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Management commentary

Date recorded:

Cover paper (Agenda Paper 15)

In this paper, the staff provide a background and overview of the project to date, and summarise the content of the following papers to be discussed in October’s meeting.

Assuming the Board agrees with the staff recommendations to follow, the staff will begin to draft the Exposure Draft for the updated Practice Statement.

Overview of guidance on matters affecting long-term prospects, on intangible resources and relationships and on ESG matters (Agenda Paper 15A)

The staff assert that a short-term focus within general narrative reporting practice has led to a gap, with investors, creditors and other stakeholders increasingly requesting information about matters that could affect an entity’s long-term prospects, for instance, regarding intangible resources and relationships, or environmental, social and governance (‘ESG’) matters.

In response to these demands, there have been significant developments in the field of narrative reporting, including various initiatives at harmonisation of the multiple frameworks in this area, and research into how to report on this information.

To meet this growing demand for information on matters that may affect an entity’s long term prospects, promotion of information on these topics has been one focus area for the Management Commentary project.

Although trying to avoid a ’checklist’ exercise that will diminish the application of judgement, the Board wishes to promote the inclusion of information about intangible resources and relationships, and ESG matters within management commentary in order to meet the objective of management commentary.

It is expected that the proposals related to provision of this information will be included throughout the draft guidance rather than as separate guidance, due to the overlap between both the areas of the business these matters could affect, and overlap between the matters themselves.

The staff sought feedback from consultative groups who:

  • broadly supported a principles-based approach to guidance on information about intangible resources and relationships;
  • broadly supported the proposal that identification of relevant matters should be based on materiality to investors and creditors; and
  • broadly agreed that guidance on these matters need not be presented separately from the Practice Statement, though some argued it could be given more prominence by being within a separate section of the statement.

The staff papers include the working draft of their guidance on the provision of information about matters that could affect an entity’s long-term prospects, intangible resources and relationships, and ESG matters.

The staff ask for comments or questions on this overview of draft guidance, but no formal decisions will be made.

Overview of the likely effects of the proposals (Agenda Paper 15B)

In accordance with the Due Process Handbook (the Handbook), the Board assess the likely effects of any proposed new Standard. Although the handbook does not explicitly require this for non-mandatory Practice Statements, it does state that the Board should follow the same procedures as for developing Standards.

The staff think that explaining the likely effects of the proposals could be helpful for:

  • a) jurisdictions considering whether to adopt the revised Practice Statement; and
  • b) preparers choosing whether to apply it voluntarily

The Handbook suggests assessing the effects:

  • a) in comparison to the existing financial reporting requirements; and
  • b) in the light of the Board’s objective of financial reporting transparency.

The staff note that due to limited adoption of the existing Practice Statement, it is difficult to assess the effects of the Board’s proposal through comparison, therefore the effects analysis focuses on assessing the effects of the proposals in the light of the Board’s objective of financial reporting transparency.

The staff identify the following as likely positive effects of the proposals:

  • a) improved focus on and provision of information on matters specific to the entity;
  • b) improved reporting on matters of particular interest to investors and creditors, namely matters that could affect the entity’s long term prospects such as intangible resources and relationships, and ESG matters;
  • c) improved coherence of discussion of matters identified;
  • d) improved qualitative characteristics of information presented, such as comparability, verifiability, completeness, and balance; and
  • e) improved quality of electronic reporting.

The staff also argue that the improved enforceability of the Practice Statement and the improved ability to gain assurance over the management commentary will provide a better basis for, and encouragement of, local regulators to mandate the revised Practice Statement.

The staff also considered the likely costs of implementing the proposals to both the preparers and the investors and creditors.

The costs of implementing these proposals for preparers is considered to be variable: some entities with pre-existing internal systems in place to identify relevant information for management commentary are unlikely to incur significant extra costs in producing information under a revised Practice Statement; however, the costs may be significant for entities that currently do not prepare any management commentary.

The staff expect that there would be a cost saving for investors and creditors as the proposals should make it easier for them to analyse the information in management commentary under a revised Practice Statement.

In summary, the staff anticipate that the likely benefits of implementing and adopting the revised Practice Statement would significantly outweigh the likely costs of implementing the proposals and ongoing application.

Board members will be asked if they have any comments or questions on this overview of the likely effects of the proposals and were not asked to vote on these matters.

Due process steps and permission for balloting (Agenda Paper 15C)

Question 1

The staff briefly outline the background to the project, and summarise the process for publishing an Exposure Draft.

The staff also discuss the proposals for the effective date and transition of the revised Practice Statement, recommending that the Practice Statement becoming effective for periods beginning on or after the date the Practice Statement is published gives sufficient time (at least one year) for entities to transition to the revised Practice Statement (e.g. if published on 1 December 2022, it would be effective on or after that date and the first management commentary following the revised Practice Statement would be 1 December 2023 at the earliest).

The staff also recommend that early adoption of the revised Practice Statement should be permitted.

The Board will be asked to vote on the staff recommendations.

Question 2

The staff outlined the steps taken so far in developing the proposals for the revised Practice Statement.

The staff discussed the appropriate length of any comment period. Though the staff do not think a period of comment shorter than the usual minimum is necessary, the staff will ask the Board for a decision on the length of any comment period at a later date.

The Board were invited to share any comments on the comment period.

The staff shared in an appendix confirmation that the required due process steps to date for the publication of the Exposure Draft have been completed.

The Board will be asked if they were satisfied that they had complied with all applicable due process steps and that it should begin the balloting process for the Exposure Draft. They were also ask if any member intends to dissent to the Exposure Draft.

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