The new ASX guidelines may discourage companies from making earnings predictions public

The proposed changes to the guidelines for listed companies on their continuous disclosure obligations (ASX Guidance Note 8) will provide greater clarity and a more pragmatic approach for companies that find themselves facing a sudden change in their profit expectations and want to know if or when they should inform the market.

However, a different, more rigorous standard will apply under the guidelines if a company is in the habit of giving regular earnings guidance.

We believe that the new standard will force companies to re-assess whether they should continue giving that guidance and may well actively discourage them from providing any guidance at all, even if they believe they have reasonable grounds for doing so.

Will the outcome of the new Guidance Note 8, due for release on July 1 2015, be a less informed market and even greater potential for earnings surprises from listed companies?

The important elements of the new guidelines:

• It will be perfectly acceptable for a company to have a policy of not providing earnings guidance to the market. Disclosure may be required, however, if a company makes statements that could be construed as de-facto earnings guidance (such as referring to growth in market share or revenue)
• Where no earnings guidance is given, prior period earnings, analyst forecasts and consensus estimates will be relevant indicators of market expectations.
• Confidential internal budgets or earnings projections do not need to be released to the market provided they are generated for internal purposes and remain confidential.
• A company will be under no obligation to correct the earnings forecast of any individual analyst or consensus estimates to bring them in to line with its internal earnings projections.
• Under the new guidelines, a company that publishes forecasts from individual analysts or consensus estimates will be implying this information is market sensitive and will be seen to be giving de-facto earnings guidance to the market. To mitigate this risk a company should publish either a complete list of individual earnings’ forecasts or a range showing the low, average (or consensus) and high earnings forecasts of the analysts covering its stock, as well as a disclaimer that the company does not have a view on their accuracy.
• Disclosure of an earnings surprise will be required only if it is “market sensitive”.
• A distinction will be made between market sensitive earnings surprises and lesser situations:
  • A market sensitive earnings surprise will be when a company’s actual or projected earnings differ so significantly from market expectations that a reasonable person would expect the information to have a material effect on the share price.
  • Lesser situations would be defined as when reported earnings differ from consensus estimates but not to the extent that a reasonable person would expect the information to have a material effect on the share price.
• Finally, and crucially, disclosure obligations for a company which provides earnings guidance will be more rigorous, requiring disclosure of updated guidance when actual or projected earnings fall 5-10% outside the earnings guidance given to the market (previously 10-15%).

Of course, we do not know precisely what will be in the final Guidance Note . The ASX has received a number of submissions after a period of public consultation, which may lead to changes to the final document. However, it seems clear that companies will soon have to comply with a much more prescriptive approach.