Last week, ASX announced updates to Guidance Note 8 on continuous disclosure requirements in relation to earnings guidance.
The ASX has retained the overall framework of its existing guidance in the update. However, for the first time the ASX expressly stated that a listed entity should make an ASX announcement to update the market on its forecast earnings where it is different from consensus earnings forecasts by a specified percentage of 15%, even where the company has not issued any earnings guidance or forecast.
The ASX has also set out exactly what it expects to see in an announcement about a market-sensitive earnings surprise. Interestingly, this will require an entity to provide quantitative guidance even if it had never published earnings guidance in the first place in some circumstances.
These changes are of increased relevance to the many ASX listed entities who withdrew their earnings guidance shortly after the onset of the COVID-19 pandemic and have not since reinstated issuing earnings guidance: see our earlier publication (COVID-19: Continuous disclosure obligations – How ASX200 entities have responded). The changes also come at a time when cost and other pressures on the research industry are making it more challenging to achieve the level of quality of reporting with the same level of coverage.
These changes could be said to be imposing new regulatory burdens on listed entities. A burden that includes correcting the “mistakes” and “errors” of third parties. That said, the position has always been that listed entities should avoid “earnings surprises” even where they do not issue earnings guidance. In this respect, the introduction of a bright line test will at least take away the guess work of what may be considered to be an earnings surprise in such circumstances.
ASX’s Guidance Note 8 is something that all listed entities should comply with (even though it does not have the force of law).
ASX has broken its Guidance Note 8 on continuous disclosure requirements down into several scenarios
Those scenarios and their corresponding guidance and announcement requirements are set out in the table below:
|
|
Scenario |
Guidance |
Summary of announcement requirements |
|---|---|---|---|
| (a)
|
Where an entity has published earnings guidance on foot |
Guidance Note 8 says that where the expected variation in an entity’s earnings compared to its published earnings guidance is between 5% and 10% (Difference in Earnings), the entity needs to form a judgment as to whether or not it is material. This has not changed in the updated Guidance Note.
ASX has clarified in the updated Guidance Note that where an entity has published its earnings guidance as a range, the Difference in Earnings guidance above should be applied by reference to the lower point of the range (in the case of a negative earnings surprise) or the higher point of the range (in the case of a positive earnings surprise). This could be said to be a more generous approach to revising guidance than many companies practised.
|
The entity should include the earnings amount /range it was previously guiding and the earnings amount/range it is now guiding.
If the announcement is to be made before the end of the reporting period ASX also expects a statement that the entity is updating its earnings guidance for that period.
If the announcement is to be made after the end of, and prior to the publication of its financial statements, the announcement should also include a statement that the entity is expecting its earnings for that period to differ materially from its published guidance. |
| (b) |
Where an entity does not have published earnings guidance on foot and it is covered by sell-side analysts |
ASX recommends carefully consider notifying the market of a potential earnings surprise if and when it expects there to be a 15% or greater difference between its actual or projected earnings for the period and its best estimate of the market’s expectations for its earnings.
This is a new threshold. As noted above, given the large number of entities to have withdrawn their guidance and not reinstated earnings guidance, this is something many of such entities will need to bear in mind. The ASX guidance note in effect requires an entity to provide ‘revised’ guidance in response to a 15% or more divergence from consensus forecasts (provided that the entity has reasonable grounds for forming that view). |
An announcement should include a statement that the entity is expecting its earnings for the current reporting period to differ materially from the current range of current analysts’ forecasts or consensus (as applicable).
If the announcement is made before the end of the reporting period, the earnings amount/range it is projecting for the reporting period. That is, the entity will be required to provide earnings guidance.
If the announcement is made after the end of, and prior to the publication of its financial statements for, the reporting period, the earnings amount/range it is expecting for that reporting period. |
| (c) |
Where an entity does not have published earnings guidance on foot and it is not covered by sell-side analysts |
The updated Guidance Note notes that, where an entity is not covered by sell-side research, ASX does not consider it appropriate to suggest any percentage guidelines on when an entity should consider announcing an earnings surprise on its prior period earnings.
This position is virtually unchanged from the previous Guidance Note, but given the 15% threshold described above, indicates that something more than a divergence of 15% from the prior corresponding period earnings (pcp earnings) may be required to trigger a disclosure obligation in ASX’s view. |
An announcement should the amount of an entity’s pcp earnings along with a statement that the entity is expecting its earnings for the reporting period to differ materially from its pcp earnings.
If the announcement is made before the end of the reporting period, a reasonable indication of the order of magnitude of the difference between its projected earnings for the reporting period and its pcp earnings. This would not require publication of a specific number or range necessarily, though it will impose a greater burden than existed prior to this update.
If the announcement is made after the end of, and prior to the publication of its financial statements, the amount or range of earnings it is expecting to report for the reporting period just ended. |
|
(a), (b) and (c) |
In all three cases above |
ASX has reiterated that:
Reflecting statements in recent shareholder class action decisions, ASX urges boards to take particular care in circumstances where it is a “negative” earnings surprise and to “err on the side of caution” and disclose when there is any doubt in their mind. |
Importantly, in each case above, ASX expects an announcement to include an explanation of the main factors resulting in the entity’s earnings being different to market expectations.
This means that an entity will not only need to disclose the ‘what’ in relation to an earnings surprise but the ‘why’ as well. While the express requirement is new, it is consistent with what listed entities publishing revised guidance generally do in practice and with standard disclosure requirements that entities keep the market informed about events or circumstances that may have a material impact on the price and value of their securities (including due to impacts on earnings performance). |
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