2009-01-26 Recent Securities Regulator Comment Letters on Impairments, Going Concern and Liquidity

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This newsletter provides comments illustrative of securities regulators expectations related to impairments, going concern and liquidity.

What is the issue?	In this current economic environment, securities regulators will be looking to see how companies have addressed the numerous financial reporting and disclosure issues they face. The Canadian Securities Administrators ("CSA") recently published Staff Notice 51-328 to assist reporting issuers in preparing financial statements and Management’s Discussion and Analysis (MD&A) in the current market environment. The Staff Notice emphasizes that clear and transparent disclosure will be important to help investors understand the present and anticipated impacts of market conditions on its operations, financial condition, liquidity and future prospects. Regulators expect this and companies can be expected to be challenged when the regulators believe they have not met those expectations. Recent comment letters from the various Canadian and US securities regulators have also focused on the financial reporting and disclosure issues arising from current market conditions. To assist you in understanding the expectations of securities regulators, the following are illustrative of the types of comments the securities regulators are making in areas such as impairment of goodwill, going concern and liquidity as well as MD&A disclosures. The quality of the working papers prepared by companies and work completed to support critical assumptions is likely to be an important factor in responding to regulatory comment letters as copies of company prepared documents are also being requested in some cases.
Example 1: Goodwill impairment	We note that indefinite-lived intangible assets and goodwill account for more than 80% of the Company's consolidated assets. Please describe in detail the process and assumptions used to support the Company's assessment that the carrying value of indefinite-lived intangible assets and goodwill were not impaired as at December 31, 2007. Provide a copy of any working papers or schedules prepared by the Company in performing the goodwill impairment review.
Example 2: Goodwill impairment and market capitalization	We noted that your goodwill impairment test in 2007 resulted in no impairment. Please provide us with the analysis performed supporting your conclusion that goodwill was not impaired as of December 31. Identify each of the significant assumptions used in your analysis and explain the basis for each such assumption. Please tell us how you concluded that no triggering events occurred that would require an interim test during either the first two quarters of 2008. Given the significant disparity between the Company’s current market capitalization and its book value, explain the facts and circumstances which management believes are responsible for the significant disparity between the Company’s market capitalization and the book value of the Company’s equity.
Example 3: Liquidity and capital resources	In light of recent events, your company has been selected for review due to its high level of indebtedness. The MD&A requires a discussion and analysis of liquidity and capital resources, including: The Company's ability to satisfy both current and long term obligations and planned future growth Capital resources available to the Company, including a discussion of sources of funding in the past as well as future sources of funding and whether this will have an impact on future operations Any impact that the current market conditions have had or may have on the liquidity and capital position, including known trends or expected fluctuations. Missed or late payments of interest and principal on the term borrowings and information about compliance with covenants
Example 4: Going concern assessment and financial instrument disclosures	...There are additional GAAP and regulatory requirements that should be considered including, If there is significant doubt as to the ability of the Company to continue as a going concern as contemplated by CICA Handbook Section 1400 Whether the credit, liquidity and market risk disclosure expectations set out in CICA Handbook Section 3862 have been met
Example 5: Impairment of financial assets	Please provide us with information on the Company's available for sale debt security portfolio including the average life, range of industries of underlying assets and the Company's current assessment of credit quality. Please discuss how the Company factors in the length of time that market value is less than cost and the amount of negative fair value adjustments when assessing whether the decline in fair value is other than temporary and its investment is impaired. Please provide the Company's specific policies and explain under what scenarios the Company would consider its portfolio to be other than temporarily impaired. To the extent known, please discuss and disclose any observable data that is used as a basis for its assumptions underlying its valuation model.
Example 6: Accounts receivable allowance	Please discuss whether current economic and credit conditions have impacted the Company's assessment of credit risk related to its accounts receivable balances and its allowances for losses. If there has been no impact, please discuss why. In your response please provide us with the amount of the allowance (dollar and percentage of receivables) and explain whether the Company's methodology for estimating the allowance has changed in response to current market conditions.