July 20, 2010

On July 9, 2010, the Canadian Securities Administrators (CSA) published Staff Notice 51-332 Continuous Disclosure Review Program Activities for the Fiscal Year Ended March 31, 2010 (SN 51-332), which sets out the results of the CSA's continuous disclosure review program of issuers, other than investment funds, over the CSA's last fiscal year.

The purpose of the CSA's continuous disclosure review program is to identify material disclosure deficiencies affecting the reliability and accuracy of the disclosure records of reporting issuers, with the fundamental objectives being education and compliance. Staff of the CSA jurisdictions employ a risk-based approach to select issuers for either a full review or an issue-oriented review. The CSA's risk-based approach focuses on accounting issues and disclosure where either non-compliance is probable or the CSA anticipates a need for increased compliance. In the last year, CSA members conducted 1,351 continuous disclosure reviews, 527 of which were full reviews and 824 of which were issue-oriented reviews.[1] In fiscal 2010, the issue-oriented reviews focused on certification, International Financial Reporting Standards (IFRS) transition disclosure, executive compensation, mining technical disclosure, oil and gas technical disclosure, going concern, asset impairment, forward-looking information, press releases, defined benefit pension plans, and complaints.

Results of the Continuous Disclosure Review

Upon the completion of a continuous disclosure review, the results are classified into one or more of five categories, reflecting the seriousness of the identified deficiencies. The outcomes for the issuers subject to continuous disclosure review for fiscal 2010 are as follows:

• 4% were cease-traded, placed on a default list, or referred to enforcement
• 16% were required to amend or re-file certain continuous disclosure documents
• 43% were informed that certain changes or enhancements are required in the next filing as a result of deficiencies identified
• 9% were notified of certain disclosure enhancements that should be included in future filings through the CSA's new education and awareness category
• 28% were required to take no action as a result of the review

Overall, in 2010, 72% of issuers reviewed were required to take some action to improve disclosure.

Specific Deficiencies Identified by the CSA

To assist issuers in avoiding common problems, in SN 51-332 the CSA provide examples of deficiencies frequently found in financial statements, Management Discussion & Analysis (MD&A), and oil and gas disclosure.

With respect to financial statements, the deficiencies identified by the CSA generally relate to disclosure surrounding accounting policies and measurement issues. In particular, the four key areas in which the CSA continue to find measurement issues and deficient disclosure are: financial instruments (valuation techniques, credit and liquidity risks, and aging and sensitivity analysis of past due accounts and receivables); revenue recognition; goodwill; and capital disclosure. The CSA emphasize that a succinct and comprehensible explanation of significant accounting policies is an essential component of an issuer's financial statements as such policies, when properly explained, provide a guide to allow investors to effectively interpret the financial results.

The CSA note, however, that MD&A remains the area with the most compliance issues. Although the CSA consider the MD&A to be a critical disclosure document for investors, one that is intended to provide clear disclosure of key risks and trends along with other material information not set out in the financial statements, the CSA continue to observe insufficient disclosure; many issuers persist in offering boiler-plate disclosure rather than disclosure specifically tailored to their particular industry and business. The CSA emphasize that issuers should be providing entity-specific disclosure in the MD&A that would enable the reader to effectively assess the current financial condition of the given issuer and its future prospects. Specifically, the CSA note critical areas where issuers continue to provide insufficient generic disclosure: operations; liquidity risk; related parties; and critical accounting estimates.

Finally, with respect to oil and gas issuers, the CSA note that they continue to see disclosure of in-place volumes using terms not recognized by the Canadian Oil and Gas Evaluation Handbook. Another common problem is the combining of terms resulting in potentially misleading disclosure, such as with respect to volumes described as contingent reserves or prospective reserves.

Key Issues for Next Year's Continuous Disclosure Review Program

SN 51-332 provides that in addition to the full review program, the CSA members will continue to conduct issue-oriented reviews throughout the CSA's 2011 fiscal year. Although the key issues are subject to change depending on economic and market conditions, the following issue-oriented reviews are currently planned for 2011:

• IFRS transition disclosure[2]
• Disclosure of material contracts
• Corporate governance
• Follow-up review of certification

---

[1] The 1,351 reviews were conducted from among Canada's approximately 4,200 reporting issuers (excluding investment funds and those issuers that have been cease-traded).

[2] In its Staff Notice 52-718 IFRS Transition Disclosure Review, the Ontario Securities Commission (OSC) advised issuers to anticipate staff requests for re-filings of MD&A in the future if an issuer has not met its disclosure obligations. As well, the OSC warned, staff may consider other regulatory action as circumstances warrant.