Future outlooks, changes in outlook and their disclosure
The Financial Supervisory Authority (FIN-FSA) has monitored issuers’ future outlook statements, changes in outlook and their disclosure. The FIN-FSA has also received contacts from the market related to the wording of profit forecasts, the interpretation of changes to profit forecasts, and practices related to the publication of inside information. Based on the findings of the FIN-FSA and the contacts it has received, it is clear that market participants have had difficulties in interpreting the meaning of changes made to profit forecasts, for example in a situation where an issuer changes its profit forecast by adding to its previous forecast modifiers such as clearly, significantly or substantially. With this article, the FIN-FSA wishes to draw issuers’ attention to the clear presentation of future outlooks and changes made to them. In addition, the FIN-FSA emphasises issuers’ obligation to monitor the development of the future outlook and the need to issue profit warnings in all market situations.
In the second article of this Market Newsletter, the FIN-FSA discusses practices related to the publication of inside information.
Profit warnings are published as inside information
Under the Accounting Act, an issuer is obliged to present in its management report an assessment of its likely future development (future outlook). The issuer itself assesses the extent to which it provides future outlook statements. Future outlook statements may therefore be very different in terms of content and precision. Issuers typically provide guidance on their current period’s profit in the form of a profit forecast1, either by giving verbal guidance, which often compares the profit with the corresponding period of the previous year (for example: The operating profit for the financial period is expected to increase compared with last year) or by giving numerical guidance on the level of the profit, for example in the form of a range for the anticipated profit (for example: The operating profit for the financial period is expected to be between EUR X and Y million). Giving a profit forecast is not mandatory, so issuers may, when giving a future outlook, focus on describing the company’s future and operating environment on a more general level without giving a profit forecast. Irrespective of the form in which future outlook statements are given, they play a central role in assessing the need to issue a profit warning.
By profit warning is meant an issuer’s announcement that its profit or financial position in the review period differs from that which it previously publicly forecast or can be reasonably inferred from other previously published information and that the change in question is so material that it meets the definition of inside information according to the Market Abuse Regulation (MAR). If the issuer assesses that there has been a change in its future outlook that is so material that it is likely to have a significant effect on the prices of the issuer’s financial instruments, it must issue as soon as possible a profit warning, which is published as inside information and is formulated with such clarity that the investor understands that a material change is involved.
The need to issue a profit warning may also arise in a situation where an issuer has not given a profit forecast, but has, for example, described the development of the market on a general level or has completely refrained from giving a future outlook due to, for example, market uncertainty. Not providing a profit forecast or future outlook does not therefore remove the obligation to issue a profit warning, if necessary. The FIN-FSA reminds issuers that they must monitor on an up-to-date basis their profit development, financial position and the development of their operating environment in order to be able to assess the need to issue a profit warning. The need to issue a profit warning is connected to the MAR definition of inside information, which may also be met in the absence of a previous profit forecast in a situation where the issuer estimates that its development deviates significantly from that which can be reasonably inferred from previously published information.
A situation where an issuer’s future outlook does not include a profit forecast or where the profit forecast is formulated very loosely may be challenging for both the investor and the issuer. In that case, the investor, without the issuer’s own assessment and guidance, has to form their view of the issuer’s future development independently on the basis of the information previously published by the issuer. On the other hand, it may be difficult for the issuer to assess what the market expects from the company based on the information it has previously published. The assessments of both parties may be influenced by, among other things, the issuer’s previous profit development, previous estimates of the development of the market and operating environment, the valuation of the company’s securities, and the estimates of analysts who follow the issuer. The issuer may manage uncertainty related to market expectations by publishing as clear and as accurate a description of its future outlook as possible.
Change in future outlook
When a change in future outlook meets the definition of inside information, it should be published as soon as possible as a profit warning. Publication of other kinds of changes in the future outlook is at the issuer’s own discretion. These discretionary changes are therefore not published as inside information; clarification takes place, for example, in connection with the publication of a financial report.
An issuer may, for one reason or another, wish to revise its future outlook but, in its assessment, the revision would not significantly affect the price of the issuer's financial instruments, i.e. the change would not be inside information. A typical situation may be, for example, one in which the issuer slightly narrows the range of its numerical profit forecast. The change is so minor, however, that the issuer does not consider that the narrowing of the range will affect the price of its financial instruments to such an extent that the definition of inside information would be met. A change such as this is clear and easy to interpret. The FIN-FSA emphasises that, for the efficient functioning of the securities market, it is important that market participants have as accurate as possible a picture of the issuer’s own assessment of its future outlook, as up-to-date information enhances the price formation of securities in the market. Therefore, updating the outlook even in situations where the update does not constitute inside information is permitted, and when implemented clearly, it increases investors’ understanding of the issuer’s future development.
As another example can be mentioned a situation that is more difficult to interpret from the investor’s point of view – where the issuer changes the form of a verbal profit forecast by adding, removing or changing the modifiers attached to the guidance: for example, the issuer changes its published profit forecast The operating profit is expected to increase compared with the previous financial period to the form The operating profit is expected to increase slightly compared with the previous financial period or the issuer changes its published profit forecast The operating profit is expected to increase clearly compared with the previous financial period to the form The operating profit is expected to increase significantly compared with the previous financial period. In a situation like the one mentioned above, it can be difficult for market participants to assess how the change should be interpreted. The significance of the change and its purpose may be unclear to the investor. Investors may try to draw conclusions about the significance of the information based on the kind of expressions that the issuer has typically used in its profit forecasts and the kind of expressions the issuer has previously used when it has published a profit warning as inside information. The FIN-FSA draws attention to the fact that investors should not have to analyse the meaning of different wordings in order to understand announcements. The market has not come up with clear definitions of what, for example, slightly, significantly or clearly mean in connection with future outlooks. Future outlooks and stock exchange releases should be so clear that they equally serve the information needs of all investors and that the investor obtains a clear picture of what the issuer means by the expressions used. In profit forecasts, expressions describing the magnitude of change, should be consistent. In FIN-FSA’s view, consistency would be supported by issuers defining internally what the terms used in profit forecasts mean in terms of euros or percentages.
The FIN-FSA emphasises that, when changing the future outlook, the issuer always has an obligation to primarily assess whether the change involves inside information.
Attention should be paid to the clarity and comprehensibility of future outlooks and changes to them
Clarity of communication in relation to future outlooks is central to investor protection, and it contributes to the pricing of the issuer’s securities in the market. The accuracy and clarity of future outlooks announced by an issuer creates the basis for the issuer’s own assessment of the need to issue a possible profit warning. Assessing the need to issue a profit warning is more straightforward in situations where the issuer has given a clear statement of its future outlook that can be defined as a profit forecast. The FIN-FSA also recommends providing future outlooks as profit forecasts, if possible.
The FIN-FSA urges issuers to pay particular attention to clarity of communication in situations where the profit forecast is not given numerically but verbally, describing the level of the profit. A profit forecast or change thereto should not contain any uncertainty of interpretation.
Profit warnings must be announced as soon as possible
The publication of a profit warning cannot be delayed, as delaying publication would likely mislead the public. Pursuant to MAR Article 17, issuers must publish a profit warning as soon as possible2, and the issuer cannot delay publication until the publication of a regular financial report, if the obligation to issue a profit warning has, based on MAR, arisen before the time of publication of that report. The issuer may therefore be obliged to publish a profit warning in a separate announcement before the publication of the financial report, very close to the publication of that report.
The FIN-FSA considers it a recommended practice that a profit warning be published in a separate announcement from the financial report, even if they are published at the same time. This practice brings visibility to the profit warning, and it also helps underline the issuer’s obligation under MAR to publish inside information as soon as possible. The FIN-FSA reminds issuers that the goal of timing announcements simultaneously with the financial report is not an acceptable reason to delay the publication of a profit warning.
For further information, please contact:
Rickard Sandell, Market Supervisor, rickard.sandell(at)fiva.fi, tel. +358 9 183 5353
1 ‘Profit forecast’ means a statement that expressly or by implication indicates a figure or a minimum or maximum figure for the likely level of profits or losses for current or future financial periods, or contains data from which a calculation of such a figure for future profits or losses can be made, even if no particular figure is mentioned and the word ‘profit’ is not used. Commission Delegated Regulation (EU) 2019/980 Article 1(d).
2 ‘As soon as possible’, according to the interpretation of the FIN-FSA, means, in practice, that only a relatively short period of time, necessary to verify and evaluate the facts and to prepare the matter for publication, can elapse between the generation of inside information and the announcement.