The Canadian Securities Administrators have issued guidance on the level of disclosure that income trusts are expected to produce about their estimated distributable cash in their prospectus.

The CSA says that the issue is important because estimated distributable cash is “likely to be central to an investor’s assessment of the income trust’s prospects”. Yet the disclosure often incorporates significant estimates and assumptions, and it says that many income trusts have provided only limited information on these estimates and assumptions.

CSA Staff Notice 41-304 – Income Trusts: Prospectus Disclosure of Distributable Cash provides guidance on what is an appropriate presentation for estimated distributable cash. This involves detailed disclosure of the information’s purpose and relevance, and of the assumptions that underlie it. It may also involve providing financial statements of other entities, or other financial information. In some circumstances, CSA staff expect that appropriate disclosure of estimated distributable cash will require a forecast be included in the prospectus.

“We have heard repeated concerns about the transparency of this information,” said Susan Wolburgh Jenah, acting chair of the Ontario Securities Commission. “We expect issuers to carefully consider whether their disclosure represents a balanced and complete assessment of all factors likely to affect estimated distributable cash.” Wolburgh Jenah added that the expectations in the notice will be reflected in staff’s prospectus reviews.

Issuers also need to consider whether their disclosure provides adequate transparency about the sustainability of estimated distributable cash. For example, for some income trusts, capital expenditures to replace productive capacity might be relatively low in initial years but could rise significantly in later years. In these instances, information should be provided about the time period in which expenses are expected to be at the level disclosed, and about any expected long-term plans to replace productive capacity that could affect the amount of cash available to be distributed to investors.

The CSA says it will continue to monitor developments with respect to income trust disclosure and may provide future additional guidance.