NIN 99/01 - CSA Staff Report on the Year 2000 Disclosure Review Program [NIN - Rescinded]

The British Columbia Securities Commission, together with the other members of the Canadian Securities Administrators ("CSA"), is publishing the CSA Staff Report on the Year 2000 Disclosure Review Program.

The Year 2000 Disclosure Review Program is an initiative of staff of the CSA. Staff selected a sample of continuous disclosure and prospectus filings and assessed the quality of Year 2000 disclosure made by issuers in light of the disclosure guidance provided in CSA Staff Notice 41-301/51-302 - The Year 2000 Challenge Disclosure Issues, published in January 1998 ("CSA Staff Notice"). The report concludes that there are serious inadequacies in the extent and nature of Year 2000 disclosure.

Staff prepared the report to assist issuers in providing meaningful disclosure on Year 2000 issues in their annual, interim and other disclosure documents . Staff expect issuers to address clearly and specifically their situation in relation to each of the four main categories of disclosure identified in the CSA Staff Notice and discussed in the report. Staff expect issuers to provide disclosure on contingency planning and vulnerability to the Year 2000 state of readiness of third parties, including suppliers, customers, lenders and borrowers.

Staff urge issuers and their advisors to take into account the report, the CSA Staff Notice and the Accounting Guideline on the Year 2000 Issue published by the Canadian Institute of Chartered Accountants when assessing their disclosure obligations under securities legislation.

Questions may be addressed to any of

Agnes Lau
Alberta Securities Commission
(403) 422-2191

Andrew Richardson
British Columbia Securities Commission
(604) 899-6730

Heidi Franken
Ontario Securities Commission
(416)593-8249

Sylvie Lalonde
Commission des valeurs mobilières du Québec
(514) 940-2150

DATED at Vancouver, British Columbia, on January 7, 1999.

Michael J. Watson
Executive Director

Executive Summary

This report has been prepared by staff of the Canadian Securities Administrators ("staff") to present the findings of the Year 2000 Disclosure Review Program (the "Review Program"). The Review Program involved the review of continuous disclosure and prospectus filings of reporting issuers ("Issuers"). Staff reviewed these filings to assess the quality of Year 2000 disclosure made by Issuers in light of the disclosure guidance provided in the form of a CSA Staff Notice issued in January 1998. The purpose of this report is to bring to Issuers’ attention the findings of the Review Program and assist them in meeting their disclosure obligations. The findings of the report do not reflect any assessment by staff of the adequacy or otherwise of the Year 2000 preparations of reporting issuers, whether individually or as a group.

In quantitative terms the results of the Review Program can be summarized as follows:

• 23% (or 40) of the 176 Issuers reviewed did not disclose any information about Year 2000 issues, while 77% (or 136) Issuers did disclose some information
  
• 74% (or 101) of the 136 Issuers that did disclose some information about Year 2000 issues did not address adequately the key elements of the Issuer’s Year 2000 risk exposure and efforts to mitigate that risk
  
• 59% (or 80) of the 136 Issuers that disclosed some information about Year 2000 issues provided statements that staff considered to be little more than a "boilerplate" description of the Year 2000 issue

In staff’s view, these findings indicate that the extent and nature of Year 2000 disclosure by reporting issuers is seriously inadequate. Staff expect annual reports to be filed by Issuers in the next few months to provide meaningful Year 2000 disclosure that addresses clearly and specifically the Issuer’s situation in relation to each of the elements identified in the CSA Staff Notice. In view of the short time remaining before January 1, 2000, staff believe it is particularly important that disclosure address directly Issuers’ vulnerability to the Year 2000 readiness of third parties, including suppliers, customers, lenders and borrowers, and contingency planning.

Where staff determine that an Issuer has failed to meet adequately its Year 2000 disclosure obligations, staff will consider appropriate regulatory action.


CSA Staff Report on the Year 2000 Disclosure Review Program

I. Introduction

This report has been prepared by staff of the Canadian Securities Administrators ("staff") to present the findings of the Year 2000 Disclosure Review Program (the "Review Program"). The Review Program involved the review of continuous disclosure and prospectus filings of reporting issuers ("Issuers"). Staff reviewed these filings to assess the quality of Year 2000 disclosure made by Issuers in light of the disclosure guidance provided by staff in the form of a CSA Staff Notice issued in January 1998. The purpose of this report is to bring to Issuers’ attention the findings of the Review Program and assist them in meeting their disclosure obligations. The findings of the report do not reflect any assessment by staff of the adequacy or otherwise of the Year 2000 preparations of reporting issuers, whether individually or as a group.

II. Canadian Securities Administrators ("CSA") Staff Notice 41-301 and 51-302 - The Year 2000 Challenge Disclosure Issues (the "CSA Staff Notice")

The CSA Staff Notice was published on January 30, 1998. This Notice recognized the need for Issuers to provide timely disclosure of Year 2000 issues. Staff believe that these issues give rise to uncertainties that are potentially significant for virtually all Issuers. The purpose of the CSA Staff Notice was to establish expectations relating to disclosure of information about the implications of the Year 2000 issue in continuous disclosure and prospectus filings and to enhance awareness of the Year 2000 issue. It was not an attempt by staff to assess the Year 2000 readiness of Issuers.

The existing requirements to disclose information about risks and uncertainties as part of Management’s Discussion and Analysis ("MD&A") are the foundation for the CSA Staff Notice on Year 2000 disclosure issues. It is in this context that the Notice described the minimum elements of disclosure in continuous disclosure and prospectus filings and described the Issuer’s responsibility to evaluate Year 2000 risks. It is important to note that the CSA Staff Notice did not address financial statement disclosure. Guidance on financial statement disclosure has been provided by the Accounting Standards Board of the Canadian Institute of Chartered Accountants ("CICA") and is discussed in a later section of this report.

The minimum elements of disclosure are categorized into four main areas. Staff would expect each of these categories to be addressed in an Issuer’s narrative disclosure explaining the risks and uncertainties arising from the Year 2000 issue and how those risks and uncertainties are being managed. These categories are as follows:

• Issuer’s vulnerability to Year 2000 issues (dependence on information technology, complexity of systems and extent of third party interactions)
• Evaluation of the Issuer’s situation and plans for critical systems
• Status of implementation of the Issuer’s remediation plans and the expected timing of completion (including testing and implementation)
  Information about associated costs, whether incurred to date or expected to be incurred in the future, including a description of the accounting treatment afforded such costs

It is important to note that, although the CSA Staff Notice links the Year 2000 issue to disclosure of risks and uncertainties in the MD&A, staff expect Issuers that are not subject to annual or interim MD&A requirements to provide Year 2000 disclosure as part of other narrative information that accompanies annual or interim financial statements.

All Issuers should review the CSA Staff Notice when preparing their Year 2000 disclosure and may wish to consider also relevant guidance issued by other regulatory or professional bodies.

III. CICA Accounting Guideline AcG-10 - The Year 2000 Issue (the "Guideline")

Issuers should note that, in June 1998, the Accounting Standards Board of the CICA issued an Accounting Guideline on the Year 2000 issue. The Guideline, which applies to all entities preparing financial statements in accordance with generally accepted accounting principles, provides that there should be minimum financial statement disclosure of the inherent uncertainty that the Year 2000 issue causes for an entity’s future financial results. The Guideline establishes criteria for additional financial statement disclosure such that the disclosure should be factual and verifiable and consistent with the inherent uncertainty disclosure. The Guideline also discusses the going concern implications of the Year 2000 issue and provides examples of other effects that may need to be considered in preparing financial statements.

The Guideline notes that qualitative discussion such as the adequacy of an entity’s mitigation efforts or the likelihood of their success are most appropriately included in documents such as MD&A. In staff’s view, MD&A provides opportunities for management to build on the required financial statement disclosure. MD&A, where required, is the appropriate place for Issuers to explain the seriousness of the Year 2000 issue in the Issuer’s particular circumstances and describe its action plans and progress against these plans and any contingency plans in the event that one or more mission critical systems fail to perform adequately.

Issuers should review the Guideline when preparing any Year 2000 disclosure to be included in the notes to their financial statements.

IV. Year 2000 Disclosure Review Program

The Review Program is a CSA project to review Year 2000 disclosure in continuous disclosure and prospectus filings for a sample of Issuers. The CSA’s objective was to assess the quality of Issuers’ disclosure against the benchmark of the CSA Staff Notice and to monitor and improve the quality of Year 2000 disclosure.

(a) Methodology

Staff selected a sample of continuous disclosure and prospectus filings for review. The review included 176 Issuers in 12 industry classifications. Issuers were selected either on a random basis or, in certain cases, as part of a specific industry group targeted by a particular CSA jurisdiction. Of the 176 Issuers, 26 Issuers selected were considered "development stage enterprises" and 86 were considered "senior" companies.

The continuous disclosure and prospectus filings were reviewed to see if they included Year 2000 disclosure. If the document contained Year 2000 disclosure, the disclosure was assessed in light of the guidance in the CSA Staff Notice.

(b) Findings

Frequency

77% (or 136) of the documents reviewed contained Year 2000 disclosure. The breakdown of the number of Issuers that provided Year 2000 disclosure by industry classification is as follows:

Where disclosure of the Year 2000 issue was made in annual filings, very few Issuers provided Year 2000 disclosure updates in their subsequent interim financial reports.

In staff’s view, the fact that an Issuer has not provided any disclosure about the Year 2000 issue implies that the Issuer is not exposed to Year 2000 issues. Staff believe the Year 2000 issue affects virtually all Issuers to some extent and as a result, the absence of comment by the Issuer on the Year 2000 issue would seldom be appropriate. An Issuer that believes it has no or minimal Year 2000 risk exposure should make a statement to that effect and explain the basis for that belief.

Quality of Year 2000 disclosure

The following findings are presented for the 136 (77%) Issuers reviewed that disclosed Year 2000 information.

The majority of Issuers reviewed as part of the Review Program did not provide the quality of detailed and specific disclosure that staff believe is warranted by the seriousness of the Year 2000 issue. In approximately 74% of the filings in which issuers provided Year 2000 disclosure, the disclosure was uninformative and ineffective. Generally, this was due to a lack of detail. In 59% of the cases, the disclosure was considered to be "boilerplate", meaning that the disclosure focussed on a generic description of the Year 2000 issue and did not enable a reader to assess the risk to that particular issuer and understand how the Issuer planned to manage that risk.

Issuers that were contacted by staff as part of the Review Program often provided staff with very informative disclosure on their Year 2000 plans. Some Issuers provided information to staff that addressed the guidance in the CSA Staff Notice but such information had not been disclosed publicly. Staff believe such information is relevant to the public and believe it is appropriate for inclusion in public filings consistent with the disclosure guidance in the CSA Staff Notice.

The following findings summarize the extent to which disclosure in the filings reviewed was consistent with the four main areas highlighted in the CSA Staff Notice and identify particular areas of weakness or inadequacy:

1. Issuer’s vulnerability to Year 2000 issues

Staff’s assessment of the disclosure under this category included taking into account the Issuer’s dependence on information technology, the complexity of its systems and the extent of its interaction with third parties.

Approximately one half of the Issuers that provided Year 2000 disclosure attempted to reflect the importance of Year 2000 issues in the context of the business of the Issuer. However, the vast majority did not include specific disclosure about how information technology is used in the Issuer’s operations or about the complexity of the information technology. Staff believe such information is important to assist investors in evaluating the significance of an Issuer’s exposure to Year 2000 risk. Useful disclosure would include such information as identification of major operational areas for review for Year 2000 issues or an explanation as to why the nature of an Issuer’s operations make its Year 2000 exposure less significant than might be expected. Disclosure generally was provided for the Issuer as a whole and was rarely provided by business segment even where it would appear that the risk exposure might differ significantly because of the different nature of operations in each segment.

Other findings

Materiality of Year 2000 issues to the Issuer’s operations:

• 50% of the filings included disclosure that the Year 2000 issues are not material to the Issuer’s operations
• 35% did not provide any disclosure regarding the materiality of Year 2000 issues
• 15% disclosed that Year 2000 issues could be material to the Issuer’s operations or that materiality is unknown

It is surprising that a significant number of Issuers do not consider Year 2000 issues to be material to their operations, particularly given Issuers’ exposure to third party risk which is discussed in more detail below.

Relationships with third parties:

• 56% of filings that included Year 2000 disclosure included disclosure regarding evaluation of material relationships with third parties (customers, suppliers, etc.) but this disclosure was often general in nature and merely indicated the issuer was aware of its exposure to third party risk rather than indicating what actions were being taken to manage this risk

2. Evaluation of Issuer’s situation and plans for critical systems

Staff assessed this aspect of Year 2000 disclosure by considering three categories of information: the Issuer’s evaluation of its Year 2000 risks; plans for managing these risks; and the existence of contingency plans.

Evaluation of Issuer’s Year 2000 risks:

• 58% of Issuers disclosed that their evaluation was still in progress
• 32% had completed their evaluation 
• 10% provided no disclosure regarding the status of their evaluation

In many cases, Issuers disclosed that they had substantially completed evaluating their exposure and implementing remediation plans in respect of their own systems or expected to do so shortly but were still in the process of evaluating their exposure in respect of third parties’ systems. In staff’s view, this further highlights the need for Issuers to turn their attention to disclosure of contingency planning and the Issuer’s reliance on the Year 2000 readiness of third parties.

Plans for critical systems:

• 56% of Issuers provided a general description of their plans
• 13% provided a detailed description
• 5% disclosed that their plan was fully implemented
• 26% did not provide any disclosure regarding their plans

In general, the disclosure of an Issuer’s plans for critical systems was uninformative due to a lack of detail.

Contingency plans:

88% of Issuers did not disclose the existence of any contingency plans. 17% of Issuers disclosed an intention to create a contingency plan but were often not specific about a timetable for doing so.

A significant concern to staff is the lack of disclosure regarding contingency planning. This issue is addressed in more detail in a later section of the report.

3. Status of implementation of the Issuer’s remediation plans and expected timing of completion

Under this disclosure category staff looked for disclosure by Issuers of their progress against plan. In particular, staff considered how Issuers described their progress, whether in terms of labour employed on Year 2000 issues or disclosure of the percentage of mission critical systems tested and verified as Year 2000 compliant.

It was apparent from this review that in the vast majority of cases it is not possible to tell how far along an Issuer is in comparison to its plan.

In terms of assessing Year 2000 readiness, some Issuers provided very helpful disclosure about their governance systems and the deployment of human resources in relation to the Year 2000 problem. This type of information is useful in enabling a reader to understand the extent of resources that the Issuer is employing to detect and resolve problems in a timely way

Timetable for expected completion of testing and implementation:

• 27% by the end of 1998
• 29% next year
• 44% no specific timetable disclosed (includes disclosure such as "by the year 2000")

Staff expect Issuers to disclose specific dates for completion of testing and implementation unless the Issuer does not have a plan in place, in which case that fact should be disclosed.

4. Costs incurred to date and expected to be incurred in the future

Costs incurred to date:

• 14% provided disclosure regarding costs incurred to date
• 59% did not provide disclosure regarding costs incurred to date
• 27% disclosed that the costs incurred to date were not material to the Issuer’s operations

Estimated total or future costs:

• 24% provided disclosure regarding estimated costs
• 38% did not provide disclosure regarding estimated costs
• 38% disclosed that estimated costs were not material to the Issuer’s operations

Accounting treatment:

• 73% of Issuers did not provide a description of the accounting treatment for Year 2000 costs

Issuers who provided information about costs incurred to date and expected costs generally provided at least a basic explanation of the accounting treatment for such costs. Staff expect all Issuers to disclose their accounting treatment for Year 2000 costs.

V. Areas for improvement

Staff are concerned about the quality of Year 2000 disclosure provided by Issuers to date. Staff’s goal is to increase the frequency and quality of Year 2000 disclosure made by Issuers and it is hoped that this report will assist Issuers in meeting their disclosure obligations in future filings.

Time is running out for Issuers to provide meaningful disclosure on Year 2000 issues sufficiently in advance of the Year 2000. Staff expect annual reports filed by Issuers in the next few months to provide meaningful disclosure of information about their Year 2000 issues. To assist Issuers in achieving this objective staff have identified the following features of effective disclosure and have highlighted areas in which improved disclosure is needed:

Features of effective disclosure

Staff will not consider "boilerplate" disclosure to be acceptable. Staff consider "boilerplate" disclosure to be disclosure that is focussed on a generic description of the Year 2000 issue and does not enable a reader to assess the risk to that particular Issuer and understand how the Issuer plans to manage that risk. Effective disclosure would, at a minimum:

• describe a specific Issuer’s situation (explain the risk exposures and explain how the risks are being managed);
• enable readers to evaluate the Issuer’s risk exposure;
• specifically address the materiality of Year 2000 issue to the Issuer’s operations;
• describe the Issuer’s third party risk exposure; and
• provide information on costs incurred and expected to be incurred and the accounting treatment for these costs.

Staff believe that all Issuers are exposed to Year 2000 risks, but to different degrees. As a result, Issuers need to be specific about their risk exposures and plans for critical systems. Issuers should discuss the results of remediation activities and discuss the status of testing carried out to date or planned.

Issuers need to provide more detailed disclosure on their assessment of their vulnerability to the state of readiness for the Year 2000 of third parties, including suppliers, customers, lenders and borrowers. In the filings reviewed, Issuers generally have not provided much disclosure on their vulnerability in this respect or how they are managing or intend to manage this risk.

Contingency plans

Since the Year 2000 issue is generally recognized as a risk mitigation exercise, staff would expect Issuers to be turning their attention to contingency planning. Contingency planning is warranted to address the following situations:

• an Issuer has significant third party risk exposure;
• an Issuer believes it has satisfactorily addressed its Year 2000 issues but cannot be certain that mission critical systems will not fail; and
• an Issuer may have come to the realization that remediation plans cannot be completed in time.

Staff expect specific disclosure of what an Issuer has achieved in terms of contingency planning to address these situations and how the Issuer intends to work around mission critical systems that fail. Issuers should ensure they have assessed the extent of risks and uncertainties that may prevent successful completion of any aspect of the Issuer’s Year 2000 plan, including an assessment of the potential consequences of failure and whether contingency plans exist to provide for this eventuality.

VI. Interim Reporting

Staff believe the Year 2000 issue gives rise to uncertainties that are potentially significant for virtually all Issuers and entities contemplating the issuance of securities by way of prospectus. The nature of the Year 2000 issue and the short time within which it must be addressed are such that staff strongly encourage all Issuers to update their Year 2000 disclosure as developments occur or significant milestones are reached. Staff believe interim reports are an appropriate vehicle for such disclosure. Issuers should be continually reassessing the need to disclose information concerning projected expenditures and uncertainties associated with Year 2000 consequences.

VII. Future CSA Action

Review of Year 2000 disclosure will continue into 1999. Where staff determine that an Issuer has failed to adequately meet its Year 2000 disclosure obligations, either in prospectus or continuous disclosure filings, staff will consider appropriate regulatory action.

Failure to provide appropriate Year 2000 disclosure in a prospectus or annual information form may result in a delay in the issuance of a receipt for a final prospectus or, in some cases, the acceptance of an annual information form.

Other action may include:

• requiring an Issuer to update its disclosure record through an immediate press release or filing of a material change report;
• requiring an issuer to rectify the deficiency in current and future filings; or
• enforcement action against Issuers or their directors/officers that fail to disclose material information regarding Year 2000 issues.

Each of the jurisdictions of the CSA can pursue a variety of enforcement remedies.