Background
The objective of this project is to develop a model for a narrative report, that would accompany but be presented outside of the financial statements, setting out management's explanation of the enterprise's financial condition, changes in financial condition, results of operations, and causes of changes in material line items. The output of the project will be a 'best practice' guidance document rather an an IFRS.
| Discussion at the February 2005 IASB Meeting
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At the October 2002 meeting between the IASB and its liaison National Standard Setters, it was recommended that a project examining the potential for issuing a standard or guidance on Management Commentary (MC) by the IASB be undertaken. Accordingly, the IASB established a project team comprising representatives from the national standard-setters in Canada, Germany, New Zealand, and the United Kingdom. The concept of MC is similar to a Management's Discussion & Analysis (MD&A) required in the USA or an Operating and Financial Review required in the United Kingdom.
The project team tabled a discussion paper which begins with an overview of the project, including the motivation for undertaking the analysis, the importance of the project to the IASB and its constituency, and the key issues addressed. It then outlines the analytical steps undertaken by the project team. This includes highlighting areas where there was strong consensus among the project team and those areas where there was less agreement. The section also presents background information on what is meant by MC, the different ways MC is presented within financial reports and the approach different jurisdictions have taken to developing requirements around its form and content.
Whilst the discussion paper does not constitute a completed draft, it covers the core components that could be developed to the next stage of this project and has been drafted as a preliminary views paper. The Board discussed the issue of how to progress the project, especially whether the IASB would be taking ownership of the work done to date.
There was general agreement that whilst the IASB should take ownership and continue with this project as its own, there was not enough time to deliberate on the issues identified and the proposals made, so as to issue the discussion paper as presenting the preliminary views of the IASB. The Board's agenda at this time would not allow for resources to be channelled to this project. The Board agreed to expose the paper on the basis that it presents the results of the research process undertaken, not the preliminary views of the IASB, but the Board may suggest that certain questions or issues be raised with constituents.
The project team made the following conclusions in the discussion paper:
- The IASB should issue a principles-based standard on MC, together with non-mandatory implementation guidance.
- MC should be defined as "information that accompanies financial statements as part of an entity's financial reporting and explains the main trends and factors underlying the development, performance, and position of the business of an entity during the period covered by the financial statements, as well as the main trends and factors which are likely to affect the entity's future development, performance and position."
- The objective of MC is to assist current and potential investors in assessing the strategies adopted by the entity and the potential for successfully achieving them.
- The objectives, principles, and qualitative characteristics of MC should be clearly outlined. Specifically, management should prepare MC setting out their analysis of the business, which both supplements and complements the financial statements with an orientation to the future. MC should be comprehensive, focusing on matters that are relevant and important to investors, and should be understandable, neutral and balanced, comparable and reliable.
- An MC standard should require certain entities to present an MC as part of their financial report. At a minimum the standard would apply to all entities that have publicly traded equity or debt securities, or are in the process of issuing equity or debt securities in public securities markets. The preferred objective is to require these entities to present MC to be able to assert compliance with IFRS. The project team acknowledges, however, that this is unlikely to be achievable in the short-term. Many jurisdictions have regulatory requirements that conflict with the MC model proposed here.
- When an entity is required to present MC the standard should require the disclosure of information around five essential elements, being Nature of the business, Objectives and strategies, Resources, risks and relationships, Performance measures and indicators, and Results and prospects.
- Non-mandatory implementation guidance accompanying the standard should be issued to assist with the preparation of MC. Such guidance would provide examples of what MC that complies with the proposed standard would look like in practice.
- If the IASB does mandate MC the IASB should determine when it subsequently issues new standards, or revises existing standards, whether information should be disclosed in financial statements or MC.
The IASB did not debate all of the above issues. However some of the key comments made during discussions are as follows:
- There was general consensus that the work performed so far and the quality of the report presented was of a high standard.
- There was no clear indication as to whether the Board favoured developing a separate series of Standards dealing with MC or incorporating such requirements into IAS 1. Those in favour of the issuance of a Standard reiterated that the content of that pronouncement would only deal with principles and would to some extent, cover what is currently presented within many operational reviews as contained in annual reports.
- Some Board members favour the inclusion of the MC as an integral part of the financial statements, however there were concerns regarding whether the MC would be a single report within the financial statements or whether the MC would be 'dispersed' within the footnotes of the financial statements and whether preparers would be left to make this decision. Concerns were also raised regarding the 'auditability' of such reports and the consequential increase in scope of financial reporting as a whole under IFRS if it were to include 'forward looking' commentary on management strategy amongst other issues.
- It was suggested the MC standard or guidance be optional, that is, not a requirement under IFRSs, except possibly for entities within the scope of IAS 33 (which would mean that the standard would apply to all entities that have publicly traded equity or debt securities, or are in the process of issuing equity or debt securities in public securities markets).
- Comments specific to the drafting of the discussion paper included some Board members stating a preference for the SEC objectives as regards the MD&A compared to those objectives of a MC set out in the discussion paper, and others requested that the drafting be aligned more with IFRS as drafted, particularly the disclosure requirements.
- Additional comments would be passed onto the project team outside of the meeting.
| Discussion at the June 2005 IASB Meeting
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Management commentaries are also called Management's Discussion and Analysis or Operating and Financial Review.
The meeting was asked to provide 'conditional clearance' on a Preliminary Views Discussion Paper on management commentary (MC), which has been prepared by a working group of staff from standard-setters in Canada, Germany, New Zealand (lead) and the UK. The project staff hopes to have the document issued in September or October 2005.
The project team had prepared the draft discussion paper from the point of view that the annual report was a package containing the financial statements, MC and other material. However, the project team did not think that it was appropriate to include MC within the 'IFRS assertion' that applies to the financial statements. Consequently, the discussion paper is to be silent on the attestation requirements attaching to MC.
The staff noted that the project team had held productive discussions with IOSCO (securities regulators) and IFAC, whose feedback had helped to refine the draft discussion paper. One of the principal sensitivities was the differentiation between items reported in the financial statements (including footnotes) and that reported in MC.
Board Members held a wide-ranging discussion of the draft discussion paper (Observers did not have a copy of this document). One of the concerns expressed was that the project staff had prepared the discussion document from an apparent point of view that MC was 'a good thing' and proceeded to develop something that looked much like an exposure draft. This approach was dissimilar to that in the forthcoming discussion document on measurement, which sets out alternative views. This difference in style should be explained carefully when the document is issued.
Board Members expressed concerns with the project team's use of the IASB Framework's qualitative characteristics in the MC context. They were afraid that using carefully crafted words in a context other than financial reporting was potentially dangerous. For example, MC (being management's self-assessment) could never be 'neutral', since management's bias would be inherent. Similarly, a proper aim in MC would be consistency (as opposed to the Framework's comparability): the MC should address matters on a consistent basis from year to year.
The Board Members reviewed the proposed Questions to Recipients (available in the Observer Notes). The questions will be redrafted and submitted to the July 2005 Board meeting for further discussion.
The Board agreed that the discussion paper should be issued (10 in favour; 3 opposed; 1 abstention). The Board Advisors on the project should be responsible for the detailed review of the text. During that review, they would bear in mind the comments and concerns expressed at this session and would bring any critical matters to a subsequent Board meeting, similar to other 'sweep issues.'
| October 2005: IASB Publishes a Discussion Paper on Management Commentary
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 | On 27 October 2005, the IASB published a discussion paper on Management Commentary that assesses the role the IASB could play in improving the quality of the management commentary that accompanies financial statements. The discussion paper was prepared for the IASB by staff of its partner standard-setters from Canada, Germany, New Zealand, and the United Kingdom. The paper reviews existing national requirements or principles on management commentary and offers recommendations on how the IASB might promote the wider adoption of best practice in the interests of investors and others who use financial reports. While the IASB has discussed the paper, it has not yet developed tentative views on the authors' recommendations. The IASB invites comments on the discussion paper by 28 April 2006. IASB subscribers can access the discussion paper now on the IASB's Website. It will be available to all without charge starting 7 November. Click for IASB Press Release (PDF 61k).
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| Discussion at the January 2007 IASB Meeting
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Analysis of Comment Letters on the Discussion Paper
The staff summarised the comments received. For a comprehensive comment letter analysis please refer to the Observer notes available from the IASB website.
In general a majority of the respondents agreed to the proposals in the Discussion Paper. However, with regard to the question whether entities should be required to include Management Commentary (MC) in their financial reports to assert compliance with IFRSs 61% of the respondents addressing this issue thought that MC should not be mandatory. Some respondents raised the concern that MC lacks the same degree of objectivity as financial statement information. Others noted that important consequences for the audit will arise since the audit of MC poses significant challenges compared to an audit of financial statements.
With regard to the audit implications one Board member pointed out that in Germany MC is part of the audit and that it has been proofed to be auditable.
Other issues like objectivity, essential contents and the form of guidance were briefly discussed but no majority views became apparent.
By a majority of 12 votes the Board decided to go forward with this project and directed the staff to prepare an Agenda Proposal.
| Discussion at the December 2007 IASB Meeting
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The IASB staff presented an agenda proposal to use the conclusions reached in the Management Commentary Discussion Paper as the basis for moving the project from the research agenda to the active agenda. The project would address the presentation of information presented outside the financial statements in the form of management's explanation of the enterprise's financial condition, changes in financial condition, results of operations, and causes of changes in material line items.
The staff presenting the paper expressed a personal view that any such guidance arising from the project should be in the form of a 'non-mandatory IFRS' rather than a 'best practice' guidance. It was proposed that jurisdictions could optionally adopt such an IFRS.
The IASB research director put forward the recommendation that the Board does not undertake management commentary as a standards-level project. Instead, the IASB research director was supportive of a project that would produce best practice guidance.
The Board agreed with the IASB research director's recommendation (8 in favour).
| Discussion at the July 2008 IASB Meeting
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The purpose of this session was to finalise the Board's preliminary views on certain topics for the exposure draft to be drafted.
Conceptual Framework
The staff asked the Board if it agreed to benchmark management commentary against the outcome of Phase A of the Conceptual Framework project ('Objective and qualitative characteristics') instead of the existing Framework of the IASB.
The Board agreed.
Objective of management commentary versus the objective of financial reporting
The project staff continued to get the Board's view on the objective of management commentary. Firstly, the staff asked the Board whether management commentary should be subordinated of the framework (that is, is the Conceptual Framework the 'umbrella' for management commentary). The Board agreed
The Board also had a short discussion of where to draw the line of the information to be provided in management commentary.
The project team then asked the Board whether the objective of management commentary should be the same as for financial reporting. The Board had a discussion of whether overemphasising neutrality would impair the 'through the eyes of the management' approach. The Board agreed to the staff recommendation to align the objectives.
The staff then went on to explain that although the objective of both financial reporting and management commentary are the same, but the purpose of management commentary is unique, which should be reflected in the wording used.
After a short debate on the distinction between objective and purpose, the Board agreed.
Users of management commentary versus the users of financial reporting
The staff asked the Board whether the primary users of management commentary should be both present and potential capital providers as defined in the ED on objective and qualitative characteristics of financial reporting.
The Board agreed.
Qualitative characteristics of management commentary versus qualitative characteristics of financial reporting
The project team noted that the use different terminology to describe the qualitative characteristics of management commentary as compared to the qualitative characteristics of financial reporting.
| | Conceptual Framework | Management Commentary |
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| Fundamental QCs: | Relevance
Faithful representation | Relevance
Balance |
| Enhancing QCs: | Understandability
Comparability
Vefrifiability
Timeliness | Understandability
Comparability (over time)
Supportability |
The staff explained that 'balance' can be subsumed within faithful representation. There was a short discussion in this topic and whether balance was interchangeable with the notion of 'neutrality'. It was agreed to use 'faithful representation' instead of 'balance'
The area of bigger concern for Board members was the difference between verifiability and supportability. It was argued that although much of the information in management commentary is forward-looking, the process for 'verifying' is essentially the same as for historical information. It was proposed to better explain what verifiability meant in the context of forward-looking information and management commentary in general instead of introducing a new term. The Board had a lengthy discussion on this topic.
In the end, the Board agreed to replace 'supportability' with 'verifiability', but asked staff write up what is the intended meaning of verifiability in this context and bring this back to the Board.
Content of management commentary
The staff presented the Board the information to be disclosed to meet the objective of management commentary. Some Board members wanted that list to be expanded to include management compensation (and how it aligns to the performance measures), segment information, financing and taxes.
The Board agreed subject to expanding the list.
Permission to begin drafting an exposure draft
At the end of the session the staff sought permission to begin drafting an exposure draft. One Board member asked what type of publication that would be - it has already been agreed that it will not be part of IFRSs. The staff replied that this is work in progress, but this would be resolved in due course.
The Board then granted permission to begin drafting.
| Discussion at the April 2009 IASB Meeting
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The staff introduced the session by reminding the Board that the forthcoming due process document:
- (a) places management commentary within the boundaries of financial reporting;
- (b) explicitly links management commentary to the financial statements, both of which are 'governed' by the [draft] conceptual framework for financial reporting;
- (c) establishes a framework for the preparation and presentation of management commentary; and
- (d) describes essential content elements for management commentary.
However, the management commentary document would not:
- (a) resolve questions about disclosure placement (the notes to the financial statements versus management commentary);
- (b) modify the disclosure requirements in existing IFRS to clarify disclosure placement;
- (c) offer a definition for what the Board means when it refers to 'financial information' or 'non financial information';
- (d) create a 'hard and fast' boundary between management commentary and the rest of financial reporting;
- (e) explicitly keep out from management commentary aspects of reporting that could be described as environmental impact reporting or corporate social responsibility reporting;
- (f) directly answer the question as to whether management commentary is necessary for a 'true and fair view' of the entity being reported on; or
- (g) contain application guidance or illustrative examples.
Much of the discussion centred on the nature of the guidance that the document would represent and whether the IASB's full due process should attach to it. Some Board members favoured treating the document as similar to the Expert Advisory Panel's guidance on measuring financial instruments, and would release the document on the IASB's Website and invite comment. Others favoured treating the document as a formal exposure draft of 'best practice' guidance. The Chairman was concerned that, having been asked by several jurisdictions to address this issue, to characterise it as an 'inferior document' would be a mistake.
By a majority, the Board voted to call the document an Exposure Draft [of proposed Best Practice Guidance]. The ED is expected to be issued in mid-June 2009 with an extended comment period ending in mid-February 2010.
Messrs Garnett, Kalavacherla, Leisenring, and (potentially) Smith indicated that they would be presenting an Alternative View.
Amendments to IAS 1 paragraphs 13 and 14 proposed in the Working Draft of the ED would be removed from the ED and referred to the Annual Improvements Project.
| June 2009: IASB proposes guidance on 'management commentary'
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On 23 June 2009, the IASB issued an exposure draft (ED) of proposed non-mandatory guidance for preparing and presenting a 'management commentary' – sometimes called 'management's discussion and analysis' or 'operating and financial review'. In a management commentary, which normally accompanies but is not part of the financial statements, management explains how the entity's financial position, financial performance and cash flows relate to management's objectives and its strategies for achieving those objectives. The proposals in the ED draw on international best practice in the preparation and presentation of management commentary. The IASB believes that providing non-mandatory guidance will improve the consistency and the comparability of management commentary across jurisdictions.
The ED Management Commentary is open for comment until 1 March 2010. Click for IASB Press Release (PDF 97k).
Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – IASB Issues Proposals Regarding Management Commentary (PDF 62k) explaining the proposals.
| Discussion at the May 2010 IASB Meeting
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Comment letter summary
Staff summarised the 102 comment letters received on the exposure draft. Most respondents were supportive of the project as they consider it to provide decision-useful information for users. A minority did not support the project as they don't see management commentary as within the boundaries of financial reporting and, therefore, not within the IASB's remit.
The majority of those that support the project also support the decision to issue a guidance document instead of an IFRS as this will avoid duplication and inconsistencies with existing legislative requirements in various jurisdictions.
Some Board members were surprised to learn that a portion of respondents would like the Board to issue an IFRS on management commentary. Overall, the Board was very pleased with the good degree of feedback and support it received on the exposure draft and requested the staff to continue their analysis of the comment letters and present something at the July meeting on the future direction of the project.
| Discussion at the September 2010 IASB Meeting
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The Board discussed the status of the Management Commentary project. The staff noted that the final document would not be binding (i.e. it will not be a Standard) and suggested to call it IFRS Practice Statement: Management Commentary. Accordingly, an entity will not be required to comply with the final document to be able to assert compliance with IFRSs. The Board agreed.
The staff noted that the final document will not be substantially different from the exposure draft published last year � and asked the Board for permission to begin their ballot process. Subject to drafting suggestions and balloting process the final document is expected to be published at the end of October this year.
| December 2010: IASB publishes IFRS Practice Statement on Management Commentary
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On 8 December 2010, the International Accounting Standards Board (IASB) published an International Financial Reporting Standard (IFRS) Practice Statement Management Commentary, a broad, non-binding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRSs.
Management commentary is a narrative report, that accompanies but
is presented outside of the financial statements, setting out management's explanation of the enterprise's financial condition, changes in financial condition, results of operations, and causes of changes in material line items.
Many entities see management
commentary as an important element of their communication
with the capital markets, supplementing as well as complementing the
financial statements.
The Practice Statement is not an IFRS. Consequently, entities applying
IFRSs are not required to comply with the Practice Statement, unless
specifically required by their jurisdiction. Furthermore, non-compliance
with the Practice Statement will not prevent an entity's financial
statements from complying with IFRSs, if they otherwise do so.
Click for:
An entity may apply the Practice Statement to management commentary
presented prospectively from 8 December 2010.
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