Philippa Ellis, Corporate Governance & Company Secretarial

ASX Guidance Note 8 Continuous Disclosure (GN8), which expands the guidance on earnings surprises, publication of analyst forecasts and consensus estimates, and investor briefings, comes into force today (July 1).

The ASX released its consultation paper outlining its proposed changes to GN8 in March 2015. On June 22 it published the final guidelines which included some minor changes based on comments from stakeholders during the consultation period.

While the changes are essentially refinements, with the overall disclosure requirements remaining unchanged, listed companies will nevertheless now have to consider much more carefully how and when they give the market guidance on their future earnings and whether it is worth giving guidance at all.

Following our initial assessment of GN8 published on May 18 here is a summary of the relevant concerns raised during the consultation process and ASX’s response.

Section 7.3
Disclosure of market sensitive earnings surprises

Concerns were expressed about a two-tiered approach in this section of GN8 – namely a distinction between companies which have issued earnings guidance (subject to a more stringent accounting materiality threshold) and those that have not (subject to the general materiality test, the anticipated share price movement).

ASX’s response:

• The two-tier approach is not new – this was a feature of the May 2013 version of GN8 which suggested an entity should update its earnings guidance if actual or projected earnings differed by more than 5-10% from that guidance whereas no percentage guidelines were included for companies that did not issue earnings guidance.
• The revised GN8 makes it clear that companies which have not published earnings guidance are not expected to issue an earnings update because their internal projections differ from consensus estimates or prior period estimates by 5-10%.
• This is not tighter regulation but reflects the fact that the market will expect earnings guidance from an entity to be inherently more authoritative and reliable than measures of expected earnings such as analyst forecasts or prior period earnings. It is therefore likely to require a comparatively smaller variation between the entity’s actual or projected earnings and its published earnings guidance for that to be considered market sensitive than would be the case for a variation against analyst forecasts or prior period earnings.

Section 7.4
Correcting analyst forecasts and consensus estimates

Clarification was sought on the application of Section 7.4 to entities that provide earnings guidance and also to situations where the market has not fully appreciated the importance of previous announcements.

• ASX amended 7.4 to include the recommendation that entities that publish earnings guidance should monitor analyst forecasts and/or consensus estimates for useful information/insights.
• It also amended 7.4 to include the recommendation that an entity should carefully consider whether it needs to publish another announcement in cases where the market has not fully appreciated the importance of the previous announcements. 

Section 7.5
Publishing analysts’ forecasts and consensus estimates generally

There were concerns expressed about the ASX supporting the practice of an entity publishing analyst forecasts even with a disclaimer. ASX stated it had received a number of submissions over recent years that investors find information about analyst forecasts helpful and relevant. On balance, ASX believes it is better for entities to have the opportunity to publish this information (in the form of the range of analysts’ forecasts or consensus estimates along with a “no endorsement” disclaimer) on their website and the ASX Market Announcements Platform (MAP) even if it is not required under Listing Rule 3.1.

• ASX modified 7.5 to allow the exclusion of analyst reports considered by the entity to be manifestly defective and analyst earnings estimates which are stale or objectively “out of the park”, as long is the reason is objective, rational and clearly disclosed.

Section 7.6
Publishing analysts’ forecasts and consensus estimates to analysts – de facto earnings guidance

The final GN8 separates this guidance out from section 7.5. Where an entity has published information about analyst forecasts and earnings on its website and/or in a market announcement (in the form of the range of analysts’ forecasts or consensus estimates along with a no endorsement disclaimer), ASX has no issue with an entity referring an analyst to the relevant web page or announcement for further information. It would not regard this as de facto earnings guidance, provided the entity does not do or say anything which conflicts with the disclaimer.

• ASX cautioned listed entities that choose to have discussions with analysts regarding their modelling logic and assumptions to tread carefully so as not to breach their continuous disclosure obligations.

Section 7.7
Analyst and investor briefings

There were concerns from stakeholders regarding the high volume of repetitive presentation material being published on the ASX MAP and also about the expanded detail on procedures for the review of Q&A discussion after such briefings.

• ASX modified section 7.7 to clarify that, for entities holding a series of presentations containing materially the same information, ASX would not regard second and subsequent presentations as new presentations. Provided they did not contain any new market sensitive information, they would not be expected to publish them on the ASX MAP.
• It was also modified to state that an entity should, as a matter of practice, review proceedings at meetings/briefings shortly afterwards and verify that no market sensitive information had been inadvertently disclosed. If it was, then that information must be disclosed immediately to the market. ASX suggested this practice be documented in the entity’s Continuous Disclosure policy or a similar document.