CSA Staff Notice 51-339 Continuous Disclosure Review Program
Activities for the fiscal year ended March 31, 2013
July 18, 2013
INTRODUCTION
This notice contains the results of the reviews conducted by the Canadian Securities
Administrators (CSA) within the scope of their Continuous Disclosure (CD) Review Program.
This program was established to review the compliance of the CD documents of reporting
issuers
1
(issuers) to ensure they are reliable and accurate. The CSA seek to ensure that Canadian
investors receive high quality disclosure from issuers.
In this notice, we summarize the results of the CD Review Program for the fiscal year ended
March 31, 2013 (fiscal 2013). To raise awareness about the importance of filing compliant CD
documents, we also discuss certain areas where common deficiencies were noted and provide
examples to help issuers address these deficiencies in the following appendices:
•
Appendix A – Financial Statements Deficiencies
•
Appendix B – Management’s Discussion and Analysis (MD&A) Deficiencies
•
Appendix C – Other Regulatory Disclosure Deficiencies
For further details on the CD Review Program, see CSA Staff Notice 51-312 (revised)
Harmonized Continuous Disclosure Review Program.
RESULTS FOR FISCAL 2013
During fiscal 2013, a total of 1,336 CD reviews (368 full reviews and 968 issue-oriented
reviews) were conducted. This is a 7% increase compared to the 1,248 CD reviews (453 full
reviews and 795 issue-oriented reviews) completed during fiscal 2012.
Reviews Completed
1600
1336
1248
1400
1200
968
1000
795
800
453
600
368
400
200
0
Full reviews
Issue-oriented reviews
Total
2013
2012
The increased number of total reviews during fiscal 2013 reflects a slightly greater emphasis on
issue-oriented reviews which increased due to certain CSA jurisdictions examining technical
1
In this notice “issuers” means those reporting issuers contemplated in National Instrument 51-102
Continuous Disclosure Obligations.
disclosure and IFRS specific topics on a larger sample of issuers. Technical issue-oriented
reviews focused on compliance with National Instrument 43-101 Standards of Disclosure for
Mineral Projects (NI 43-101), and National Instrument 51-101 Standards of Disclosure for Oil
and Gas Activities (NI 51-101). Specific topic issue-oriented reviews were conducted to
determine issuers’ compliance with a specific IFRS and to determine if the MD&A disclosure on
a specific subject was compliant with Form 51-102F1 Management’s Discussion & Analysis of
National Instrument 51-102 Continuous Disclosure Obligations (Form 51-102F1).
OUTCOMES FOR FISCAL 2013
In fiscal 2013, 47% of our review outcomes required issuers to take action to improve their
disclosure, compared to 56% in fiscal 2012.
Review outcomes
60%
53%
50%
44%
40%
26%
28%
30%
17%
20%
14%
9%
5%
10%
2%
2%
0%
Education and
Referred to
Refiling
Prospective changes
No action required
awareness
Enforcement/Cease-
traded/Default list
2013
2012
We classified the outcomes of the full and issue-oriented reviews in the five categories described
in Appendix D. Some CD reviews generated more than one category of outcome. For example,
an issuer may have been required to refile certain documents and also make certain changes on a
prospective basis.
The largest review outcome was in the “no action required” category (53%). This category is
made up primarily from the results of issue-oriented reviews on specific IFRS topics and Form
51-102F1 disclosures. These reviews generally did not result in issuing comment letters. Our
main objective was to monitor overall quality of disclosure, observe trends and conduct research.
Our learning from these findings will be incorporated into our CD review program going
forward. These reviews included reviews of cash flow and operating segments.
The “prospective changes” category (26%) continues to represent a large portion of our
outcomes. If material deficiencies or errors are identified, we expect issuers to correct them by
restating and refiling the CD documents. However, when enhancements are required as a result
of deficiencies identified, we request that amendments be made when the issuer next files CD
documents. We aim to educate issuers by providing future filing comments. Some of the
common examples of the “prospective changes” include enhancement of:
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• financial statement disclosure for critical judgements, sources of estimation uncertainty
disclosure and going concern disclosure, consistent with IFRS requirements;
• MD&A to comply with Form 51-102F1, including discussion of operations, liquidity
and transactions between related parties;
• executive compensation disclosure to comply with Form 51-102F6 Statement of
Executive Compensation, with emphasis on compensation discussion and analysis.
ISSUE-ORIENTED REVIEWS
An issue-oriented review focuses on a specific accounting, legal or regulatory issue that we
believe warrants scrutiny. In fiscal 2013, a total of 72% of the reviews were issue-oriented
reviews (as compared to 64% of the reviews in fiscal 2012).
Issue-Oriented reviews 2013
Mining, Oil &
Gas technical
Other
disclosure
The “Other” category includes reviews of:
38%
24%
•
Defined Benefit Plans;
•
Risk disclosure;
•
Forward-Looking Information;
•
Certification;
•
Business Acquisition Report; and
Cash-Flow
•
Press Releases.
Operating
Segments
IFRS
19%
7%
Transition
12%
You will find below the results of certain issue-oriented reviews conducted during fiscal 2013
and the common deficiencies noted. Please refer to Appendix C for “Mining, Oil & Gas
technical disclosure” common deficiencies.
Cash flow disclosure
Issuers must comply with the disclosure obligations set out in IAS 7 Statement of cash flows,
and sections 1.6 and 1.7 of Form 51-102F1 when addressing cash flow reporting in their
financial statements and MD&As respectively. When conducting our reviews, we focused on
cash flow presentation, liquidity and capital disclosure. Common deficiencies noted include:
• inadequate classification of cash flows between operating, investing or financing activities in
the financial statements;
• incomplete or unclear discussion about the issuer’s exposure to liquidity risks arising from
financial instruments, such as short and long-term borrowing in the financial statements;
• incomplete or unclear discussion in MD&As of why certain non-GAAP cash flow financial
measures provide useful information to investors;
• incomplete or unclear discussion in MD&As of the issuer’s liquidity, its working capital
requirements, its ability to generate sufficient amount of cash to maintain its capacity, meet
its planned growth or to fund development activities; and
• incomplete or unclear discussion in MD&As on the status of debt facilities, the amount of
facility drawn and remaining, details of covenants, and when there is material risk of default,
how the issuer intends to remedy the default or address the risk.
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IFRS transition
During fiscal 2013 we reviewed the first IFRS interim financial reports of issuers with non-
calendar year ends. When conducting our reviews, we focused on IFRS transition disclosures.
Common deficiencies noted include:
• insufficient or unclear description of the effect of the transition; and
• omission of certain reconciliations with previous Canadian GAAP – Part V.
Operating segments
Issuers must comply with the disclosure obligations set out in IFRS 8 Operating segments, and
section 1.2 of Form 51-102F1 when addressing operating segments in their financial statements
and MD&As. Common deficiencies noted include:
• incomplete or omitted information about geographic areas and major customers in financial
statements;
• failure to combine and disclose in an “all other segments” category information about other
business activities and operating segments that are not reportable, i.e. disclosed separately
from other reconciling items in the reconciliations required in financial statements;
• failure to provide restated comparative period segment data reflecting a change in reportable
segments in financial statements; and
• incomplete analysis of operating segments that are reportable segments in MD&As.
FULL REVIEWS
A full review is broad in scope and covers many types of disclosure. A full review covers the
selected issuer’s most recent annual and interim financial reports and MD&A filed before the
start of the review. For all other CD disclosure documents, the review covers a period of
approximately 12 to 15 month. In certain cases, the scope of the review may be extended in order
to cover prior periods. The issuer’s CD documents are monitored until the review is completed.
A full review includes an issuer’s technical disclosure (i.e. technical reports for oil and gas and
mining issuers), annual information form, annual report, information circulars, press releases,
material change reports, business acquisition reports, websites, certifying officers’ certifications
and material contracts.
In fiscal 2013, a total of 28% of the reviews were full reviews (as compared to 36% of the
reviews in fiscal 2012).
COMMON DEFICIENCIES IDENTIFIED
Our full and issue-oriented reviews focus on identifying material deficiencies and potential areas
for disclosure enhancements. To help issuers better understand their CD obligations, we have
provided guidance and examples of common deficiencies in the following appendices:
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Appendix A: Financial Statements Deficiencies
1.
Judgements
2.
Impairment of goodwill
3.
Going concern
Appendix B: Management’s Discussion and Analysis (MD&A) Deficiencies
1.
Liquidity
2.
Discussion of operations
3.
Related party transactions
Appendix C: Other Regulatory Disclosure Deficiencies
1.
Mineral projects
2.
Oil and gas activities
3.
Disclosure controls and procedures and internal control over financial reporting in
venture issuers’ MD&A
4.
Executive compensation
This is not an exhaustive list of disclosure deficiencies noted in our reviews. We remind issuers
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.
Results by jurisdiction
The Alberta 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.lautorite.qc.ca
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APPENDIX A
FINANCIAL STATEMENTS DEFICIENCIES
This Appendix provides some examples of deficient disclosure contrasted against more robust
entity-specific disclosure for three areas of IFRS requirements. Many issuers could improve
compliance in these areas.
1.
Judgements
In accordance with paragraph 122 of IAS 1 Presentation of Financial Statements (IAS 1), an
issuer shall disclose in the summary of significant accounting policies or other notes, the
judgements, apart from those involving estimations, that management has made in the process of
applying the entity’s accounting policies and that have the most significant effect on the amounts
recognised in the financial statements.
We found that the disclosure about judgements that have the most significant effect on the
amounts recognised in the financial statements is generally deficient and boilerplate. We noted
that some issuers did not disclose any information about judgements. In some instances, issuers
included a note with a title referring to judgements and estimates in the financial statements, but
the note only included information about estimates. In other instances, issuers listed the financial
statements items involving judgements, but they did not disclose the judgements made.
Example of deficient disclosure
Use of estimates and judgements
The preparation of financial statements in compliance with IFRS requires management to make
judgements, estimates and assumptions that affect the application of accounting policies and the
reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates.
Estimates are based on management’s best knowledge of current events and actions that the
Company may undertake in the future. Estimates and underlying assumptions are reviewed on an
on-going basis.
Critical judgements in applying accounting policies that have the most significant effect on the
amounts recognized in the financial statements include assessing when depletion of capitalized
costs for mining properties begins.
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Example of entity-specific disclosure
Judgements
In applying the Company’s accounting policies, management used its judgement in areas which
have the most significant effect on the amounts recognized in the consolidated financial
statements, including:
Determining Production Stage of a Mine
The Company capitalizes costs incurred in exploration, evaluation and development as part of
mining properties prior to a mine being capable of operating at levels intended by management.
Depletion of capitalized costs for mining properties begins upon the mine entering into
production stage, which requires significant judgement in its determination. Management
considers various factors to determine when a mine is substantially complete and ready for its
intended use. These factors include: 1) level of capital expenditures compared to construction
cost estimates; 2) completion of a reasonable period of testing of major mine and plant
components; 3) achievement of consistent operational results over a reasonable period of time;
4) achievement of planned production capacity for plant and mill; and 5) ability to sustain
ongoing production. The Company determined that the ABC mine was capable of operating at
levels intended by management and moved into production stage on March 1, 2013.
2.
Impairment of goodwill
In accordance with paragraph 134 of IAS 36 Impairment of Assets (IAS 36), an issuer must
disclose information on each cash-generating unit (CGU) or group of CGUs for which the
carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that
CGU or group of CGUs is significant in comparison with the entity’s total carrying amount of
goodwill or intangible assets with indefinite useful lives. If the CGU or group of CGUs’
recoverable amount is based on value in use, this information includes a description of each key
assumption on which management has based its cash flow projections for the period covered by
the most recent budgets/forecasts. Key assumptions are those to which the CGU or group of
CGUs’ recoverable amount is most sensitive.
Some issuers did not disclose all the information required by paragraph 134 of IAS 36.
Example of deficient disclosure
Goodwill is tested at least annually for impairment. The Corporation performed its impairment
test as at December 31, 2012. For the purpose of impairment testing, goodwill is tested for
impairment at the CGU level. The recoverable amount of the CGUs is based on value in use. If
the carrying value exceeds the recoverable amount, an impairment charge is recognized to the
extent that the carrying value exceeds the recoverable amount.
The recoverable amount of all CGUs has been determined based on cash flow projections on
financial budgets approved by management covering a five-year period. Cash flows beyond the
five-year period are extrapolated using estimated growth rates of 2%.
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Example of deficient disclosure (continued)
The discount rates used are pre-tax and reflect specific risks relating to the relevant CGUs. The
pre-tax discount rate used for the value in use calculation was 16%.
No impairment charge has arisen as a result of the review performed as at December 31, 2012.
Reasonably possible changes in key assumptions would not cause the recoverable amount of
CGUs to fall below the carrying value.
In the above example, the issuer did not provide:
• the carrying amount of goodwill allocated to the CGU or group of CGUs for which the
carrying amount of goodwill is significant in comparison with the issuer’s total carrying
amount of goodwill (Paragraph 134 (a) of IAS 36);
• a complete description, by CGU or group of CGUs, of each key assumption on which
management has based its cash flow projections for the period covered by the most recent
budgets/forecasts. Key assumptions are those to which the CGU or group of CGUs'
recoverable amount is most sensitive (Paragraph 134 (d) (i) of IAS 36). Examples may
include revenue growth or gross margin percentage assumptions; and
• a description of management's approach in determining the value (or values) assigned to each
key assumption, whether these values reflect past experience or, if appropriate, are consistent
with external sources of information, and, if not, how and why they differ from past
experience or external sources of information (Paragraph 134 (d) (ii) of IAS 36). For
example, if the gross margin percentage for a specific CGU or group of CGUs is higher in
the cash flow projection than what has been experienced, it would be important for users to
be alerted to this and to understand why.
Example of entity-specific disclosure for paragraph 134 (a) of IAS 36
For the purpose of annual impairment testing, goodwill is allocated to the following CGUs which
are the units expected to benefit from the synergies of the business combinations in which the
goodwill arises.
CGU A: $300,000
Note 1 : Assumes that CGU A, B, C and D are adequately
CGU B: $150,000
described in another note. Also assumes that all other
CGU C: $95,000
information required by paragraph 134 of IAS 36 is
CGU D: $80,000
disclosed.
3.
Going concern
Under IAS 1, when management is aware of material uncertainties related to events or conditions
that may cast significant doubt upon the issuer’s ability to continue as a going concern, the issuer
must disclose these uncertainties.
Under paragraph 19 of the Canadian Auditing Standards 570 Going Concern, if adequate
disclosure is made in the financial statements, the auditor shall express an unmodified opinion
and include an “Emphasis of Matter” paragraph in the auditor’s report to highlight the existence
of a material uncertainty relating to the event or condition that may cast significant doubt on the
entity’s ability to continue as a going concern and draw attention to the note in the financial
8
statements that discloses the matters set out in this paragraph.
We sometimes see inconsistent information between the going concern disclosure provided in an
issuer’s financial statements and the going concern disclosure included in the auditor’s report.
Some issuers provide indications of financial difficulty, sometimes under a going concern
heading, without explicitly stating that the disclosed uncertainties may cast significant doubt
upon the issuer’s ability to continue as a going concern despite the fact that the auditor’s report
highlights the existence of a material uncertainty relating to the event or condition that may cast
significant doubt on the issuer’s ability to continue as a going concern.
Example of deficient disclosure
Extract from the auditor’s report
Emphasis of Matter paragraph
We draw attention to Note 2 to the financial statements that highlights the existence of a material
uncertainty relating to the event or condition that may cast significant doubt on the entity’s
ability to continue as a going concern. Our opinion is not qualified in respect of this matter.
Extract from the financial statements
Note 2 - Going concern assumption
At year-end the Company had minimal cash and a working capital deficiency. While the
Company has prepared its financial statements on the going concern basis, it is dependent on its
ability to obtain additional financing from related parties and external financing to sustain
operations and fund its expenditures.
Management is actively pursuing such additional sources of financing, and while it has been
successful in doing so in the past, there can be no assurance it will be able to do so in the future.
Example of entity-specific disclosure
Extract from the auditor’s report
Emphasis of Matter paragraph
We draw attention to Note 2 to the financial statements that highlights the existence of a material
uncertainty relating to the event or condition that may cast significant doubt on the entity’s
ability to continue as a going concern. Our opinion is not qualified in respect of this matter.
Extract from the financial statements
Note 2 - Going concern assumption
The financial statements were prepared on a going concern basis. The going concern basis
assumes that the Company will continue to operate in the foreseeable future and will be able to
realize its assets and discharge its liabilities and commitments in the normal course of business.
For the year ended December 31, 2012, the Company had a net loss from operations of
$3 million, a negative cash flow from operations of $2 million. As at year-end, the Company had
a working capital deficiency of $1.5 million and cash on hand of $2 million.
9
Extract from the financial statements (continued)
The Company has a history of operating losses. In recent years, it had negative cash flows from
operations and working capital deficiencies. The Company’s credit facility contains certain
financial covenants that are subject to periodic reviews. As part of its debt agreement, the
Company must maintain a working capital ratio of at least 1:1. As at December 31, 2012, this
ratio was 0.5:1. Given the breach, the lender has the right to demand full repayment at any time.
As a result, the bank debt has been reclassified to short term liabilities resulting in a higher
working capital deficiency. The Company is currently in negotiations with the lender to waive
the covenant violations.
Whether and when the Company can attain profitability and positive cash flows is uncertain.
These uncertainties cast significant doubt upon the Company’s ability to continue as a going
concern.
The Company will need to complete a short term financing to make the payment for the credit
facility, raise sufficient working capital to maintain operations, reduce operating expenses and
increase revenues. Subsequent to year end, the Company completed a private placement of
$3 million to fund ongoing operations and to pay off the credit facility in the event the waiver
cannot be obtained.
We remind issuers, that when there are uncertainties that cast doubt on the issuer’s ability to
continue as going concern, the MD&A should also provide a discussion and analysis on how the
issuer expects to resolve the uncertainty event or condition.
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APPENDIX B
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A) DEFICIENCIES
As in prior years, deficiencies were noted in the MD&A disclosure. As stated in Part 1(a) of
Form 51-102F1 Management’s Discussion and Analysis of National Instrument 51-102
Continuous disclosure obligations (Form 51-102F1), the MD&A should include balanced
discussions of the issuer’s financial performance and financial condition, including, without
limitation, such considerations as liquidity and capital resources. The MD&A should help
current and prospective investors to understand what the financial statements show and do not
show. It should also discuss material information that may not be fully reflected in the financial
statements.
There are three important areas of the MD&A where deficient disclosures were noted:
1) liquidity; 2) discussion of operations; and 3) related party transactions. For each area, we have
provided examples of deficient disclosure contrasted against more robust entity-specific
disclosure.
1.
Liquidity
Many smaller issuers focus their resources on completing a project or on expanding their
operations. In accordance with section 1.6 of Form 51-102F1, the MD&A should focus on the
issuer’s ability to generate sufficient liquidity in the short term and in the long term to fund
development activities or to meet planned growth. Moreover, the MD&A should explain how an
issuer will meet its obligations as they become due and how they will address working capital
deficiencies. We often find issuers reproduce in their MD&A information that is readily
available from the financial statements without ensuring compliance with section 1.6 of
Form 51-102F1.
Example of deficient disclosure
Liquidity
Year ended
December 31, 2012
December 31, 2011
Difference
$
$
$
Cash flows from operating
(270,000)
102,000
(372,000)
activities
Cash flows from investing
(350,000)
(340,000)
(10,000)
activities
Cash flows from financing
520,000
425,000
95,000
activities
Increase (decrease) of cash
(100,000)
187,000
(287,000)
flows
Operating activities
The cash flows used in operating activities totalled $270,000. For the same period last year, the
cash flow from operating totalled $102,000.
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Investing activities
The cash flows used in investing activities increased by $10,000.
Example of deficient disclosure (continued)
Financing activities
The cash flows from financing activities totalled $520,000. For the same period last year, the
cash flows from financing totalled $425,000.
December 31, 2012
$
Cash
51,000
Accounts receivable
789,000
Inventory
800,000
Prepaid expenses
30,000
Bank indebtedness
350,000
Loan – Investment tax
120,000
credits
Accounts payable
1,035,000
Current portion of
150,000
long term debt
Total working capital
15,000
The company’s working capital decreased by $981,000.
Example of entity-specific disclosure
At the end of fiscal 2012, the Company had $51,000 of cash on hand and working capital of
$15,000.
Given the various projects the Company is handling in the short and medium terms, management
still considers the current cash balance and forecast net cash flows from operating activities for
the next 12 months to be below the $300,000 desirable for its planned business development
activities.
The success of development projects depends greatly on the Company’s ability to generate
sufficient cash to meet its needs. In fiscal 2012, the Company renegotiated the terms of its
financing agreement with its financial institution and obtained an operating line of credit of
$500,000 to continue development of its X products distribution activities and to finance growth.
As at the end of fiscal 2012, $150,000 was available on the line of credit. Also in 2012, the
Company contracted new financing of $120,000, secured by investment tax credits, to continue
research and development work on its Y project. This financing was used at the end of fiscal
2012.
Hence, as of the end of fiscal 2012, management was still considering various sources of
financing available on the market to increase the Company’s liquidity. At year end, management
was negotiating a private placement of $500,000 that was completed after year end.
December 31, 2011
Increase (decrease in
$
working capital)
$
151,000
(100,000)
852,000
(63,000)
942,000
(142,000)
28,000
2,000
0
(350,000)
0
(120,000)
877,000
(158,000)
100,000
(50,000)
996,000
(981,000)
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2.
Discussion of operations
An MD&A should explain what factors contributed to changes in an issuer’s operations. Issuers
often reproduce information from the statement of profit or loss and other comprehensive income
in their MD&A, without explaining what caused the changes.
In accordance with section 1.4 of Form 51-102F1, the revenue analysis included in an issuer’s
MD&A should discuss any change caused by selling prices, volume or quantity of goods or
services being sold, or the introduction of new products or services. It is useful to investors if the
issuer quantifies each of these elements. If other elements affected revenue, such as the
introduction of a new competitor, the issuer’s MD&A should also address these factors. If an
issuer’s financial statements present information from more than one reportable segment, the
issuer must discuss the results of each segment in its MD&A.
Example of deficient disclosure
The Company reported revenue of $7,666,000 for the year ended December 31, 2012, compared
with $7,098,000 a year earlier, an increase of 8%. The growth is mainly due to the sales of L
products.
Example of entity-specific disclosure
During fiscal 2012, the Company’s sales increased by 8%. The Company undertook a new
activity, namely the distribution of L product in the Canadian manufacturing sector. As at year
end, because of a delay in the manufacturing of L products, this activity had not yet reached the
level that management had anticipated. The sales of L products increased sales by 7%.
Since 30% of sales are made in US dollars, the depreciation of the Canadian dollar had a positive
impact on sales. This impact was a 3% increase in sales.
Despite the positive effect of the introduction of L product and of the exchange rate, the arrival
of a new competitor forced the Company to decrease its sale price on product V. With this
decrease, the Company was able to maintain the sale volume of product V. Due to the quality
reputation of product V, management believes that no other decrease of the sale price will be
necessary to maintain the sale volume of product V in the future. The decrease in the sale price
caused a 2% decrease in sales.
3.
Related party transactions
Under section 1.9 of Form 51-102F1, issuers are required to identify the related person or
entities, to discuss the business purpose of the transaction, to describe the measurement basis
used and to discuss ongoing commitments resulting from the transaction. It is common for
issuers to reproduce the related party transactions note provided in their financial statements or
to simply refer to that note. However, IAS 24 Related Party Disclosures does not require the
same level of information as section 1.9 of Form 51-102F1.
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Example of deficient disclosure
The Company paid $150,000 to a company controlled by a director for consulting services.
Example of entity-specific disclosure
During the year, the Company paid $150,000 to Orange Inc., which is controlled by Mr. Smith,
Chief Executive Officer and director of the Company. The $150,000 fee was paid for
programming services relating to the implementation of new inventory software. The fee is
based on what Orange Inc. usually charges its regular clients less a 10% discount. The Company
expects to continue to use Orange Inc.’s programming services until the implementation of the
new inventory software is completed.
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APPENDIX C
OTHER REGULATORY DISCLOSURE DEFICIENCIES
CSA Staff assess issuer compliance with securities laws. Our objective is to promote clear and
informative disclosure that will allow investors to make informed investment decisions. The
areas where compliance issues persist include disclosure about: 1) mineral projects; 2) oil and
gas activities; 3) disclosure controls and procedures and internal control over financial reporting
in venture issuers’ MD&A; and 4) executive compensation.
1.
Mineral projects
Issuers engaged in mining activities have to comply with the requirements set out in National
Instrument 43-101 Standards of Disclosure for Mineral Projects. Common deficiencies noted
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.
2.
Oil and gas activities
Issuers engaged in oil and gas activities must comply with the requirements set out in National
Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101). Common
deficiencies noted include:
•
failure to adapt to current requirements of Form 51-101F1 Statement of Reserves Data
and Other Oil and Gas Information (Form 51-101F1), Form 51-101F2 Report on
Reserves Data by Independent Qualified Reserves Evaluator or Auditor, and Form
51-101F3 Report of Management and Directors on Oil and Gas Disclosure;
•
non-compliance with sections 5.9, 5.16 and 5.17 of NI 51-101 concerning disclosure of
resources other than reserves, classification to the most specific category of resources,
summation across resource categories and disclosure of high case estimates of resources;
•
inadequate disclosure of the meaning of, and method of calculating, the metrics used by
issuers to measure and compare oil and gas activities;
•
deficiencies in reserves reconciliation disclosure, including, for example, opening
balances for the reserves reconciliation required under item 4.1 of Form 51-101F1 that do
not agree with the prior year’s closing balances; and
•
insufficient and boilerplate disclosure of significant factors and uncertainties as per items
5.2 and 6.2.1 of Form 51-101F1, regarding the issuer’s proved and probable undeveloped
reserves and plans for developing those reserves under item 5.1 of Form 51-101F1.
3.
Disclosure controls and procedures (DC&P) and internal control over financial
reporting (ICFR) in venture issuers’ MD&A
Some venture issuers discussed DC&P or ICFR in their MD&As, but did not include cautionary
language. In accordance with section 15.3 of the Companion Policy to National Instrument
52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (52-109 CP), if a
15
venture issuer and its certifying officers file Forms 52-109FV1 or 52-109FV2 (Venture Issuers
Basic Certificates) and choose to discuss the design or operation of one or more components of
their ICFR and DC&P in the MD&A or other regulatory filings, they should also consider
disclosing in the same document that:
(a) the venture issuer is not required to certify the design and evaluation of its DC&P and ICFR
and has not completed such an evaluation; and
(b) inherent limitations on the ability of the certifying officers to design and implement on a
cost-effective basis DC&P and ICFR for the issuer may result in additional risks to the
quality, reliability, transparency and timeliness of interim and annual filings and other
reports provided under securities legislation.
Venture Issuers Basic Certificates provided in National Instrument 52-109 Certification of
Disclosure in Issuers’ Annual and Interim Filings (NI 52-109) include a “Note to Reader” that
the certifying officers are not making any representations relating to the establishment and
maintenance of:
i) controls and other procedures designed to provide reasonable assurance that information
required to be disclosed by the issuer in its annual filings, interim filings or other reports filed
or submitted under securities legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with the issuer’s
GAAP.
In the following example, the venture issuer used Venture Issuers Basic Certificates.
Example of deficient disclosure
Disclosure controls and procedures
The Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) are
responsible for establishing and maintaining the Company’s disclosure controls and procedures.
These controls and procedures have been evaluated as at December 31, 2012 and have been
determined to be effective.
Internal controls over financial reporting
The Company’s CEO and the CFO are responsible for establishing and maintaining the
Company’s internal controls over financial reporting.
The internal control system pertaining to financial reporting gives a reasonable assurance as to
the reliability of the financial information reported and the preparation of the financial statements
in accordance with IFRS.
In the above example, to avoid confusion, it would have been more appropriate for the venture
issuer to use Forms 52-109F1 or 52-109F2 (Full Certificates) as allowed by subsections 4.2(2)
and 5.2(2) of NI 52-109. However, if the venture issuer does use Full Certificates, it must use a
control framework for the design of ICFR, as required by subsection 3.4(2) of NI 52-109. The
guidance in Parts 6 and 7 of 52-109 CP regarding establishing and evaluating DC&P and ICFR
would also apply.
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If in the above example, the venture issuer intends to use only a Venture Issuers Basic Certificate
then it could have discussed only one or a few discrete components of DC&P or ICFR. In
addition, the MD&A disclosure should be clear and should not include assertions about the
design or evaluation of all aspects of DC&P or ICFR, and should not include any conclusions on
the effectiveness of DC&P or ICFR. In addition, the cautionary language set out in section 15.3
of 52-109 CP would ensure transparent disclosure.
For additional guidance on NI 52-109, please see CSA Staff Notice 52-325 Certification
Compliance Review and CSA Staff Notice 52-327 Certification Compliance Update.
4.
Executive compensation
Issuers must provide the executive compensation disclosure for the periods set out in, and in
accordance with Form 51-102F6 Statement of Executive Compensation of National Instrument
51-102 Continuous disclosure obligations. This disclosure can be included in an information
circular, an annual information form (AIF) or as a stand-alone document.
The executive compensation disclosure must be filed not later than 140 days after the end of the
issuer’s most recently completed financial year pursuant to subsection 11.6(3) of National
Instrument 51-102 Continuous Disclosure Obligations. We noted that some issuers failed to file
the executive compensation disclosure within 140 days. We remind issuers, that if they are not
planning to send an information circular to their securityholders within 140 days after the end of
their most recently completed financial year, they must include the executive compensation
disclosure in either the AIF or as a stand-alone document, and file it within the 140 days.
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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 list, 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. The issuer could have been
selected in order to monitor overall quality disclosure of a specific topic, observe trends and
conduct research.
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Questions
Please refer your questions to any of the following:
Nadine Gamelin
Allan Lim
Analyst, Continuous Disclosure
Manager
Autorité des marchés financiers
British Columbia Securities Commission
514-395-0337, ext. 4417
604-899-6780
Toll-free: 1-877-525-0337, ext. 4417
Toll-free 800-373-6393
nadine.gamelin@lautorite.qc.ca
alim@bcsc.bc.ca
Nicole Parent
Sabina Chow
Analyst, Continuous Disclosure
Senior Securities Analyst
Autorité des marchés financiers
British Columbia Securities Commission
514-395-0337, ext. 4455
604-899-6797
Toll-free: 1-877-525-0337, ext. 4455
Toll-free 800-373-6393
nicole.parent@lautorite.qc.ca
schow@bcsc.bc.ca
Cheryl McGillivray
Tony Herdzik
Manager, Corporate Finance
Deputy Director, Corporate Finance
Alberta Securities Commission
Financial and Consumer Affairs Authority of
403-297-3307
Saskatchewan
cheryl.mcgillivray@asc.ca
306-787-5849
tony.herdzik@gov.sk.ca
Elena Kim
Securities Analyst, Corporate Finance
Alberta Securities Commission
403-297-4226
elena.kim@asc.ca
Bob Bouchard
Kathryn Daniels
Director, Corporate Finance
Deputy Director, Corporate Finance
Manitoba Securities Commission
Ontario Securities Commission
204-945-2555
416-593-8093
bob.bouchard@gov.mb.ca
kdaniels@osc.gov.on.ca
Patrick Weeks
Christine Krikorian
Analyst, Corporate Finance
Senior Accountant, Corporate Finance
Manitoba Securities Commission
Ontario Securities Commission
204-945-3326
416-593-2313
patrick.weeks@gov.mb.ca
ckrikorian@osc.gov.on.ca
Pierre Thibodeau
Kevin Redden
Senior Securities Analyst
Director, Corporate Finance
Financial and Consumer Services Commission
Nova Scotia Securities Commission
(New Brunswick)
902-424-5343
506-643-7751
reddenkg@gov.ns.ca
pierre.thibodeau@fcnb.ca
Junjie (Jack) Jiang
Securities Analyst, Corporate Finance
Nova Scotia Securities Commission
902-424-7059
jiangjj@gov.ns.ca
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