MD guide

MD guide

A canadian Performance Reporting Board publication Preface The Canadian Institute of Chartered Accountants (CICA) established the Canadian Performance Reporting Board (CPRB) to advance the measurement and reporting of organizational performance outside of financial statement reporting. In support of its mission, the CPRB publishes guidance materials to assist preparers and thought- leadership documents that raise awareness about issues or that report the results of environmental scans and research.

Building A Better MD&A ??” A Guide For Smaller Issuers supplements the CPRB’s arlier material Management’s Discussion and Analysis: Guidance on Preparation and Disclosure that was published in 2004. Building A Better MD&A??”A Guide For Smaller Issuers is intended to assist senior management and boards of directors in maximizing the usefulness of their MD&A for investors. While it is targeted at smaller companies, the CPRB believes it may also be useful for larger entities. The CPRB welcomes comments about this guidance.

They should be addressed to: Chris Hicks, CA, Principal, Knowledge Development The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, ontano, M5V 3H2 Comments may also be sent by e-mail to md&a. [email protected] ca. November 2007 Table of Contents 1. Introduction…. 2. Preparing the MD&A. 2. 1 Where to Start. 32. 2 Helpful Hints…. 5 2. 3 Suggested Reporting Calendars. 3. MD&A Disclosures Most Important to Investors……………… 11 3. 1 Annual . 3. 1. 1 Profile and Strategy…. ….. ….. …. ………………….. Key Resources and Competencies. Performance Analysis.. Outlook. . Risks…. … . Interim Overseeing the Reliability and Timeliness of Disclosures … 19 Certification ??” Oversight and Review…. Additional Resources. Appendix ??” Regulatory Requirements ??” . . 11 123. 1. 2 133. 1. 3 .. 153. 1. 4 17 3. 1. 5 17 3. 2 184. .. 19 . 20 .. 21 MD&A content. …………. 23 It is generally recognized today that financial statements alone do not communicate all the information that investors seek.

Securities regulators and capital market participants view the Management’s Discussion and Analysis (MD) as an integral component of financial reporting, an essential companion to the financial statements. What are the most useful disclosures beyond financial statements that smaller ssuers will want to provide to capital markets in their MD? This guide urges companies to consider the MD as a key communication vehicle to investors, not just a regulatory compliance document.

The MD can be used to integrate and accumulate in one location material information about the company that investors most need to know. The MD can serve as an effective information source not only for use by investors and debt providers, but also as a helpful orientation for new directors and others interested in knowing about a company’s performance and prospects. The CICA ublication Management’s Discussion and Analysis: Guidance on Preparation and Disclosure offers more comprehensive guidance than that provided in this document.

Many larger reporting issuers have chosen to follow this Guidance, toa greater or lesser extent, in preparing and presenting their MD. This document offers tips and guidance for smaller issuers in preparing MD that are useful to investors. While written principally for the benefit of smaller issuers, companies of any size may find this guide helpful. Some of the disclosures suggested in this guide are not mentioned specifically in ecurities regulations but are consistent with the underlying principles and purpose of an MD as stated by regulators.

This guide does not set out all the detailed disclosures mandated by securities regulators as it is expected that MD preparers will always refer to applicable requirements. Headings of the key regulatory requirements related to the content of MD are provided in the appendix. For a summary of this and other CPRB publications, see http://www. cica. ca/cpr 2. Preparing the MD 2. 1 Where to Start Begin by reviewing the six general disclosure principles for MD . . Through the eyes of management: enable readers to view the company through the eyes of management 2.

Integration with financial statements: complement by providing useful quantitative and qualitative information that may not be reported in financial statements, as well as supplement through insightful analysis of financial statements 3. Completeness and materiality: be reliable, that is, complete, fair and balanced, and providing material information ??” namely, information that could influence a company 4. Forward-looking orientation: is fundamental to useful MD reporting 5. Strategic perspective: focus on management’s strategy for generating value for investors over time 6.

Usefulness: be written in plain language, with candour and without exaggeration, and embody the qualities of understandability, relevance, comparability and consistency over reporting periods For both annual and interim MD&As, review information that will help to identify the key disclosures most likely to be important to investors. Financial Statements: Identify key items and issues arising from financial statements that are likely to be of most interest to investors and that are not self- vident.

Corporate Objectives: Consider business goals, objectives and challenges for the year as communicated internally and externally by management. Board Meetings: Review board agendas, minutes and submissions to identify relevant issues discussed ??”e. g. strategy, risks, operational or financial matters. Identify issues that need to be drawn to the attention of investors, including significant transactions, commitments, events and changes. CICA Management’s Discussion and Analysis: Guidance on Preparation and Disclosure ??” 2004 buildING a better MD ??” A guide for smaller issuers

Press releases: Review the content of press releases since the last MD (annual or interim) for material information. Other filings: Review other filings such as annual information forms, information circulars or material change reports that may contain information to consider including in the MD. External factors: Identify industry specific and economic or environmental issues that are expected to impact performance going forward (and therefore should be explained in the MD). Competitors’ disclosures: Review other companies’ disclosures, especially those of rimary competitors. There is also an increased risk of regulatory review/ scrutiny of MD that do not compare well with those of other companies in the same industry. ) Award winning disclosures: Consider looking at the disclosures of winners of the CICA Corporate Reporting Awards, especially those of the small cap/ venture issuers category. Regulatory continuous disclosure review reports: Review recent CSA reports and staff notices that summarize recurring MD disclosure deficiencies. Examples of P only reproducing financial statement information, P lack of segment reporting,

P failure to provide appropriate disclosures about liquidity and capital resources, P inadequate discussion of one time adjustments, such as write downs, P failure to provide appropriate forward looking information, P failure to provide information on risks, P lack of analysis and disclosure of operating costs and their relationship to revenues, P failure to discuss environmental issues that have impacted or may impact results, P not including information on quarterly trends and fourth quarter adjustments, P not including information on financial instruments, See http://www. cica. /index. cfm/ci_id/131 /la_id/l for information on the awards and award winners. An example of a relevant staff notice is CSA Staff Notice 51-316 Continuous Disclosure Review of Smaller Issuers. 2 Preparing the MD P lack of discussion about projects under development for operations that are not producing significant revenue, and failure to provide sufficient disclosures about related party transactions. Review any comment letters received from regulators. If applicable to your company: Analyst reports: Look at analyst reports on your company or on competitors in the same industry.

Conference or investor presentations: Review questions and discussions at conference or investor presentations about your company or any presentations by companies in the same industry. 2. 2 Helpful Hints Some helpful hints for preparing effective MD disclosures include: Consider the purpose of your MD: Use the MD to integrate material information about the company that investors need to know ??” investors and analysts appreciate finding information accumulated and integrated in one location. Make your MD a primary disclosure document about your company, rather than considering it simply as a regulatory compliance ocument.

Seize the opportunity to provide context: The MD is to be prepared “through the eyes of management”, enabling meaningful manner. Involve the CEO and other management: To ensure consistency in messaging, the CEO needs to be involved early in the process to participate in identifying key messages for the MD. In addition, other management (sales, operations, legal, etc. as appropriate) needs to be involved in identifying themes. Seek directors’ input: Ask directors for their input based on their work on other boards or in capital markets.

Create a mock-up of the redesigned MD&A: To build management and director commitment to a redesigned MD&A consider creating a mock-up that will illustrate the concept, content and presentation for the new MD&A. Present pros and cons of moving to the new design. Start early: In the first year of redesigning the MD&A, it will be particularly important to begin the process early. The time required in subsequent years may be less, as the redesigned template can be used Allow sufficient time for review by senior management and the audit committee and for any resulting revisions.

Develop a reporting calendar (see suggested reporting calendars at 2. 3). Use plain language: Avoid Jargon, boilerplate and long sentences; make disclosures understandable to Explain the whys: Provide insights in analyzing information; connect the dots for investors. Add value for the reader; don’t simply repeat information that is apparent in the financial statements, such as year over year revenue increases. Provide balanced reporting: Address the bad news as well as the good (consistent with disclosure principle 3 on page 3).

Management earns credibility in the eyes of investors when it acknowledges things that have gone wrong and demonstrates a plan to rectify or respond. Highlight and discuss trends: Communicate and explain trends and indicate expectations as to whether the trends will continue into the future. Ensure a forward-looking orientation: ??? Provide insight into the future. Give readers information about longer term goals and metrics and then report progress on them. Use graphics and tables: Effective use of graphics and tables can enhance communication about trends or complex issues and shorten the length of the MD.

Provide a table of contents: A table of contents provides a roadmap for locating key information located throughout the MD. Establish a review process: Establish a process involving management (CEO, sales, operations and legal executives, if appropriate) to review drafts to ensure the MD provides a complete and fair picture. (Larger companies establish a disclosure committee to provide a structure to ensure that information percolates up to management and that the MD and other disclosures provide a complete and fair picture. Allow sufficient time to enable the audit committee and board of directors to review and provide feedback on the MD. Challenge attempts to omit disclosures due to competitive reasons: Some may esitate to disclose significant information due to concerns about maintaining competitive advantage. Challenge such concerns to determine the extent to which they are truly Justified (for example, if employees or others are aware of the issue, it is likely no longer confidential).

Weigh these concerns against the risks of losing the confidence of the capital markets and failing to meet regulatory requirements by not providing key information. Use a checklist: Use a checklist to ensure you include all necessary disclosures. In designing a checklist, consider applicable disclosure requirements to ensure completeness of he MD (see appendix) and consider reviewing the CICA’s Management’s Discussion and Analysis Guidance on Preparation and Disclosure of MD to identify opportunities for enhancing the usefulness of the drafted MD. . g. CICA MD Self-Assessment Tool for Preparers available at http://www. cica. ca/ cpr. Canadian Securities Administrators have set out continuous disclosure requirements for all companies that are reporting issuers with them. These requirements set out both what must be disclosed and where the disclosures should be located. National Instruments 51-102 (Continuous Disclosure Obligations), 43-101 Standards of Disclosure for Mineral Projects), and 51-101 (Standards of Disclosure for Oil and Gas Activities) are important documents.

In addition, National Policy 51-201 (Disclosure Standards) sets out disclosure standards regarding fair and timely disclosure of information to the capital markets. for a summary of the publication, see http://www. cica. ca/cpr. Adopt a continuous improvement approach: Consider incremental improvements in MD reporting, as changes do not have to be made all at once. Pick an area, e. g. liquidity, and focus on improving disclosures about the chosen topic in that period’s MD&A. 3 Suggested Reporting CAIendArs A Suggested Reporting Calendar for the Annual MD&A Preparation Process for Non-Venture Issuers (annual MD&A due no later than 90 days after period end*) Step Timing Develop and circulate a reporting calendar prior to period end CEO/CFO/other management identification of key themes/messages, (develop mock-up MD&A design if helpful) Draft a pro-forma MD&A (without actual results) and circulate to senior management for comments Review for compliance with regulatory requirements and revise pro-forma draft as necessary Insert actual results, along with necessary revisions f discussion and analysis after closing Circulate draft MD&A, review with senior management and revise as necessary and 2 to 3 weeks before filing Final CEO review and approval, CEO/CFO certification sign off (N. B. ensure consistency of MD&A with earnings press release) 1 to 2 weeks prior to filing Audit committee review of MD&A, revisions as necessary Board of director approval last week prior to filing Filing with securities regulators no later than 90 days after period end * 120 days for venture issuers A Suggested Reporting Calendar for the Interim MD&A (interim MD&A due no later than 45 days after period end*)

Review annual MD&A to determine if any key themes/messages need to be revised or updated Draft a pro-forma MD&A (without actual results) between closing Audit committee review of MD&A, revisions as necessary Board of director or audit committee approval no later than 45 days * 60 days for venture issuers 11 3. MD&A Disclosures to Investors Most issuers agree that it is important to communicate why investors should invest or continue to invest in their companies. This involves providing: ??? evidence of the quality of management, a discussion and analysis of historical performance, discussion and analysis of future prospects or outlook, a discussion of risks, risk management and sensitivities. As regulators have stated: “… users are interested in understanding what is behind the historical results of the RI [reporting issuer], what to expect in the future, and the rationale behind decisions made by management. This publication does not attempt to present all the detailed information that is required by securities regulators. Requirements of National Instrument 51-102 Form Fl MD&A and MI 52-109 Certification of Disclosure of Issuers’ Annual and Interim Filings must be satisfied. The appendix sets out the headings of the content requirements that apply to MD and references in the right hand column of the appendix are provided to assist preparers in linking regulatory requirements to relevant sections of this publication. 3. 1 Annual MD Annual MD disclosures are intended to provide a context and bigger picture for assessing past financial performance and future prospects.

Annual MD tend to be particularly useful to investors who are considering or analyzing a company for the first time. Otherwise investors use annual MD to confirm previously dis Alberta Securities Commission, Continuous Disclosure Review Program 2006 Report, February 16, 2007, page 2 12 closed information or identify significant changes in direction. The main elements of a useful MD, as discussed below, are: ??? profile and strategy, key resources and competencies, ??? performance analysis, outlook, and risks. 3. 1. 1 Profile and Strategy Company profile and business segments Set the context for investors by communicating matters such as: P what the company does and what industry it is in, P its key business segments and key business locations,