Updated ASX Guidance Note 8 – Analysing The Expanded Guidance

WHAT YOU NEED TO KNOW

• Updated ASX Guidance Note 8 on continuous disclosure came into effect on 1 July 2015.
• ASX emphasises that the 5-10% guidance on when an earnings surprise may require disclosure to ASX only applies where an entity has previously published earnings guidance. That is, expected variations of 10% or more should be presumed to be material (in the absence of convincing argument to the contrary) and require disclosure where the entity has published earnings guidance for the current reporting period.
• Where an entity has not published earnings guidance, ASX has maintained its previous position – it does not consider it appropriate to lay down any general rule of thumb or percentage guidelines on when a difference in actual or projected earnings compared to market expectations ought to be considered market sensitive.
• Entities wanting to publish information about analyst forecasts should publish all known analyst forecasts or a consensus range on their website or on the ASX Market Announcements Platform. This is necessary to avoid the risk of providing de facto earnings guidance.

WHAT YOU NEED TO DO

• As we move into 30 June reporting season, continue to monitor the "market's expectation" (ie the entity's own guidance or – in the absence of guidance – analyst forecasts) in relation to your entity's earnings for the current reporting period and assess whether disclosure may be required in connection with any market sensitive earnings surprise.
• Consider your entity's investor relations practices in relation to publishing analyst forecasts or consensus forecasts both generally and to other analysts. In particular, consider whether you will publish details of analyst forecasts on your website and the steps to take to avoid being seen to endorse or approve of those forecasts.
• Ensure your analyst and investor briefing procedures seek to minimise the risk of selective disclosure of market sensitive information and avoid providing any earnings guidance (including de facto guidance) without first disclosing that information to ASX.

Background

On 1 July 2015, ASX's updated Guidance Note 8 on continuous disclosure ("GN 8") came into effect. Updates to GN 8 were proposed by ASX in March 2015 (discussed in our 27 March 2015 Company Law & Governance Update) and the updated GN 8 was finalised in late June 2015. The updated GN 8 contains expanded guidance on analyst and investor briefings, analyst forecasts, consensus estimates and earnings surprises.

ASX was prompted to issue updated guidance as it had become concerned that entities and their advisers were misinterpreting elements of GN 8, causing some entities to:

• "manoeuvre" analyst forecasts in a non-public or selective manner to align them with the entity's internal projections in order to reduce the perceived risk that the entity would need to give an earnings update; and
• disseminate analyst forecasts or consensus estimates in a manner that could be interpreted as "de facto earnings guidance" (rather than providing earnings guidance to the market).

In addition, there have been a number of developments since GN 8 was last updated in 2013 that ASX considers justify updated guidance, including:

• ASIC releasing REP 393, which highlights that analyst and investor briefings are a significant area of risk for selective disclosure of market sensitive information; and
• the Federal Court imposing a $1.2 million penalty on Newcrest Mining for selectively disclosing information about its expected gold production and capital expenditure.

Earnings guidance and "market sensitive" earnings surprises

As a starting point, ASX emphasises that "all other things being equal, an entity is not required by Listing Rule 3.1 to release its internal budgets or earnings projections to the market… Accordingly, subject to the exceptions noted [in relation to earnings surprises], it is perfectly acceptable for an entity to have a policy of not providing earnings guidance to the market."

However, the updated GN 8 clarifies ASX's existing guidance on when entities may have a continuous disclosure obligation as a result of an earnings surprise. ASX's existing guidance drew a distinction between entities that had provided earnings guidance to the market and those that had not. That distinction remains. The updated GN 8 is concerned with ensuring that readers of the GN 8 understand that ASX's guidance that a variation in an entity's earnings compared to its published guidance equal to or greater than 10% is likely to be material with the result that its guidance needs updating (and a variation of less than 5% is unlikely to be material), unless there is convincing argument to the contrary.

ASX has added a new footnote including examples of where there might be a convincing argument that a 5-10% variation may not be material, such as:

• where an entity has particularly low earnings, such that a 5-10% variation is very low in absolute terms and unlikely to have a material effect on the value of an entity's securities; or
• an entity that has particularly "lumpy" revenue or expenses, such that a 5-10% variation above its published guidance part way through the reporting period may not be market sensitive, is expected to correct itself over the course of the financial period as it receives revenue and incurs expenses.

For cases where an entity has not published earnings guidance for the current reporting period, the updated GN 8 maintains ASX's previous position that it does not consider it appropriate to lay down any general rule of thumb or percentage guidelines on when a difference in actual or projected earnings compared to market expectations ought to be considered market sensitive. ASX is keen to emphasis in the updated GN 8 that the 5- 10% guidance does not apply to entities that have not published guidance for the current reporting period:

"The fact that their actual or projected earnings at a point in time may differ, if they are covered by sell-side analysts, by 5 to 10% from analyst forecasts or, if they are not covered by sell-side analysts, by 5 to 10% from their earnings for the prior corresponding period, will not necessarily be market sensitive and therefore will not necessarily require disclosure to the market under Listing Rule 3.1."

Other financial forecasts and exploration and production targets

ASX notes that its guidance on earnings surprises is not limited to guidance around earnings. Other financial forecasts, such as forecast operational or capital expenditure information published by an entity or exploration and production targets published by mining or oil and gas entities, can raise similar considerations to earnings guidance. Where the entity has published such a financial forecast or target, the entity may have an obligation in certain circumstances to update the market – eg, under Listing Rule 3.1 or having regard to the prohibition in section 1041H on an entity engaging in misleading and deceptive conduct (by failing to update a previously published forecast).

Correcting analyst forecasts and consensus estimates

ASX has added new guidance to the effect that it does not believe an entity has any obligation to:

• correct the earnings forecast of any individual analyst, or the consensus estimate of any individual market data vendor, to bring it into line with the entity’s internal earnings projections; or
• publish its internal earnings projections just because they happen to differ from an analyst’s forecast or a consensus estimate of analysts’ forecasts.

But that guidance is qualified by the principle that where an entity has not published earnings guidance, analyst forecasts and consensus estimates can be relevant indicators of market expectations and:

• "an entity will have an obligation under the Listing Rules to make an appropriate announcement if it becomes aware that its earnings for the current reporting period are likely to differ so significantly from market expectation that information about that difference is market sensitive"; and
• ASX expects that the entity will be monitoring analyst forecasts and consensus estimates so that it has an understanding of the market's expectations for its earnings and "is alive to any potential market sensitive earnings surprise that may be emerging".

The emergence of a significant difference between an entity's internal earnings projections and analyst's forecasts or consensus estimates, in ASX's view, should prompt an entity to ask itself why that might be so. However, ASX's new guidance "cautions" entities that may choose to discuss their earnings forecasts with analysts to "tread very carefully" so as to avoid the risk of selectively disclosing information to those analysts or saying anything that could be construed as de facto earnings guidance.

Publishing analyst forecasts and consensus estimates

The updated GN 8 makes it clear that, in ASX's view, where an entity chooses to publish a single analyst's forecast or single consensus estimate on the Market Announcements Platform, the entity is implicitly endorsing that forecast or estimate and providing de facto earnings guidance. For entities wishing to publish or refer to information about analyst forecasts, ASX recommends that the entity consider publishing either:

• a list of the individual earnings forecasts of the analysts known to be covering its stock; or
• a range showing the low, average (or consensus) and high earnings forecasts of the analysts known to be covering its stock,

together with a disclaimer making it clear that the entity "does not endorse, confirm or express a view as to the accuracy of, the forecasts nor does it make any representation that its earnings will fall within the range of forecasts provided." The source, completeness and currency of the information should also be disclosed. The publication can be made either on the entity's website or on ASX's Market Announcements Platform.

The updated GN 8 now also includes a specified section discussing ASX's view concerning the practice of publishing analyst forecasts or consensus estimates "to analysts". There has been a practice of some entities providing summary or consensus information about forecasts to analysts to assist the analysts more with up-todate information concerning those forecasts than may otherwise be available from market data providers. ASX counsels that it will "generally be safer" for the entity to make the information available by publishing it on its website or in a market announcement rather than directly to analysts.

Disclosing information at analyst and investor briefings

The updated GN 8 includes a new section on "Analyst and investor briefings" emphasising the importance of avoiding selective disclosure of market sensitive information by ensuring that all market sensitive information has first been disclosed to ASX. To this end, ASX suggests that it is prudent practice for entities to ensure that any "new presentation" to be given at an analyst or investor briefing is first given to ASX. Following feedback received during the consultation period, ASX's final guidance note clarifies that where an entity gives a series of presentations over a short period of time and the presentations have been tailored for each event but contain materially the same information, it will not expect that each subsequent iteration of the presentation be lodged with ASX for release to the market.