Introduction to disclosure objectives (Agenda Paper 15A)

The staff introduced the disclosure objectives on business model, strategy and resources and relationships (discussed further in the discussions of the remaining agenda papers).

Disclosure objectives for the main areas of content in management commentary are intended to support the overall objective of management commentary and its link to supporting guidance in identifying information to be provided in management commentary. The paper also presents how staff designed the relevant disclosure objectives. Staff clarified that they intend for there to be a consistent theme or principle that ties all of the work on the objectives of the various topics of this project. The emphasis may be slightly different in each topic, however, but ultimately, the aim is to have all topics linked to a consistent principle.

This paper was for information purposes only and the Board was not asked for decisions.

For Agenda Papers 15B–15D, The Board will be asked to vote on the recommended disclosure objectives and the key features (related to these items) that would need to be addressed in management commentary. They will be asked for their comments on other supporting guidance provided by staff.

Business model (Agenda Paper 15B)

The staff introduced the paper which builds on previous agenda papers and discussed the disclosure objective for business model and possible guidance to be included in the Practice Statement to support this objective.

Question 1

The staff recommend that the revised Practice Statement specifies the disclosure objective for business model as follows:

a) Management commentary shall provide information and analysis to help investors and creditors understand how the entity’s business model creates value and converts that value into cash flows.

That information and analysis helps investors and creditors assess:

• (i) how effective the entity’s business model is in creating value and converting it into cash flows;
• (ii) how scalable the entity’s business model is; and
• (iii) how durable, resilient and adaptable the entity’s business model is.

b) That information and analysis shall cover:

• (i) the range, nature and scale of the entity’s operations;
• (ii) the entity’s cycle for creating value and generating cash flows; and
• (iii) the impacts of the entity’s operations that could affect the entity’s ability to generate cash flows.

c) That information and analysis shall focus on the key features of the entity’s business model.

Discussion and voting

The discussion centred primarily on two issues, the use of the term ‘converts’ in part a) above and the use of ‘durable, resilient and adaptable’ in part a)(iii) above.

Many Board members were concerned that the term ‘converts’ would imply that any value created would be distributed rather than reinvested or redeployed within the business. Staff agreed that drafting would alleviate this concern.

Some Board members noted that the use of ‘durable, resilient and adaptable’ instead of ‘sustainable’ is useful given the diversity in the use and understanding of the term ‘sustainability’ in practice.

Some Board members also suggested that a greater link to the financial statements in the objective would be useful – management commentary provides context of the business but it and the financial information should be linked where possible (for example, revenue generation and value creation).

On the basis that the wording of the recommendations would be refined to take into account the discussion, when asked to vote, 14 Board members voted in favour of the staff’s recommendation.

Questions 2 and 3

The staff recommend that the revised Practice Statement specifies that the key features of the entity’s business model are those that underpin the entity’s ability to create value and generate cash flows.

Staff also provided a discussion regarding the guidance supporting the disclosure objective that could be included in the revised Practice Statement.

Discussion and voting

When asked to vote on the staff recommendation above, 14 Board members voted in favour.

A few comments were made about the supporting guidance.  These included:

• A potential overlap between these and information in the financial statements (particularly in segment reporting) exists;
• Additional information about specific locations (including tax-related information) could be useful to users;
• Whether additional examples would be useful to guide preparers to ensure that only items that ‘truly matter’ are disclosed.

Strategy (Agenda Paper 15C)

Staff discussed the disclosure objective for strategy and possible guidance to be included in the Practice Statement to support this objective. In the context of management commentary, strategy, ‘fundamentally relates to management’s how management intend to sustain and develop the business model in future including leveraging key resources and relationships and reflects consideration of opportunities and threats’.

Question 1

The staff recommend that the revised Practice Statement specifies the disclosure objective for strategy as follows:

a) Management commentary shall provide information and analysis to help investors and creditors understand management’s strategy for sustaining and developing the entity’s ability to generate cash flows in the future.

b) That information and analysis helps investors and creditors assess:

• (i) the potential impact of the strategy on the entity’s ability to generate cash flows; and
• (ii) the entity’s ability to execute the strategy.

c) That information and analysis shall cover:

• (iii) what drives management’s strategy;
• (iv) what management sets out to achieve in the long term;
• (v) how management plans to achieve that; and
• (vi) how management will monitor and measure success.

That information and analysis shall focus on the key aspects of management’s strategy.

Discussion and voting

Some Board members wanted to understand why the stated objective appeared to focus on the generation of cash flows but did not reference value creation. Staff stated that feedback received in this area focused on the generation of cash flows and therefore this was emphasised. However, they reiterated that they would want the underlying principle to be consistent with that of business model i.e. that value creation be considered along with and the generation of cash flows. It was suggested that the objective should be redrafted to clarify this to ensure consistency across the topics to be included in management commentary.

When asked to vote, 13 Board members voted in favour of the staff recommendation (which is to take into account the points raised in the discussion) with one member absent.

Questions 2 and 3

The staff recommend that the revised Practice Statement specifies that the key aspects of management’s strategy are those that will significantly affect the entity’s ability to generate cash flows in the future.

Staff also provided a discussion regarding the guidance supporting the disclosure objective that could be included in the revised Practice Statement.

Discussion and voting

13 Board members voted in favour of the staff recommendation (with similar adjustments to those discussed in question 1 to be made), with one member absent.

The Board commented on the following areas of supporting guidance:

• The importance of the link of strategy to executive compensation;
• Capital allocation information and its link to the financial statements; and
• Significant competitive advantage and sustainability.

Resources and relationships (Agenda Paper 15D)

Staff discussed the disclosure objective for resources and relationships and possible guidance to be included in the Practice Statement to support this objective.

Question 1

The staff recommend that the revised Practice Statement specifies the disclosure objective for resources and relationships as follows:

a) Management commentary should provide information and analysis to help investors and creditors understand the resources and relationships on which the business model and strategy depend.

b) That information and analysis helps investors and creditors assess:

• how much the entity depends on particular resources or relationships; and
• whether those resources are likely to continue to be available and whether the relationships are strong enough to sustain the entity’s business model and strategy.

c) That information and analysis shall cover:

• the nature of resources and relationships;
• how resources and relationships are accessed;
• how those resources are used;
• what could affect the availability of resources and the strength of relationships;
• how resources and relationships are managed.

That information and analysis shall focus on the key resources and relationships.

Discussion and voting

A few drafting recommendations were provided to the staff, notably the need to emphasise the link between resources and relationships, value creation and the generation of cash flows. It was also noted that information about resources and relationships is vital as these items may lead to value creation but may not be recognised in the financial statements.

13 Board members voted in favour of the staff recommendation with one member absent.

Questions 2 and 3

The staff recommend that the revised Practice Statement specifies that an entity’s key resources and relationships are those on which operation of the entity’s business model or implementation of management’s strategy depend.

Staff also provided a discussion regarding the guidance supporting the disclosure objective that could be included in the revised Practice Statement.

Discussion and voting

The Board recommended additional use of examples to aid preparers. Furthermore, it may be useful to emphasise materiality, else too many immaterial items may be disclosed in instances where an entity has multiple business models. Again, the need to promote disclosure of unrecognised (in the financial statements) items in management commentary was highlighted. Finally, it was noted that there is some overlap between the staff’s proposals and the IIRC’s six capitals. Staff noted that this was not necessarily the aim, but the work conducted by the IIRC and the FRC had contributed greatly to their research.

When asked to vote on question 2, 13 Board members voted in favour of the staff recommendation with one member absent.

The Board commented on the following areas of supporting guidance:

• The need to discuss potential future growth in relationships (i.e. growth in customer base); and
• Highlighting opportunities in addition to risks relating to relationships (i.e. leveraging a relationship with a supplier of a scarce resource).