On 6 March 2015 the Australian Securities Exchange (the ASX) released a consultation paper (the Paper) on proposed changes to Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B (GN 8). The changes expand upon the existing ASX guidance given in relation to analyst and investor briefings, analyst forecasts, consensus estimates and earnings surprises.  The Australian Securities and Investments Commission was consulted by ASX about the changes.

The consultation period closed on Friday 24th April and the ASX received submissions from seven different entities, a mix of both publicly listed companies, law firms and industry associations (Submissions).

Not all the feedback was positive.

Why the changes?

In the Paper, the ASX acknowledges that GN 8 was only recently subject to a major re-write in May 2013.  The re-write included substantially updated materials on earnings guidance, de facto earnings guidance, earnings surprises and correcting analyst forecasts.

But ‘developments since then have indicated to ASX that listed entities and their advisers would benefit from further guidance in these areas.’  One such development was the imposition of a $1.2 million fine on Newcrest for its well-publicised poor continuous disclosure practices.  The release of ASIC Report 393: Handling of Confidential Information, which deals with the release of confidential information by ASX listed entities in investor and analyst briefings and unannounced corporate transactions, was another development.

Earnings surprise

The majority of the ASX’s proposed changes relate to the divisive and difficult topic of updating the market in relation to earnings.

Generally, the ASX is of the view that the way an entity should manage earnings expectations, in accordance with the continuous disclosure requirements in LR 3.1, is through a market announcement, not selective disclosures to analysts.

The ASX further clarifies what circumstances would or wouldn’t prompt the need for a market announcement:

  • market sensitive earnings surprise’ is a situation where an entity’s reported earnings differ so significantly from market expectations that a reasonable person would expect information about its reported earnings to have a material effect on the price or value of its securities – requiring a disclosure; and
  • ‘earnings surprise’ a situation where an entity’s reported earnings differ from the consensus estimate, but not necessarily to the extent that a reasonable person would expect information about its reported earnings to have  a material effect on the price or value of its securities – disclosure not required.

The question for entities to answer then involves an exercise of discretion and judgement, being: if there is an earnings surprise, is it ‘market sensitive’?

Earnings guidance

The ASX inserts a pargraph into section 7.1 of GN 8 confirming that subject to the existing exceptions and ‘all thing being equal’, it is ‘perfectly acceptable’ for an entity to have a policy of not providing earnings guidance to the market.

However, the ASX makes it clear that if earnings guidance is published, an entity will have made a ‘positive representation’ to the market that will set expectations in the market, and if the entity expects its earnings to differ from the published guidance, it will be in a position where it needs to assess whether the difference will be ‘market sensitive’ and require a disclosure – as per the question discussed above.

The ASX clarifies what the consequences could be for an entity that does not exercise its judgement correctly in that situation, being a potential breach of LR 3.1 and sections 674 and 1041H of the Corporations Act 2001 (Cth) (misleading conduct).

Correcting analyst forecasts and consensus estimates

Analyst forecasts and consensus estimates are relevant indicators of market expectations and an entity is obliged to make a disclosure if it becomes aware that earnings for a current reporting period will differ so much from market expectations that the information meets the test of ‘market sensitive’ information.

Section 7.4 of the Paper provides further clarification on when an entity should make corrections in light of market expectations.

It’s interesting that, as one of the publicly available submissions commented, there is no ASX definition of ‘consensus’.

What has been the reaction to the proposed changes?

The Submissions generally support ASX’s proposed changes.  That said, they also offer suggestions and criticisms.

The Australasian Investor Relations Association (AIRA), in particular, disagrees with some of the new guidance, as reported by the Financial Review.

AIRA Chief Executive Ian Matheson is quoted in that report as saying that ‘under the proposal the ASX makes the rules more complicated while also telling companies that they can ignore big errors in consensus analyst expectations if the company doesn’t provide any guidance of its own.’

In its submission to the ASX, AIRA elaborates further and believes that the amendments are unhelpful because they:

• go beyond the level of guidance that is necessary and appropriate from ASX in so far as the “guidance” relates to provisions of the Corporations Law and not the Listing Rules;
• fail to appreciate that what the ASX views as “guidance” will be viewed by many if not most listed entities as tantamount to regulatory requirements; and
• (as a consequence of the preceding two bullet points) will result in a less informed market and greater potential for earnings surprises–contrary to the best interests of both issuers and investors.
It remains to be seen if ASX incorporates some of the feedback it received into the final version of GN 8.

What does this mean for you?

Entities should be reviewing their disclosure policies in light of the proposed changes to GN 8.

Once ASX finalises GN 8, intended to be effective from 1 July 2015, changes may be required, particularly if an entity has policies and procedures in relation to earnings guidance.

CompliSpace will also be reviewing the final GN 8 and will update our disclosure policy for ASX-listed clients.