Cover paper (Agenda Paper 15)

The staff continued presenting their findings and recommendations for disclosure objectives relating to further areas of content to be included in the Practice Statement.

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.

Risks (Agenda Paper 15A)

Staff introduced the paper which discusses the disclosure objective for risks 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 risks as follows:

• a) Management commentary shall provide information and analysis to help investors and creditors understand the risks that could disrupt: the entity’s business model; management’s strategy for developing and sustaining that model; or the entity’s resources and relationships.
• b) That information and analysis helps investors and creditors assess:
  • (i) the magnitude and likelihood of potential future disruption to the entity’s ability to create value and generate cash flows; and
  • (ii) how effectively management identifies and manages risks.
• c) That information and analysis shall focus on the key risks and cover:
  • (i) a description of the risks and of the entity’s exposure to those risks; and
  • (ii) how management monitors and manages the risks, and would mitigate disruption if it occurs.

Discussion and voting

Discussions centred around the need to emphasise the ‘key risks’ of a business. These risks are those that would affect investor decisions and are subject to ongoing monitoring and mitigation by management (those that ‘keep management awake at night’). Focus on these would, hopefully, eliminate ‘boilerplate’ risk disclosures.

A few board members highlighted that it would be useful to know whether management had previously identified the ‘right’ risks and how effectively these were mitigated and managed and what risks are being identified as management look forward – a feedback loop.

When asked to vote, 13:1 Board members voted in favour of the staff recommendation.

Questions 2 and 3

The staff recommend that the revised Practice Statement specifies that the key risks are those that could disrupt the entity’s ability to create value and generate cash flows.

The Board will be asked to vote on the staff’s recommendations and to discuss the proposed supporting guidance for the risks objective.

Discussion and voting

Discussions followed on from the previous question. There was concern that the word ‘disrupt’ could be read and understood differently: many things could cause disruption, this could be quite broad and lead to a lengthy list of risks being disclosed. The focus should be on the ‘key’, material risks.

Some Board members highlighted that the objective proposed should clarify this narrower focus. 

These comments were to be incorporated by staff in drafting. With these suggestions considered, when asked to vote, 12:2 Board members voted in favour of the staff recommendation.

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

• The Practice Statement would be more effective if it is consistent with other frameworks (i.e. TCFD). Staff confirmed that this should be the case.
• Staff should, in drafting, clarify whether disclosure of the ‘nature of the risk’ or the ‘disruption the risk could lead to’ should be the emphasis.

External evironment (Agenda Paper 15B)

Staff introduced the paper which discusses the disclosure objective for external environment 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 external environment as follows:

• a) Management commentary shall provide information and analysis to help investors and creditors understand how the environment in which an entity operates affects: the entity’s business model; management’s strategy for sustaining and developing that model; the entity’s resources and relationships; or its risks.
• b) That information and analysis helps investors and creditors assess:
  • (i) how factors and trends in the external environment affect the entity; and
  • (ii) how effectively management monitors and responds to those factors and trends.
• That information and analysis shall focus on the key factors and trends and cover:
  • (i) a description of the factors and trends in the external environment;
  • (ii) how those factors and trends affect the entity; and
  • (iii) how management responds to those factors and trends.

Discussion and voting

It was noted that discussions relating to Agenda Paper 15A would be relevant here too, especially with reference to determining what management actually monitors.

It was confirmed that risks relate to the internal and external environment and consideration should be made of management commentary’s anticipated audience and their level of assumed knowledge.

A few Board members said that disclosure of any opportunities that may arise as a result of risks would be useful and important in providing a balanced message to users. However, a boilerplate list of potential opportunities should be avoided as this would be of little value to users.

When asked to vote, all 14 Board members voted in favour of the staff recommendation.

Questions 2 and 3

The staff recommend that the revised Practice Statement specifies that the key factors and trends in an entity’s external environment are those that affect the entity’s ability to create value and generate cash flows.

The Board was asked to vote on the staff’s recommendations and to discuss the proposed supporting guidance for the external environment objective.

Discussion and voting

The concept of materiality was discussed with staff confirming that they would like to clarify materiality in the context of management commentary which provides different information to financial statements - it is more qualitative and forward-looking.

Similar to the previous discussions, disclosures should convey information about areas on which management are focussed as they run the business and determine strategy.

When asked to vote, all 14 Board members voted in favour of the staff recommendation.

When asked to comment about the supporting guidance, Board members again emphasised the need for information about the areas on which management is focussed.