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This guide is for issuers of financial products. It gives guidance on ASIC's approach to the use of prospective financial information (including financial forecasts and projections) in a disclosure document or Product Disclosure Statement (PDS). It also applies to conduct under s1041H of the Corporations Act 2001 (Corporations Act).
About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:     explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act) explaining how ASIC interprets the law describing the principles underlying ASIC's approach giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations).
Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project.
This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements.
Key points As part of its disclosure obligations, an issuer of financial products may be required to include prospective financial information in a disclosure document or PDS. This may include information about expectations or predictions of future performance, benefits or costs. This guide is intended to help issuers of financial products understand whether and how to include prospective financial information in a disclosure document or PDS. It outlines: · when prospective financial information can or should be disclosed; · what are reasonable grounds for stating prospective financial information; and · how prospective financial information should be disclosed.
Under the Corporations Act 2001 (Corporations Act), issuers of financial products who are required to provide a disclosure document or PDS must comply with the obligation to provide information a person would reasonably require to decide whether to acquire the product or make an informed decision about the product: see s710, 714, 715 or 1013D. Information in a disclosure document or PDS may include information that is prospective or forward-looking in nature. Prospective financial information may include, for example, forecasts and projections of future performance, benefits or costs. It may also be presented in different ways, such as numerically or using charts or graphs.
the inherent potential to mislead by disclosing prospective financial information based on hypothetical circumstances or unrealistic assumptions.
the release of prospective financial information by management has a significant effect on share prices (indicating that buy/sell decisions are influenced by prospective financial information); perceptions of the likely long-term rate of return are the dominant criteria for investors in selecting a managed investment scheme. For other investment products, the rate of return is seen as a determining factor in making a purchasing decision; and longer time horizons reduce the accuracy of prospective financial information.
when prospective financial information can or should be disclosed (see Section B); what are reasonable grounds for stating prospective financial information (see Section C); and how prospective financial information should be disclosed (see Section D).
For further guidance on the use of prospective financial information and other material in a PDS, see Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) (RG 168).
When should prospective financial information be disclosed?
Key points This section sets out our guidance to help issuers determine when particular prospective financial information should be included in a disclosure document or PDS. In making that assessment, an issuer should consider the nature and extent of the obligation to make disclosure under the Corporations Act, as well as the information value of the disclosure and the risk that the disclosure might be misleading: see RG 170.7­RG 170.19. Even if there are no reasonable grounds for including prospective financial information, there must still be adequate disclosure about the benefits and risks of investing in the financial product: see RG 170.20­RG 170.22.
the nature and extent of the obligation to make disclosure required under the Corporations Act (see RG 170.10­RG 170.15); the information value of what is being disclosed by ensuring there are `reasonable grounds' for the inclusion of the information (see RG 170.16); and the risk that the disclosure might be misleading (see RG 170.17­ RG 170.19).
A decision whether or not to include prospective financial information in a disclosure document or PDS requires balancing the information value (relevance) of what is disclosed against the likelihood that the information may be misleading (reliability). The two elements are interrelated. The less reliable information is, the less relevant it becomes to investors, and the less likely it is that it should be included in the disclosure document or PDS.
... a Product Disclosure Statement must include the following statements, and such of the following information as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product: ... (b) information about any significant benefits to which a holder of the product will or may become entitled, the circumstances in which and times at which those benefits will or may be provided, and the way in which those benefits will or may be provided.
Note: Section 1013D does not apply to margin loans, superannuation or simple managed investment schemes: see Sch 10A, Pt 5A, Pt 5B and Pt 5C of the Corporations Regulations 2001 (Corporations Regulations) respectively, and RG 170.12­RG 170.15.
relevant to its audience; and reliable (i.e. there must be a reasonable basis for it: see GIO Australia Holdings Ltd v. AMP Insurance Investment Holdings Pty Ltd (1998) 29 ACSR 584).
Information is not material to investors if it is `speculative or based on mere matters of opinion or judgment': see AAPT v. Cable &amp; Wireless Optus Ltd (1999) 32 ACSR 63. While these cases relate to takeovers, we consider that they state principles that apply equally to disclosure made in a disclosure document or PDS.
Issuers of margin loans, superannuation products and simple managed investment schemes must comply with shorter, simpler PDS disclosure (shorter PDS regime): see Sch 10A, Pt 5A, Pt 5B and Pt 5C of the Corporations Regulations. The shorter PDS regime prescribes the content and length of the PDS for these products.
Note: The shorter PDS regime is not the same as Short-Form PDSs, which were introduced by the Corporations Amendment Regulations 2005 (No. 5). Under the ShortForm PDS provisions, issuers who are required to provide a PDS have the option of giving retail clients a `Short-Form PDS' (unless excluded) as long as a full PDS is available on request: see s1017H as inserted by Sch 10BA of the Corporations Regulations.
For issuers of superannuation products and simple managed investment schemes, the shorter PDS must include prescribed headings and content. The prescribed content covers key information such as significant product features and benefits, significant risks, how the investment is managed, fees and costs, taxation and how to apply for the product. For issuers of margin loans, the shorter PDS must also include prescribed headings and content. The prescribed content covers key information such as margin loan features and benefits, what a margin call is, risks, costs and how to apply for a margin loan: see Schs 10C­10E of the Corporations Regulations.
Note: Commencement dates for the shorter PDS regime are: 1 January 2011 for margin loans; 22 June 2011 for superannuation and simple managed investment schemes for all new products, as well as for existing products if a supplementary PDS is required; and 22 June 2012 for all other PDSs. For more information, see Information Sheet 133 Shorter and simpler PDSs: Superannuation, managed investment schemes and margin lending (INFO 133) and the Explanatory Memorandum to the Corporations Amendment Regulations 2010 (No. 5).
The shorter PDS may include information in addition to the prescribed content; however, unless the disclosure pertains to the key benefits (for margin loans) or significant features or benefits (for superannuation and simple managed investment schemes) of the product, any prospective financial information should be incorporated by reference: see Sch 10A, item 5A.2, 5B.2 and 5C.2 of the Corporations Regulations. If prospective financial information is included within the shorter PDS, we expect the key assumptions and methodologies to also be disclosed. Prospective financial information presented in isolation from the assumptions and a description of the methodologies used to develop the information may be misleading: see Section D.
A disclosure document or PDS should only include prospective financial information if there are reasonable grounds for its inclusion. This applies even if the information has been used to estimate future performance for internal planning purposes. For a detailed discussion of `reasonable grounds', see Section C.
The making of a statement that contains prospective financial information (i.e. a forward-looking statement) must have reasonable grounds or it will be taken to be misleading under s728(2) or 769C of the Corporations Act. What are `reasonable grounds' should be determined objectively in light of all of the circumstances at the time of the statement, so that a reasonable person would view as reasonable the grounds for the statement: see Section C.
information that investors and their professional advisers would reasonably require in order to make an informed assessment of the issuer's prospects; information that a person as a retail client would reasonably require to make an informed decision about whether to acquire the product to which the information relates; or information reasonably required or expected by an investor to be disclosed in a disclosure document or PDS.
the issuer's prospects (s710); the significant benefits of a product and the way in which the benefits will or may be provided (for products other than margin loans, superannuation and simple managed investment schemes) (s1013D(1)(b)); the significant features and significant benefits of a superannuation product or simple managed investment scheme (Schs 10D and 10E, respectively, of the Corporations Regulations); and the key or other benefits available to the borrower or potential borrower of a margin loan (Sch 10C of the Corporations Regulations).
historical information about the product, such as yield or price (making sure that investors will not think it is a guarantee of future performance); risks (e.g. historically, the factors that have an impact on the key areas of yield and price, and the experience of the directors); anticipated acquisitions; product development and market share; and the kinds of matters discussed in Regulatory Guide 70 Prospectuses for cash box and investment companies (RG 70).
What are reasonable grounds for stating prospective financial information?
Key points Reasonable grounds means that there must be a sufficient objective foundation for the statement. There are several factors that may amount to reasonable grounds, such as when the information relates to forward-sales contracts or leases, or when the information is underpinned by independent industry experts' reports or independent accountants' reports: see RG 170.25­RG 170.41. Other factors (such as information supported only by hypothetical assumptions) do not, by themselves, indicate reasonable grounds: see RG 170.42­RG 170.43. Statements based on a contingency that is unlikely to occur are not prohibited. However, in many cases they will have a predictive faculty and will therefore need to have reasonable grounds: see RG 170.46­ RG 170.48. Advertising will also be misleading if it contains prospective financial information without reasonable grounds: see RG 170.50­RG 170.52. If we suspect that a disclosure document or PDS contains prospective financial information without reasonable grounds, we may exercise our administrative, investigative or consumer protection powers: see RG 170.53­RG 170.57.
issuers discounting, or not taking into account, the variable nature of matters that may influence, or be influenced by, future events; and the inherent potential to mislead by disclosing prospective financial information based on hypothetical circumstances or unrealistic assumptions.
existing at the time of publication of the information in the disclosure document or PDS; on which the issuer in fact relied; which are objectively reasonable; and which support the information: see Sykes v. Reserve Bank of Australia (1999) ATPR 41­699, Heerey J at 42­902.
the information relates to options on forward-sales contracts or leases that lock in future expenses and revenue (see RG 170.28­RG 170.29); the information is underpinned by independent industry experts' reports and/or independent accountants' reports (see RG 170.30­RG 170.38); and the information includes reasonable short-term estimates (see RG 170.39­RG 170.41).
These factors may indicate that reasonable grounds exist for stating prospective financial information, but they are not necessarily conclusive. There may be other methods of establishing reasonable grounds and, importantly, these factors may not be sufficient to establish reasonable grounds in some cases.
of the initial term unless there are reasonable grounds to believe that the option will be exercised. An example is where there is an option to renew a lease, and the lessor has had a long track record of exercising this option to renew the lease and there is nothing to indicate that this will change in the next period.
is included in or incorporated by reference into the document containing the prospective financial information; sets out the assumptions underlying that information; and makes a positive statement that both the prospective financial information and its assumptions are reasonable and the expert does not disclaim liability for the statement.
An expert could even adopt management's assumptions if that expert states that those assumptions are reasonable. For example, if a lease is ending, an independent industry expert may provide reasonable assurance that the property can be re-leased for the relevant amount given certain assumptions about such factors as economic circumstances and local vacancy rates, and state that all those assumptions are reasonable. However, we will not generally regard an expert's report that accepts management's assumptions without testing whether they are reasonable as meeting the test in s728(2) or 769C. In preparing an expert's report, the independent expert should have regard to Regulatory Guide 111 Content of expert reports (RG 111). For the requirements to establish an expert's independence, see Regulatory Guide 112 Independence of experts (RG 112). An independent industry expert must have the credentials to give an opinion on the issue of whether reasonable grounds exist for the prospective financial information. These credentials might be shown by the expert's specialised training, study or experience. The subject matter of the report must not be outside the scope of the expert's relevant field of expertise: see Makita v. Sprowles  NSWCA 305. An expert's report is unlikely to be of assistance in establishing the existence of reasonable grounds for prospective financial information if the facts that the expert has relied upon are unverified or unverifiable. If an expert relies on information provided by third parties, they should indicate if they have any reservations about accepting that information as accurate because they will often be in the best position to decide if the information warrants further inquiry.
We will monitor experts' reports that seek to provide reasonable grounds for disclosing prospective financial information to ensure the reports themselves are reasonable and have not been prepared or presented in a misleading manner. If such a report does not enable an objective evaluation of the expert's conclusion, it may be given no weight in determining whether there are reasonable grounds for the prospective financial information: see Makita v. Sprowles  NSWCA 305.
be based on an investigation of the reasonableness of the assumptions giving rise to the prospective financial information; state that there is no reason to believe that the assumptions do not provide reasonable grounds for the preparation of the prospective financial information; in addition to meeting professional standards for reporting requirements, also state that there is no reason to believe that the information itself is unreasonable; and clearly identify any hypothetical assumptions and state that they have no significant impact upon the projected outcome.
We expect accountants who review and report on prospective financial information contained in a disclosure document or PDS to disclose in their report the scope of their engagement and the extent and nature of their enquiries. The Auditing and Assurance Standards Board (AUASB) has provided guidance on the presentation of prospective financial information in Auditing and Assurance Guidance Statement 1062 Reporting in connection with proposed fundraisings (AGS 1062). In addition to complying with AGS 1062, the independent accountant's report should clearly identify any hypothetical assumptions used in the prospective financial information and state that they have no significant impact upon the projected outcome.
Note 1: Guidance may also be taken from Auditing Standard 804 The audit of prospective financial information (AUS 804), which establishes standards and guidance on engagements to audit and report on prospective financial information. Note 2: The AUASB has stated that it intends to issue a new assurance standard to replace AUS 804 and AGS 1062 in June 2011: see www.auasb.gov.au/admin/file/ content2/c7/Annual_Regulatory_Plan_2010-2011_Updated_Sep_2010_FINAL.pdf.
Short-term estimates (not exceeding two years) relating to an existing business and based on events that management reasonably expects to take place or actions management reasonably expects to occur may establish reasonable grounds for disclosing prospective financial information in a disclosure document or PDS. Our regulatory experience has shown that the longer the period the prospective financial information relates to, the less likely it is that there are reasonable grounds for disclosing it because the grounds for longer term prospective financial information become less verifiable. We generally consider that prospective financial information for a period of more than two years may require independent or objectively verifiable sources of information to establish that there are reasonable grounds to provide it. However, for an existing business preparing a statement on estimates for up to two years, we will generally not regard as necessary independent verification if there otherwise appear to be reasonable grounds to make the statement. Directors should state why they believe the information is objectively reasonable. We may still take action on a statement on estimates for up to two years if we believe there are no reasonable grounds to provide it.
728(2)] also ensures that forecasts are made where there is a reasonable basis for them and not made on the basis of genuine but unreasonable beliefs of issuers.
relating to foreign currency exchange rates; or that performance will track or outperform a certain benchmark. Both the performance of the benchmark in future and the fact that the forecast returns will track or outperform that figure require reasonable grounds.
the overall impression created by the disclosure document or PDS; and the wider circumstances and context in which the disclosure is made.
A reasonable class of consumers may include the astute and the gullible, the intelligent and the not so intelligent, and the well educated and poorly educated: see Fraser v. NRMA Holdings Ltd (1995) 13 ACLC 132.
Because of the marketing role of prospective financial information and its use by investors, we consider it difficult to argue that prospective financial information in a disclosure document, PDS or advertisement will not have a predictive faculty.
the likely rate of expenditure for the venture; if and when further funds will be required to continue business operations; and how those funds might be raised.
For the purposes of this Chapter, or of a proceeding under this Chapter, if: (a) a person makes a representation with respect to any future matter (including the doing of, or refusing to do, any act); and (b) the person does not have reasonable grounds for making the representation; the representation is taken to be misleading.
A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
will need to be assessed on the particular facts of each case. However, the principles set out in this guide may provide some general guidance.
the issuer is in the start-up phase; the issuer will substantially change its operations following the fund or capital raising; the issuer's present activities constitute research and development of products and the development is not significantly advanced to warrant a reasonable expectation that the products will be commercialised; or the prospective financial information indicates a return significantly higher than industry competitors or historical performance.
substantiation notices; and interim stop orders.
If an issuer makes a claim or representation promoting the supply or possible supply of financial services and we suspect that the claim or representation may be in breach of a consumer protection provision, we may issue a notice to the issuer to require it to provide information that supports the claim or representation under s12GY of the Australian Securities and Investments Commission Act 2001 (ASIC Act).
If the existence of reasonable grounds for prospective financial information is unclear and a delay in resolving our concerns may be seen to be prejudicial to the public interest, we may make an interim stop order affecting the disclosure document or PDS (see s739(3) and 1020E(5) of the Corporations Act) without reference to the issuer.
How should prospective financial information be disclosed?
Key points Prospective financial information in a disclosure document or PDS can be misleading if it is presented in isolation from the assumptions and a description of the methodologies used to develop the information. Prospective financial information should generally be accompanied by full details of assumptions, the time period covered by the information, the risks that projections will not be achieved and an explanation of how the information was calculated: see RG 170.58­RG 170.83. An issuer must also ensure that the prospective financial information is not presented in a way that may be misleading: see RG 170.84­RG 170.89. Even if there are reasonable grounds for including prospective financial information, issuers should consider including a warning statement to ensure that investors understand the risks in placing undue reliance on the information: RG 170.91­RG 170.94.
assess whether the prospective financial information is relevant and reliable (i.e. to form their own view about how reasonable the grounds are for making the statement); and identify with certainty the facts and circumstances that support prospective financial information, as well as being able to demonstrate that the information is reasonable.
Note: Disclosure of this information is required under s710 and 1013D of the Corporations Act.
full details of the assumptions used to prepare the prospective financial information (see RG 170.61­RG 170.70); the time period covered by the prospective financial information (see RG 170.71­RG 170.74); the risks that the predictions in the prospective financial information will not be achieved (see RG 170.75­RG 170.77); and an explanation of how the prospective financial information was calculated and the reasons for any departures from accounting standards or industry standards that investors would reasonably expect to be followed (see RG 170.78­RG 170.83).
the validity of the assumptions on which the prospective financial information is based; the likelihood of the assumptions actually occurring; and the effect on the prospective financial information if the assumptions vary.
specific future economic conditions; and particular circumstances affecting a company or financial product and the industries relevant to that company or financial product.
Disclosure of the material assumptions allows an investor or adviser to make an informed assessment of an issuer's prospects, or a person as a retail client to make an informed decision whether to acquire the product.
state general assumptions, such as the absence of war or natural disasters, unless the forecast takes these events into account; or disclose assumptions that would not materially affect the prospective financial information.
It is not sufficient to state the general nature of an assumption. Specific quantities or amounts should be set out. For example, it may not be sufficient to state that prospective financial information is based on an anticipated recovery in equity markets, without setting out the amount of the required recovery: see GIO Australia Holdings Ltd v. AMP Insurance Investment Holdings Pty Ltd (1998) 29 ACSR 584. We consider that because the presence or absence of reasonable assumptions is a factor in any determination of whether an issuer has satisfied the relevant disclosure obligation, the basis for the assumptions underlying the prospective financial information should be stated in the disclosure document or PDS in order that an investor has some means of assessing that information: see Miba Pty Ltd v. Nescor Industries (1996) 141 ALR 525 and Wesfi Ltd v. Blend Investments Pty Ltd (1999) 31 ACSR 69. Disclosure of the basis for prospective financial information may reduce the capacity of the information to mislead because such disclosure assists the assessment/decision of an investor or retail client.
Including a sensitivity analysis is a useful means of demonstrating the responsiveness of prospective financial information to material changes in key assumptions underlying the information. A sensitivity analysis should show the impact of change on significant assumptions to highlight the importance of those assumptions in calculating the prospective financial information. However, a sensitivity analysis alone is not an adequate substitute for prospective financial information prepared in accordance with s728(2) (if it is required) or explaining all relevant assumptions and risks. Sensitivity analyses using positive or optimistic variables should generally be accompanied by a corresponding set of analyses based on negative or pessimistic variables of substantially similar weight. The range of variables covered by a sensitivity analysis should be reasonable.
The time period covered by the prospective financial information is an assumption that forms part of the information that must be disclosed.
investors can compare results with previous year financial results; and periods are not selected to create a misleading impression.
Subject to our comments in RG 170.72, if reliable prospective financial information can only be reasonably stated for part of a financial year, it can be made for that part only.
risks associated with a particular asset class for the financial product-- for example, the volatility of share prices or the fact taxation deductions may be disallowed for scheme interests subject to a product ruling; and risks specific to the proposed investment strategy--for example, the risks associated with particular investment plans or investing in emerging industries.
In the absence of these warnings, prospective financial information may have a greater capacity to be misleading.
the reasons for any departure from current accounting or industry standards that apply; the reason a particular accounting or industry standard is applied in a particular way when there is some discretion involved; and the reason a particular accounting or disclosure treatment is adopted when current practices differ among relevant professionals.
Where non-statutory financial information is included in a disclosure document or PDS, corresponding information that is prepared in accordance with the recognition and measurement requirements of accounting standards should also be disclosed with sufficient prominence.
Note: `Non-statutory financial information' is any financial information, financial figure, measure or ratio that is prepared on a basis that is not in accordance with all relevant accounting standards. Non-statutory financial information may exclude certain transactions, or present transactions or balances on a different recognition and measurement basis from that required or permitted by accounting standards.
The issuer should also disclose the effects of any chosen accounting treatment on the prospective financial information. The effects should be disclosed in enough detail for investors to properly assess the information. Reasons for preparing prospective financial information in a particular way will not need to be given if they would not be material to investors. We are not concerned with trivial or unimportant differences in accounting treatment in a prospectus. Similarly, if an expert adopts a particular methodology in preference to others when preparing prospective financial information, it should be explained. Experts should see RG 111 for more detailed guidance. The methodology itself should not be misleading. For example, calculation of prospective financial information in a manner that does not take into account the time value of money may be misleading if investors do not understand that fact.
Section 728(2) is not an exhaustive statement of when prospective financial information is misleading. The presentation, accompanying disclosures and terminology used in prospective financial information should also be considered. A statement that is literally true may at the same time be misleading and deceptive: see Hornsby Building Information Centre Pty Ltd v. Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228.
with its assumptions and limits prominently displayed immediately after the information, or in a way that ensures that an investor is made aware of the existence, nature and quantity or amount of the assumptions and limits at the time they read it; with the assumptions and limits displayed in a way which is not less prominent than the prospective financial information (i.e. when compared to the `key' statement); and so that prominence is not given to a more favourable figure or fact in the forecast range if a range is cited.
Presenting prospective financial information as a range may reduce the risk that investors will place undue weight on it, as may occur with a single point estimate. However, giving a range is only appropriate for significant totals, such as net profits or net assets. Ranges may be confusing or misleading if they are used for every item that appears in a statement of financial position. If prospective financial information is expressed as a range, the range must be small enough to give meaningful information about an issuer's prospects. A disclosure document or PDS should state which variables will have a significant effect on the outcome within the range. It may be misleading to include a range when the maker expects the results to be at the lower end of the range. If a range is given, the link between the assumptions and the upper and lower ends of the range should be clear. It may be appropriate to express prospective financial information as a statement that a result of at least a specific amount is likely.
has a particular accounting meaning. The use of that or other technical terms should not be misleading to investors. Issuers should ensure that the use of any technical terms is adequately explained in a disclosure document or PDS and is not misleading. In particular, care should be taken to ensure that the use of terminology is consistent throughout a disclosure document or PDS to avoid investor confusion.
The commercial benefits of keeping certain information confidential are relevant in assessing what is reasonable for investors to require or expect for the purposes of s710 and 1013F(1). However, these commercial benefits do not justify withholding information that may deter investors from acquiring the securities if that information were generally known. Careful disclosure may often satisfy the requirements of the Corporations Act without revealing confidential information.
is predictive in character; may be affected by inaccurate assumptions or by known or unknown risks and uncertainties; and may differ materially from results ultimately achieved.
The use of warnings and other cautionary language will not always be sufficient to prevent particular information being misleading and importantly will not, of itself, affect the requirement for there to be reasonable grounds to state the information.
Note: See Div 3 of Pt 7.1 of the Corporations Act for the exact definition.
Note: See s761A for the exact definition.

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