28 September 2020

Results season: Disclosure challenges in the COVID-19 pandemic

This article was written by Tim Bednall, Diana Nicholson, Will Heath and Miriam Kleiner.

Australian listed companies with a 30 June year end faced unique challenges as they prepared their full-year accounts this year. COVID-19 and associated restrictions closed some businesses, materially impacted others (especially in the retail, hospitality, tourism, health, property and arts sectors), and created unexpected opportunities for others, but generally made decisions about provisions, valuations and impairments much more difficult. And with that came the challenge of meeting continuous disclosure requirements ahead of formal results announcements.

COVID-19 has also meant that very few companies have provided earnings guidance for FY21, leaving investors with much less information than usual.

Pre-results announcements

As a general matter, ASX-listed companies responded to the challenge and kept the market informed as decisions were made about these issues, so that there were very few major surprises in the formal results announcements.

Below are some examples of announcements of COVID-related charges ahead of full year results announcements:

    • CBA announced a $1.5 billion COVID-19 loan provision in its third quarter update in May. It then announced additional provisions of $300m for remediation exposures in 2H20 on 30 July, ahead of its results announcement on 12 August. The remediation provision was not COVID-related but indicated that there would be no other material provisions or impairments that had not previously been flagged, which was the case.  

    • Qantas has been keeping the market informed of its response to COVID-19, including comprehensive disclosures on 25 June at the time of an equity raising. Those disclosures included guidance on FY20 full year financial performance, and detailed information on asset impairments and other COVID-related expenses. The full year results were consistent with these disclosures.

    • Tabcorp announced a goodwill impairment charge of $1bn to $1.1bn on 3 August, ahead of its full year results announcement on 19 August. The impairment was attributable to a range of factors, most of which related to the COVID-19 pandemic. Tabcorp also gave guidance on the likely earnings results of FY20.

    • Origin announced additional non-cash charges for FY20 on 15 July, including provisions related to COVID-19, ahead of its results announcement on 20 August.

Qualified results announcements

Many full-year results announcements also contained qualifying language related to the uncertain impact of COVID-19.

For example, the notes to the Tabcorp accounts included the following statements:

“The COVID-19 pandemic and government restrictions have affected these businesses to varying degrees, and in turn their financial and operational performance primarily due to the temporary closure of licensed venues and agencies and disruption to sporting events and international racing. The outlook for FY21 and beyond continues to be uncertain due to the timing of lifting of COVID-19 restrictions and any potential longer-term changes to consumer behaviour as an indirect result of the pandemic and increased economic uncertainty.”

The Qantas full-year accounts include the following note:

“Impact of COVID-19 on substantial operations: As the impact of COVID-19 continues to evolve, it is extremely challenging to predict the full extent and duration of the impact on the Group’s operations. Under the Group’s Recovery Plan, the Group has assumed that domestic operations will recover to their pre-COVID-19 levels by the end of FY21. International recovery is anticipated to be slower, with only approximately 50% of the pre-COVID-19 capacity expected in FY22. Changes in the duration and impact of COVID-19 may change these assumptions.”

These and other statements highlight the uncertainty facing all businesses, whether they expect positive or adverse impacts from COVID-19, and indicate the extreme difficulty of managing a listed company’s disclosure obligations in this environment, not least because Governments are taking unpredictable measures as the pandemic waxes and wanes. The issues are exacerbated by Australia’s very low bar to liability exposure for continuous disclosure breaches: a no-fault hair-trigger, creating unprecedented risks for listed companies.

Addressing disclosure risks created by COVID-19 uncertainty

The Federal Government has recognised this risk by modifying the application of s674 and s675 of the Corporations Act to limit the exposure to claims during the pandemic, including class actions, to circumstances in which the company [or its officers] have failed to comply with disclosure obligations knowingly, recklessly or negligently. However, this modification does not change the misleading and deceptive conduct obligations which also expose companies to class actions and other damages claims for unintentional breaches.

We would support the following additional measures to ensure that the current economic uncertainty does not provide windfall opportunities to make claims against listed companies:

    • Apply a similar qualification (that is the company [or its officers] have failed to comply with disclosure obligations knowingly, recklessly or negligently) to any claim against a listed company for misleading and deceptive conduct in relation to compulsory market disclosure obligations. This would be a more complex amendment but would ensure that the government’s objective in modifying s674 and s675 is effective.

    • ASX Guidance Note 8 currently encourages listed companies that have not published forward looking earnings guidance (presently almost every listed company) to disclose material departures from broker consensus on forecast earnings. However, brokers are not updating their forecasts due to the economic uncertainty, and so consensus is no longer a reliable guide to market expectations. (Some have said it never was). To borrow the phrase used by ASX in its 31 March 2020 Compliance Update, compliance obligations should not assume that brokers can and do predict the unpredictable. GN8 should be modified to remove any express or implied obligation to “correct” broker consensus, if only pro tem.

In the meantime, the current economic uncertainty has created additional volatility in equities markets, at a time of historically low interest rates, which in itself substantially increases the market disclosure risks for those who will be judged with hindsight against unpredictable price movements. We live in interesting times.

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