Securities Law

BCN 2005/16 - Report on Staff’s Review of Management’s Discussion and Analysis [BCN - Lapsed]

Published Date: 2005-03-23
Rescinded Date: 2012-05-31

Purpose

This report contains the main findings arising from our review of management’s discussion and analysis (MD&A) filed by a sample of BC-based reporting issuers. We have concluded that many issuers need to improve the quality of their MD&A disclosure.

Objective and Scope of Review

The adoption of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) on March 30, 2004 significantly changed the disclosure requirements for MD&A. The new form of MD&A (Form 51-102F1) added new disclosure requirements and altered some disclosure items previously required under the old form of MD&A in BC (Form 51-901F Quarterly and Year End Report).

Our continuous disclosure reviews of interim MD&A filed under NI 51-102 indicate a lack of compliance and understanding with some of the new MD&A requirements. In an effort to further evaluate the scope of the problem and the specific problem areas, we conducted a two-part MD&A review project.

Part 1

We reviewed the first filing of Form 51-102F1 made by 485 BC-based issuers between June 1, 2004 and September 30, 2004. We asked 115 issuers to re-file their interim MD&A. In addition, we asked an additional 25 issuers to change disclosure in future MD&A filings.

Part 2

We performed a subsequent review of the 140 issuers who were sent deficiency letters in Part 1. For issuers we asked to re-file, we reviewed the re-filed interim MD&A. For issuers who committed to make changes in future MD&A filings, we reviewed the subsequent interim MD&A filing. Although the subsequent review did show some improvements, the overall quality of the MD&A disclosure still fell short of our expectations.

Specific Disclosure Deficiencies Identified

Based on Parts 1 and 2 of our MD&A review project, we identified MD&A disclosure deficiencies in six areas:

  • Selected annual information
  • Summary of quarterly results
  • Critical accounting estimates
  • Changes in accounting policies including initial adoption
  • Disclosure of outstanding share data
  • First MD&A filed in Form 51-102F1

1.   Selected annual information[1]

Form 51-102F1 requires issuers to provide certain financial data derived from the financial statements for each of the three most recently completed financial years. As well, an issuer must discuss the factors that have caused period to period variations that the issuer believes would enhance an understanding of, and would highlight trends in, financial condition and results of operations. This requirement for selected annual information (quantitative and qualitative) applies to the annual MD&A and also to an interim MD&A if it is the first MD&A filed in Form 51-102F1.

During our initial review we noted that many issuers did not provide any disclosure relating to selected annual information (quantitative or qualitative). During our subsequent review we noted that, although many issuers included the required numerical data, less than one-third of the issuers discussed any factors that had caused period-to-period variations.

Issuers’ discussion of past results should provide information about the quality, and potential variability, of earnings and cash flow to assist investors in determining if past performance is indicative of future performance[2]. To accomplish this, issuers should supplement the quantitative financial data derived from financial statements with a qualitative discussion that enhances the understanding of, and highlight trends in, financial condition and results of operations.

2.   Summary of quarterly results[3]

Issuers must provide specified data for revenue and income derived from the interim financial statements for each of the last eight quarters. This requirement applies to both annual and interim MD&A.

Most issuers in the review sample included the required numerical data, but a significant number of the issuers did not discuss any factors that caused period-to-period variations.

The analysis of past results should provide information about the quality, and potential variability of earnings and cash flow to assist investors in determining if past performance is indicative of future performance. The quantitative quarterly information must be supplemented with a qualitative discussion of the factors that have caused variations over the quarters necessary to understand general trends that have developed and the seasonality of the business[4].

3.   Critical accounting estimates[5]

The MD&A form requires issuers, other than venture issuers, to provide an analysis of their critical accounting estimates. 

During Part 2 of our review project, we reviewed 25 non-venture issuers’ MD&A. Most of those issuers identified their critical accounting estimates and the methodology used in determining the estimates. However, most of the non-venture issuers reviewed did not comply with MD&A form requirements to discuss:

  • the assumptions underlying the accounting estimate that relate to matters highly uncertain at the time the estimate was made,
  • any known trends, commitments, events or uncertainties reasonably expected to materially affect the methodology or assumptions,
  • reasons the critical accounting estimate is reasonably likely to change from period to period and materially impact the financial presentation,
  • the significance of the critical accounting estimate to the issuer’s financial condition, changes in financial condition and results of operation, including financial statement line items affected, and
  • the segments affected by the critical accounting estimate and the estimate on a segment basis.

4.   Changes in accounting policies including initial adoption[6]

The MD&A form requires an issuer to discuss and analyze any change in accounting policy that it has adopted or expects to adopt after the date of the financial statements. This includes changes an issuer expects to make voluntarily and those due to a change in an accounting standard or a new accounting standard that does not have to be adopted until a future date.

One third of the non-venture issuers and half of the venture issuers reviewed in Part 2 of our MD&A review project did not fully comply with the MD&A requirements for disclosure of changes in accounting policy. Many issuers failed to discuss and analyze changes in accounting policies that were disclosed in the financial statements. Other issuers’ MD&A disclosure of changes in accounting policy was identical to the disclosure in their financial statements. However, the form requires issuers to discuss the potential impact of the change in accounting policy on the business, for example technical violations or default of debt covenants or changes in business practices[7].

5.   Disclosure of outstanding share data[8]

The MD&A form requires disclosure of outstanding share data[9]. In Part 1 of our review project we identified many issuers who did not provide any details of outstanding share data in their MD&A. In Part 2 of our review project we found that less than half of the issuers provided the required details of outstanding share data.

NI 51-102 requires disclosure in the MD&A of outstanding share data as of the latest practicable date[10]. The “latest practicable date” should be current, and as close as possible to the date of filing of the MD&A[11]. The policy states that simply disclosing the number of securities outstanding at the period end is generally not sufficient to meet this requirement.

6.   First MD&A filed in form 51-102F1[12]

If the first MD&A filed in Form 51-102F1 is an interim MD&A, the interim MD&A must include all the disclosure elements set out in Item 1 of Part 2 of the form, such as a discussion of critical accounting estimates and changes in accounting policies. This ensures that the first MD&A provided in Form 51-102F1 is a comprehensive platform that will be the basis for future interim MD&A.

We identified many issuers who did not include all the disclosure elements required in the form[13]. Specifically, issuers did not provide the following:

  • selected annual information[14]
  • the table of contractual commitments for non-venture issuers[15], and
  • a discussion of critical accounting estimates for non-venture issuers[16]

If the first MD&A filed in Form 51-102F1 is an interim MD&A, the interim MD&A must include all the disclosure elements in Item 1 of Part 2 of the form.

Next Steps

We will continue monitoring MD&A with emphasis on the specific issues discussed in this notice. We will direct our efforts towards improving disclosure by issuers, their senior management and directors.

March 21, 2005

Martin Eady, CA
Director, Corporate Finance 

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the section Securities Law & Policy: Policy & Instruments.


[1] Part 2, Item 1.3 of Form 51-102F1
[2] Refer to general instructions to Form 51-102F1
[3] Part 2, Item 1.5 of Form 51-102F1
[4]Refer to Part 2, Item 1.5 of Form 51-102F1
[5] Part 2, Item 1.12 of Form 51-102F1
[6] Part 2, Item 1.13 of Form 51-102F1
[7] Refer to Part 2, Item 1.13 of Form 51-102F1
[8] Part 2, Item 1.15 of Form 51-102F1
[9] Refer to Part 2, Item 1.15 of Form 51-102F1
[10] Section 5.4 of NI 51-102
[11] Refer to Item 5.3 of the companion policy to NI 51-102 (51-102CP)
[12] Part 2, Item 2.2 of Form 51-102F1
[13] Refer to Part 2, Item 1 of Form 51-102F1
[14] Part 2, Item 1.3 of Form 51-102F1
[15] Part 2, Item 1.6 of Form 51-102F1
[16] Part 2, Item 1.12 of Form 51-102F1