limit the operational analysis to revenue; if issuers experienced a change in their gross
profit percentage, the MD&A should discuss the factors behind the change.
Example of Deficient Disclosure
Revenue increased from $900,000 to $1,080,000, a 20% increase. Gross profit increased
from $400,000 to $408,000, a 2% increase.
Example of entity-specific disclosure
Revenue increased from $900,000 to $1,080,000, a 20% increase. Gross profit increased
from $400,000 to $408,000, a 2% increase. Three factors caused revenue to increase by
$180,000:
13
- increased sales volume of Product X-$60,000;
- decreased unit price of Product X-($30,000); and
- the introduction of a new product during the fourth quarter, Product Y-$150,000.
In late 2011, we anticipated new competition entering our market, so we discounted our
remaining Product X units to encourage their sale and to allow us to focus on its
replacement, Product Y. Discounts on Product X caused the reduced gross profit
percentage. We expect to continue discounting Product X in the first quarter, but expect
our gross profit to improve as Product Y replaces Product X.
2.
Liquidity
The MD&A should identify and discuss any known or expected fluctuations and trends in
an issuer’s liquidity, taking into account demands, commitments, events or uncertainties.
Where applicable, the discussion should also include disclosure of any defaults or risk of
defaults on debt covenants and how the issuer intends to cure the default or otherwise
address the risk as set out in the example below. The disclosure relating to expected
liquidity fluctuations is required for all issuers, but it is especially important when issuers
have negative cash flows from operations, a negative working capital position or have
breached or expect to breach their debt covenants.
Example of deficient disclosure
As at year-end, the Company had cash of $100,000 and accounts receivable of $50,000.
Current assets amounted to $150,000 with current liabilities of $400,000 resulting in a
working capital deficit of $250,000. The Company believes that it has sufficient capital
on hand to satisfy working capital requirements for the next 12 months.
Example of entity-specific disclosure
As of year-end, the Company’s debt to equity ratio was in breach of a covenant in its loan
agreement. Subsequent to year-end, the Company:
- renegotiated the covenants in the loan agreement to cure the default; and
- borrowed an additional $300,000 to meet current and future working capital
requirements.
New terms under the loan agreement restrict repayment of existing debt payable to
related parties. We estimate that the Company will need $500,000 over the next two years
to complete its exploration project. In the short-term, the Company will rely on advances
from shareholders and the exercise of options and share purchase warrants to fund
exploration costs.
3.
General Provisions
Issuers must endeavour to improve MD&A disclosure. In particular, many issuers
operating in a specialized industry or high-tech sector do not sufficiently describe their
operations, thereby restricting the usefulness of their MD&As. We would like to remind
issuers of the requirements under Part 1(a) of Form 51-102F1, Management’s Discussion
& Analysis.
14
Example of deficient disclosure
Strategy
The Corporation (ABC) expects to generate revenue from its product candidates in the
form of royalties. ABC sold its interest in its joint venture to its partner, XYZ Inc. (XYZ)
on June 30, 2011. Following this transaction, ABC manages its relationship with its two
major partners to maximize value from the products that will generate royalties on a
going-forward basis. The main assets of ABC are the patent portfolio licensed to NMO
Inc. and the royalty agreement with XYZ.
Example of entity-specific disclosure
Strategy
We have implemented a business strategy with intent to reacquire growth in revenue and
improve our operations. We continue to invest in order to transform from a print
directory business to a digital media and marketing solutions company.
Our strategy remains to leverage our multiplatform media and marketing solutions, to
enhance services to our advertisers, build traffic to our network of properties and improve
user experience. Our goal is to serve the advertising needs of small and medium
enterprises across Canada, by providing the right services and tools to manage and grow
their businesses.
We are focusing on key areas, such as:
- Improving our operations with increased focus on sales effectiveness, product
fulfillment, billing and customer support;
- Provisioning of new services for our customers with the objective of offering an overall
better customer experience and return on investment by driving more quality leads
through calls, clicks, forms and emails;
- Improving our value proposition for the consumer by enhancing our content on our
online and mobile properties;
- Creating partnerships in traffic and distribution to augment leads to our advertisers; and
- Branding and promotion to raise awareness on our product portfolio and accelerate our
brand transformation.
We achieve profitability by maximizing our operating efficiency and constantly
reviewing all of our operations with a view to ensuring we maintain a competitive cost
structure. Improving our cost structure remains a key priority and will continue to be
achieved through:
- Business process redesign;
- Cost containment initiatives; and
- Investment in technology to better support our operations and our transformation.
Our key priorities for 2012 are to:
- Execute our sales approach;
- Deliver superior customer value; and
- Lead our industry transformation.
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APPENDIX C: OTHER REGULATORY DEFICIENCIES
CSA Staff assess issuer compliance with requirements of our securities laws. Our
objective is to promote clear and informative disclosure that will allow investors to make
informed investment decisions. We have identified the following areas where we
continue to see lack of compliance: mineral projects, executive compensation and
governance practices.
1.
Standards of Disclosure for Mineral Projects
National Instrument 43-101, Standards of Disclosure for Mineral Projects (NI 43-101),
sets out the requirements when a mining company discloses scientific or technical
information on mineral projects. Under these requirements, the disclosure must be based
on information prepared by a qualified person. Deficiencies identified include:
•
incomplete or inadequate disclosure of preliminary economic assessments,
mineral resources and mineral reserves;
•
non-compliant certificates and consents of qualified persons for technical reports;
•
incomplete or inadequate disclosure of historical estimates and exploration
targets; and
•
name of the qualified person omitted in documents containing scientific and
technical information.
We remind issuers that the amendments to NI 43-101 came in force on June 30, 2011.
2.
Statement of Executive Compensation
All direct and indirect compensation provided to certain executive officers and directors
for, or in connection with, services they have provided to the issuer or subsidiary of the
issuer must be disclosed. The objective of this requirement is to provide insight into
executive compensation as a key aspect of the overall stewardship and governance of
issuers and to help investors understand how decisions about executive compensation are
made. Many issuers continue to provide insufficient disclosure related to the summary
compensation table, as well as in their compensation discussion and analysis.
a.
Summary compensation table
Section 3.1 of Form 51-102F6, Statement of executive compensation (Form 51-102F6),
requires issuers to provide a summary compensation table (SCT). We noted that some
issuers did not disclose in the SCT the grant date fair value of share-based awards and
option-based awards. We remind issuers that the grant date fair value of these types of
awards must be reported in the SCT in the year of grant irrespective of whether part or
the entire award relates to multiple financial years or payout is subject to performance
goals and similar conditions. We also remind issuers that they must disclose key
assumptions and estimates used to calculate the fair value of the grant.
Example of deficient application
In 2011, a company grants restricted share units (RSUs) to a named executive officer
(NEO). Under the terms of the award, the NEO will be entitled to a payout of 1,000
RSUs in each of 2011, 2012, and 2013 if certain performance goals, including vesting,
are satisfied in those years. The performance goals, including vesting, in respect of the
2011 part of the award have been satisfied and the company reports the grant date fair
value of that part of the award in the 2011 SCT but decides to defer reporting the part of
the award related to 2012 and 2013.
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What should have been done
The company should have reported the grant date fair value of the entire award, including
the parts related to 2012 and 2013, in the 2011 SCT. The grant date fair value
methodology used should have taken into account the fact that the NEO will not receive
those RSUs unless the performance goals, including vesting, for 2012 and 2013 are
satisfied.
b. Compensation discussion and analysis
Section 2.1 of Form 51-102F6 requires issuers to describe and explain all significant
elements of compensation awarded to, earned by, paid to, or payable to NEOs. The
compensation discussion and analysis must include the following:
(a) the objectives of any compensation program or strategy;
(b) what the compensation program is designed to reward;
(c) each element of compensation;
(d) why the company chooses to pay each element;
(e) how the company determines the amount (and, where applicable, the formula) for
each element; and
(f) how each element of compensation and the company’s decisions about that
element fit into the company’s overall compensation objectives and affect
decisions about other elements.
A number of issuers did not provide the required disclosure. Many issuers provided an
analysis expressed in boilerplate language; others did not fully and accurately explain
significant elements of compensation awarded to NEOs.
Example of deficient disclosure
The objective of the Corporation’s compensation is to: (i) compensate management in a
manner that encourages and rewards a high level of performance with a view to
increasing long-term shareholder value; (ii) align management’s interests with the long
term interests of shareholders; and (iii) provide a compensation package that is
commensurate with other junior companies in order to enable the Corporation to attract
and retain talent.
Example of entity-specific disclosure
The Compensation Discussion and Analysis section explains the pay program for the
financial year ended December 31, 2011 for our NEOs, which include our President and
Chief Executive Officer, Executive Vice President and Chief Financial Officer, and our
three other most highly compensated executive officers as follows: [list of names].
Executive Compensation Philosophy and Policy
Executive compensation at XYZ Inc. (XYZ) is aligned in several ways with our strategic
business plan. Our key long-term objective is to motivate executives to achieve targets
that are aligned with the Corporation’s strategic goals and that are expected to enhance
shareholder value over the long term. Our shorter-term corporate goals, business unit
objectives, and individual contributions to business success are reflected in the annual
incentive plan. A significant portion of the executive pay program consists of “at-risk”
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pay meaning that compensation is dependent on achieving corporate, business unit and
individual performance objectives both in the short and long term.
XYZ’s executive pay program is also designed to attract and retain experienced
executives who have the skills required to help the Corporation achieve its strategic and
organizational goals. XYZ is committed to providing compensation plans that are
consistent with best practices in corporate governance.
The Corporation’s executive compensation policy is to provide total compensation that is
generally competitive with the median of its peer group, taking into consideration
additional Corporation-specific issues such as the achievement of financial and
operational objectives, and the specific roles and responsibilities of different executive
positions. Total compensation plans are structured to provide compensation that is above
market median when results exceed the Corporation’s business objectives and below
market median when results are below target.
Executive Compensation Components
The following describes the different compensation components, which together provide
compensation packages that meet the objectives of XYZ’s compensation philosophy.
Base Salary: Market-competitive fixed rate of pay to attract and retain executives with
experience and skills required to achieve strategic and organizational goals.
Annual Incentive Plan (AIP): Annual cash bonus with target awards established for each
NEO as a percentage of base salary to motivate executives to drive superior short-term
performance through Corporation, business unit and individual objectives.
Long-term Incentive Plan (LTIP): Option grant levels are based on individual
performance and options are time-vested rateably over 4 years with a 10-year term to
promote retention and encourage executives to pursue opportunities that will increase
shareholder value over the long term.
To achieve the objectives described above, each element of pay is targeted at the market
median with adjustments based on meeting specific performance goals as follows:
- Base salary is adjusted above and below the median to reflect specific circumstances
such as experience, individual performance and changes in responsibility;
- AIP payouts may exceed market median target levels when results exceed objectives
and may be below median levels (down to zero) when results are below targets; and
- LTIP grants of stock options can be adjusted from 0% to 200% of target levels based on
each individual’s performance and contribution to the Corporation’s overall results.
The Corporation has chosen to reward achievement of overall Corporation performance
goals defined as earnings before income taxes and non-controlling interest (adjusted
EBT). The Corporation believes that adjusted EBT is the most appropriate indicator of
the operational and financial performance of the business. For 2011, there was no payout
in respect of the corporate objective of the AIP and LTIP, as the minimum performance
threshold of $3.5 M in respect of adjusted EBT was not achieved.
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For more information and guidance about the compensation discussion and analysis, see
CSA Staff Notice 51-331 – Report on Staff’s Review of Executive Compensation
Disclosure. Although, we remind issuers that new amendments to Form 51-102F6 came
in force on October 31, 2011.
3.
Disclosure of corporate governance practices
Issuers must adequately disclose their corporate governance practices. For example, Item
6 of Form 58-101F1, Corporate Governance Disclosure, and Item 5 of Form 58-101F2,
Corporate Governance Disclosure (Venture Issuers), require issuers to describe the
process by which the board identifies new candidates for board nomination. Disclosure
by issuers reviewed was often deficient.
Some issuers simply indicated that the nominating committee or another board committee
was responsible for identifying candidates. Others merely stated that the nominee
committee was responsible for recommending candidates for board nomination. This type
of disclosure is insufficient, as it does not explain the process for identifying new board
nominees.
Example of deficient disclosure
Members of the Human Resources, Corporate Governance and Nomination Committee,
the Board and management are responsible to determine the nomination of new
candidates for Board nomination.
The following example illustrates full disclosure of the board nominee selection process.
Example of entity-specific disclosure
The board of directors has conferred on the Corporate Governance Committee
responsibility for identifying new candidates for director positions and for proposing
these candidates to the board of directors. The process by which the Corporate
Governance Committee identifies new candidates for director positions begins with the
approval by the board of a statement of competencies and experience sought with respect
to each new candidate. The board of directors or management may propose candidates to
the committee. On occasion, the services of a recruitment adviser may be used. Potential
candidates are interviewed by the chairman of the board of directors and the lead director
as well as by the other members of the board, as necessary. An invitation to join the
board is made only where board consensus regarding the proposed candidate is obtained.
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APPENDIX D: CATEGORIES OF OUTCOMES
Enforcement referral/ Default list/ Cease trade order
If the issuer has critical CD deficiencies, we may add the issuer to our default lists, issue
a cease trade order and/or refer the issuer to Enforcement.
Refiling
The issuer must amend and refile certain CD documents.
Prospective Changes
The issuer is informed that certain changes or enhancements are required in its next filing
as a result of deficiencies identified.
Education and Awareness
The issuer receives a proactive letter alerting it to certain disclosure enhancements that
should be considered in its next filing.
No action required
The issuer does not need to make any changes or additional filings.
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FOR MORE INFORMATION
Contact any of the following:
Johanne Boulerice
Manager, Continuous Disclosure
Autorité des marchés financiers
514-395-0337, ext. 4331
Toll-free: 1-877-525-0337, ext. 4331
johanne.boulerice@lautorite.qc.ca
Benoit Veilleux
Analyst, Continuous Disclosure
Autorité des marchés financiers
514-395-0337, ext. 4339
Toll-free: 1-877-525-0337, ext. 4339
benoit.veilleux@lautorite.qc.ca
Cheryl McGillivray
Manager, Corporate Finance
Alberta Securities Commission
403-297-3307
cheryl.mcgillivray@asc.ca
Elena Kim
Securities Analyst, Corporate Finance
Alberta Securities Commission
403-297-4226
elena.kim@asc.ca
Bob Bouchard
Director, Corporate Finance
Manitoba Securities Commission
204-945-2555
bob.bouchard@gov.mb.ca
Pierre Thibodeau
Senior Securities Analyst
New Brunswick Securities Commission
506-643-7751
pierre.thibodeau@nbsc-cvmnb.ca
Allan Lim
Manager
British Columbia Securities Commission
604-899-6780
Toll-free 800-373-6393 (BC and Alberta)
alim@bcsc.bc.ca
Alan Mayede
Senior Securities Analyst
British Columbia Securities Commission
604-899-6546
Toll-free 800-373-6393 (BC and Alberta)
amayede@bcsc.bc.ca
Tony Herdzik
Acting Deputy Director, Corporate Finance
Saskatchewan Financial Services
Commission
306-787-5849
tony.herdzik@gov.sk.ca
Lisa Enright
Manager, Corporate Finance
Ontario Securities Commission
416-593-3686
lenright@osc.gov.on.ca
Ritu Kalra
Senior Accountant, Corporate Finance
Ontario Securities Commission
416-593-8083
rkalra@osc.gov.on.ca
Kevin Redden
Director, Corporate Finance
Nova Scotia Securities Commission
902-424-5343
reddenkg@gov.ns.ca
Junjie (Jack) Jiang
Securities Analyst, Corporate Finance
Nova Scotia Securities Commission
902-424-7059
jiangjj@gov.ns.ca
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