The Australian Bureau of Statistics conducted a 'Business Impacts of COVID-19' survey of 2000 businesses between 10-17 June 2020 which provides a snapshot of how the virus is affecting companies. The survey showed that approximately two-thirds of companies experienced a decline in revenue when compared against the same period last year and only 8% posted an increase in revenue. The survey goes on to indicate that 26% of businesses suffered a revenue fall of up to 25%; 37% lost 25-50%; 17% posted a 50-75% fall and 14% suffered a reduction of more than 75% of their revenue.

In light of the impact of COVID-19 on their businesses, a significant number of listed companies have already withdrawn forecasts or guidance to the market. However, as results for the financial year or half year ending 30 June 2020 are being finalised over the coming days, companies need to consider whether a further disclosure obligation is triggered beyond their usual financial reporting in August.

While the Federal Government introduced changes in May 2020 which limit civil liability for companies and their officers for a breach of continuous disclosure obligations in light of COVID-19 uncertainties, the continuous disclosure test and criminal liability and misleading and deceptive conduct provisions remain unchanged. In addition, while ASX has released some guidance around continuous disclosure with respect to COVID-19 impacts on future operations or results, this has not touched on disclosure around year end results.

What needs to be disclosed and when?

In the absence of any specific new guidance, the standard ASX and Corporations Act disclosure provisions apply with respect to continuous disclosure of changes to financial results from market expectations.

Under ASX Listing Rule 3.1, once an entity is or becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, it must immediately tell ASX that information unless it can rely on one of the disclosure exceptions under Listing Rule 3.1A such as the information being ‘insufficiently definite to warrant disclosure’.

Ordinarily, a company’s earnings for a reporting period are not required to be disclosed to the market until the applicable reporting date under the ASX Listing Rules, e.g. preliminary final results must by released by the end of August for companies with a 30 June year end. However, ASX guidance makes clear that if an entity becomes aware that its earnings for the current reporting period will differ materially from market expectations, this must be immediately announced to the market if the difference may have a material effect on the price or value of its securities.

As many companies, particularly within severely impacted sectors such as travel, entertainment and recreation, will have suffered material decreases in revenue and/or profits from the corresponding period last year, once results for the period become clear in the lead up to or shortly following 30 June, if the change is market sensitive there will need to be an immediate announcement to the market rather than waiting for audited results to be finalised.

Practical steps

Boards should consider:

• What the market expectations are for the company’s results. These will be derived from:
  • the company’s guidance to the market if a forecast for the reporting period has been provided and not withdrawn; or
  • analysts’ consensus forecasts, many of which will have been updated to reflect the anticipated impact of COVID-19; or
  • in the absence of the above, the financial results for the corresponding period last year.
• Has there been a material change (up or down) from market expectations? While ASX guidance no longer provides any specific thresholds for companies who have not released guidance, a commonly used rule of thumb based on Australian Accounting Standards is that a change of more than 10% is likely to be material and a change of less than 5% is unlikely to be material.
• Is the change materially price sensitive? This requires a judgement by directors taking into account factors including the extent of the change from market expectations and whether the company is generally valued on short term earnings. For smaller companies without analyst coverage, this is more likely to be the case unless the anticipated drop in revenue has already been announced to the market.
• Whether previous announcements released to the market around the impact of COVID-19 have already adequately disclosed the financial impact on the company’s revenues or profits.

If the Board determines that there is a materially price sensitive change from market expectations, an announcement needs to be made to the market immediately upon there being sufficient certainty around the numbers for the reporting period and the announcement must indicate not only that there will be a change from expectations but the magnitude of the change.