Published analyst consensus could be misinterpreted as earnings guidance

ASX has clarified in a formal manner when an earnings surprise ought to be disclosed to the market in revisions to Guidance Note 8 on continuous disclosure.

In the revision to Guidance Note 8 that was released in 2013 following public consultation, ASX drew a distinction between those entities that provide earnings guidance to the market and which make a positive representation to the market that their current period earnings would be in a certain range, and those that do not.

If actual earnings fall five to 10 per cent outside the range of the earnings guidance, the 2013 Guidance Note clarified that the entity should make a market announcement, to ensure the market is not misled.

The 2013 Guidance Note was also clear that if an entity does not issue earnings guidance, there is no representation to the market, so the test is whether the actual or projected earnings is likely to differ so significantly from market expectations that information about the difference is market sensitive. Where an entity does not issue earnings guidance, the best indicator of what the market is expecting an entity's earnings to be is the analyst consensus estimate of those earnings.

However, ASX had a number of concerns with how some entities were interpreting Guidance Note 8. Some had read it to mean that an earnings update is required for small differences in actual or projected earnings from consensus forecasts, which in turn led them to ‘manoeuvre’ analyst forecasts in a non-public or selective manner to align with their internal projections in order to reduce the perceived risk that they need to give an earnings update. Another interpretation was that an entity should publish analyst forecasts or consensus estimates, which from ASX’s perspective could be seen as the entity issuing ‘de facto’ earnings guidance, even where that entity had a policy to not give earnings guidance to the market.

The revisions clarify that entities have no obligation to correct the earnings forecast of any individual analyst or the consensus estimate to align it with the entity's internal earnings projections and that they need only make a disclosure if what their internal projections and what the market expects the earnings to be differ so significantly that the information is market sensitive. The proposed revisions to Guidance Note 8 also clarify that entities should not publish analyst forecasts on their website in any manner that could be construed as de facto publication of earnings guidance (a tacit representation that an entity's results will be close to the forecast or estimate).

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