General principles and obligations
Paragraph 8 of the JSE Listings Requirements sets out a comprehensive framework for reporting financial information. Paragraph 8 of the JSE Listings Requirements regulates the manner in which financial information must be presented when issuers publish profit forecasts, interim results and annual financial statements. Financial results are required to conform to the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). As per our Alert, issuers are entitled to apply to the JSE in order to approve any variations in reporting occasioned by COVID-19.
In terms of paragraph 3.4(b) of the JSE Listings Requirements, all issuers must publish a trading statement as soon as they are satisfied that a reasonable degree of certainty exists that the financial results for the period to be reported upon next will differ by at least 20% (or 15% for certain property entities which elect distribution per share (DPS) as their relevant measure of financial results) from (i) the most recent financial results for the previous corresponding period or (ii) a profit forecast previously provided to the market in relation to such period.
Paragraph 3.4(b)(ix) of the JSE Listings Requirements provides that issuers who have a policy of publishing quarterly results will be exempt from the requirement to publish trading statements, but must instead include a general commentary in each quarterly results announcement to ensure that shareholders are guided on the expected performance of the issuer for the next quarter (which may be as detailed or broad as the issuer chooses).
In terms of paragraph 3.4(a) of the JSE Listings Requirements there is a general and continuing obligation to announce price sensitive information without delay. Price sensitive information is defined as unpublished information that is specific or precise which if it were made public would have a material effect on the price of the issuer’s securities.
The JSE recommends a cautious approach in relation to the compilation of quantitative explanations and considerations for financial results. Practically, this means that issuers are required to provide a full and detailed (i) disclosure of the estimates and judgments made in applying IFRS and (ii) risk disclosures required under IFRS 7.
Paragraph 8.57 of the JSE Listings Requirements sets out the minimum contents and presentation requirements applicable to interim reports, preliminary reports, provisional reports and abridged reports. The JSE points out that issuers may be required to provide additional disclosures when compliance with the specific IFRS or IAS standard is insufficient to enable a full understanding of the impact of an event such as the COVID-19 pandemic and lockdown. This may lead to the need for further disclosures which are normally only included in the unabridged annual financial statements. It is essential that issuers provide investors with the most comprehensive and realistic view of the impact and future impact of COVID-19 on their IFRS financial results.
The JSE’s letter refers to various instances in which an issuer should consider a presentation requirement in the light of COVID-19. For example, an issuer should include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance since the end of the last annual reporting period. As such, issuers should include disclosures for events and transactions such as a write-down of inventories, changes in the business or economic circumstances that affect the fair value of the issuer’s financial assets or liabilities and any loan default.
The JSE recognises that issuers may wish to present additional financial information and analysis in relation to COVID-19 when communicating their interim reports, preliminary/provisional reports, abridged results and annual financial statements. Shareholders need to receive full information, and investor confidence in standards of disclosure and corporate governance should be promoted. When presenting additional information and analysis, issuers must ensure that such information complies with IAS 1 and is:
- not misleading;
- consistently presented between reporting periods; and
- does not obfuscate or detract from the financial information required in terms of paragraph 8 of the JSE Listings Requirements.
The JSE advises that the above can be achieved by considering the following:
- labels or abbreviations should be meaningful and not misleading, and should be accompanied by a definition which clearly explains the basis of the calculation and distinguishing between information that is factual and/or based on assumptions and/or hypothetical information;
- detailed calculations should be presented to demonstrate how the definition referred to above was applied to the specific period and should either take the form of a reconciliation to the most directly comparable line item (or subtotal or total) presented in the IFRS financial statements where possible or provide an explanation if it is not possible to reconcile to an IFRS equivalent;
- an explanation should be provided if an issuer decides in a subsequent period to no longer provide a specific COVID-19 financial analysis that was previously provided; and
- the definitions referred to in the analysis should be applied consistently from one period to the next or if there is a change (in either application or the definition itself), then an explanation of the nature and reasons for that change should be provided.
Property Entity Trading Statements
The JSE has also issued a letter dealing with the specific impact that COVID-19 has had on the disclosure obligations of property entities.
Paragraph 3.4(b)(vi) of the JSE Listings Requirements defines financial results as relevant criteria that are of a price sensitive nature and then prescribes certain measures that must be applied. Pursuant to paragraph 3.4(b)(vii) of the JSE Listings Requirements, property entities may elect DPS as their relevant measure of financial results. Property entities making this election, are then required to publish a trading statement as soon as it becomes reasonably certain that DPS will differ by at least 15% from that of the prior corresponding reporting period.
The COVID-19 pandemic and lockdown has led to many property entities deferring their distributions, as discussed in our previous Alert, which may render DPS an insufficient measure.
If DPS is no longer an appropriate measure, property entities may choose to revert to reporting headline earnings per share (HEPS), earnings per share (EPS) or net asset value per share (NAVPS) as performance measures for trading statement purposes (the Standard Measures). If property entities elect to use one of the Standard Measures, the reporting variation regime must be followed and such entities will be required to issue a SENS announcement which addresses the adoption of a different measure.
Price Sensitive Information
Furthermore, as set out above, issuers are required to announce material price sensitive information in terms of paragraph 3.4(a) of the JSE Listings Requirements. Therefore, regardless of whether DPS is still a relevant measure or if the property entity defaults back to the Standard Measures, general price sensitive information requires further and separate consideration.
In terms of Practice Note 2 of 2015 issued by the JSE (PSI Practice Note), directors of issuers are required to apply their own discretion in determining what will constitute price sensitive information. The PSI Practice Note provides guidelines to directors when making such an assessment.
The JSE acknowledges that numerous variables may affect, contribute to or impact on the assessment of price sensitive information in the context of property entities but requests that diligent attention be awarded to distributable income (as defined by the property entity) and the percentage of distributable income declared. The JSE’s view is that there is a strong argument that both of these elements may comprise general price sensitive information and should be announced in accordance with paragraph 3.4(a) of the JSE Listings Requirements as read with the PSI Practice Note.
The JSE is of the view that, in line with the trading statement approach on DPS, at the very least any difference of at least 15% from each or both of these elements (distributable income and the percentage of distributable income declared) is likely to be price sensitive and should be announced.
The publication of such an announcement will enable investors to engage in a comparative analysis with the last reporting period’s distributable income and total dividend with the current (interim) period, providing insight into the operating performance despite the postponement, cancellation or deferral of a distribution.