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Management Commentary

Date recorded:

Sweep issues — Status of the Practice Statement (Agenda Paper 15A)

Background

In December 2020, the staff circulated a pre-ballot draft of the Exposure Draft (ED) of the revised IFRS Practice Statement 1 Management Commentary (Practice Statement) to the Board and external reviewers. This paper analysed the comments and questions from the feedback.

Staff analysis

The reviewers said that it is unclear how a non-binding Practice Statement can include requirements and that reference to requirements should be replaced by reference to principles, guidance or similar. In particular, the reviewers said the descriptions of the status and applicability of the Practice Statement should be aligned with those used in IFRS Practice Statement 2 Making Materiality Judgements (Materiality Practice Statement) and asked the staff to clarify, in the transition provisions, that the application of the Practice Statement is permitted rather than required after the effective date. The staff believe the status of the Practice Statement and the requirements for the statement of compliance are appropriately described in the pre-ballot draft of the ED but the staff will consider in drafting whether the descriptions need further clarification. Furthermore, the staff think the Basis for Conclusions (BC) should explain why the ED does not use the terms ‘non-binding’, ‘non-mandatory’ or similar. Specifically, the BC should explain that the use of the term ‘non-binding’ in the existing Practice Statement has caused confusion and to clarify how the status of the Practice Statement compares to the status of the IFRS Standards. Lastly, the staff agreed to clarify how the status of the Practice Statement compares to the status of the Materiality Practice Statement.

Board discussion

Board members agreed with the staff analysis and agreed with the suggested approach. Board members recommended the staff not compare and contrast the Practice Statement against the Materiality Practice Statement. No decisions were made by the Board.

Sweep issues — Definition of material information (Agenda Paper 15B)

Background

The Board tentatively decided in the July 2019 meeting to include in the Practice Statement guidance on making materiality judgements when preparing management commentary. The staff suggested that the Practice Statement should define material information, applying the definition in the Board’s Conceptual Framework for Financial Reporting (Conceptual Framework).  This paper presented the two questions in drafting the definition of material information for the Practice Statement.

Staff analysis

The staff asked whether the definition should refer to the related financial statements and if the definition should include ‘which provide information about a specific reporting entity.’ The staff recommended that the Practice Statement definition of material information should refer to the decision investors and creditors make on the basis of the management commentary and the related financial statements. The staff also recommended that the Practice Statement state that ‘Information is material if omitting it from management commentary, or misstating or obscuring it within management commentary, could reasonably be expected to influence decisions that investors and creditors make on the basis of that management commentary and the related financial statements.’ Lastly, the staff concluded that it would not be necessary to include ‘which provide information about a specific reporting entity’ as this message will be communicated by the disclosure objectives, other requirements and supporting guidance in the Practice Statement.

Board discussion

Some Board members disagreed with the staff’s recommendation of referring to decisions made on the basis of the management commentary and the related financial statements. Proponents of this view said that management commentary was designed on a stand-alone basis and referring to related financial statements may result in challenges for auditors when providing assurance on the financial statements. Furthermore, this approach may result in the duplication of the information already provided in the financial statements and could imply that management commentary must provide all material information normally provided in financial statements if the entity’s financial statements do not provide that information. However, some Board members agreed with the staff’s recommendations to link management commentary to related financial statements as management commentary is intended to be supplementary information to the financial statements. Supporters of the staff’s proposal raised the concern that management commentary may be result in duplication if management commentary is considered to be separate from financial statements. Board members further suggested that the definition of materiality be aligned to the definition in the Conceptual Framework. Lastly, the Board asked the staff to clarify that the preparers may cross-reference to the information already disclosed in the financial statements rather than requiring duplication of information in the management commentary.

Board decision

7 of the 12 Board members present (1 was absent) supported the staff’s recommendation that the Practice Statement state that information is material if omitting it from management commentary, or misstating or obscuring it within management commentary, could reasonably be expected to influence decisions that investors and creditors make on the basis of that management commentary and the related financial statements. No comments were received from the Board in relation to the guidance.

Sweep issues — Requirements and guidance on key matters (Agenda Paper 15C)

Background

This paper analysed the comments and questions from feedback on the pre-ballot draft about the proposed requirements and guidance relating to key matters and suggested an approach to clarifying the proposed requirement and guidance.

Staff analysis

Some reviewers suggested it is unclear how the notion of material information relates to the notion of key matters and how the notion of ‘fundamental’ relates to the notion of ‘material’ and to the notion of ‘key’ and whether they all constitute different materiality thresholds. Furthermore, the reviewers have said it is unclear why the notion of ‘fundamental’ features in some, but not all, specific descriptions of key matters. In addition, the reviewers said the pre-ballot draft used the label ‘key’ which it sometimes uses to describe items other than key matters and this can cause confusion. The staff suggested clarifying the relationship between material information and key matters and explain in the BC why the ED uses the terms ‘key’, ‘fundamental(ly)’, ‘severely’ and ‘underpin’, and explain how those terms relate to the materiality threshold. In addition, the staff will consider further whether to retain the terms ‘severely’ and ‘underpin’ rather than ‘fundamental(ly).’ Lastly, the staff will review and eliminate the use of ‘key’ when not referring to key matters.

Board discussion

Board members asked the staff to clarify that materiality is entity-specific. Board members agreed it would be important to clarify what is meant by material information versus key matters as not all information about a key matter is considered to be material. For example, material may be used to describe matters such as material transactions, events or conditions rather than referring to information. Board members preferred to use consistent language such as ‘fundamentally’ if the intention is to convey the same threshold. Lastly, Board members asked the staff to clarify the use of ‘factor’ rather than ‘matter’. No decisions were made by the Board.

Sweep issues — Long-term prospects, intangible resources and relationships and ESG matters (Agenda Paper 15D)

Background

The Board asked the staff to provide an overview of requirements and guidance for reporting on matters that could affect the entity’s long-term prospects, about intangible resources and relationships about environmental and social matters which would be included in an appendix to the ED. This paper analysed the comments received on the appendix.

Staff analysis

The reviewers suggested that the appendix may not be necessary if it repeats the requirements and guidance included in the main text. Some of the feedback included that the overview of requirements and guidance on reporting environmental and social matters is incomplete because it misses some requirements and guidance (i.e. chapter on risk). In addition, the reviewers have suggested to emphasise in the introduction that materiality decisions are made in context of the entity and so management commentary should include entity-specific information and some examples should be included in the appendix. The staff suggested restructuring the appendix by providing a more summarised description of applicable requirements and guidance instead of quoting from the main body with cross-references included for more detail and accompanying those summarised description with a brief caption identifying the topic discussed and with examples of how an entity would apply those requirements and guidance in determining which information to provide. Furthermore, the staff also suggested including in the table on reporting environmental and social matters an overview of requirements and guidance set out in the chapters on risks, strategy and financial performance and financial position.

Board discussion

Board members expressed appreciation for the new format and suggested that the staff provide quantitative examples rather than describing what an example might look like. Board members expressed concerns that there is a risk that preparers will misinterpret the current examples as the level of disclosure required and provide vague information believing that they have met all the requirements. No decisions were made by the Board.

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