Management commentary

Date recorded:

Cover paper (Agenda Paper 15)

At this meeting, the IASB continued discussing feedback on its proposals for a revised Practice Statement on management commentary, as set out in the ED/2021/6 Management Commentary.

No decisions were asked from the IASB in this session.

There was no discussion of this paper.

Feedback summary—Detailed feedback on disclosure objectives and supporting examples (Agenda Paper 15A)

This paper summarised detailed feedback on the proposed disclosure objectives for the six areas of content and supporting examples.

There was broad support for the proposed areas of content and for the disclosure objectives proposed for those areas of content. In particular, investors stated that the proposed disclosure objectives correctly identify their information needs. However, some respondents suggested adding ‘governance’ as a distinct area of content, and some suggested incorporating explicit requirements for governance-related information throughout requirements for areas of content. Some respondents also suggested broadening the ‘risks’ area of content to include both risks and opportunities. In addition, some investors suggested giving greater prominence to specific information that is of particular importance to investors—for example, information about management’s funding and capital allocation strategies and metrics that play a role in determining management compensation.

The paper gives detail on suggestions from respondents for additional disclosure objectives or refinements to some of the proposed disclosure objectives. It also summarises comments on the proposed examples of information that might be material. Most of the respondents commenting expressed the view that these examples would be helpful to preparers in identifying material information that is needed to meet the disclosure objectives for the different areas of content. Some respondents expressed concerns that the examples might be used in a way that results in information overload.

IASB discussion

Agenda Papers 15A and 15B were discussed together.

IASB members were pleased to see that the proposed disclosure objectives seemed to meet investors’ needs. On the role of management commentary, IASB members acknowledged that the landscape has changed significantly since the ED was published, especially with the creation of the ISSB. One IASB member suggested to create a roadmap that sets out all the different parts of narrative reporting and how they would interact (for example the interaction of a sustainability report with management commentary). One IASB member said he would not object keeping those two reports separate although there seems to be some merit in combining them.

Where respondents pointed out duplications in the disclosure requirements of the ED, IASB members suggested that these should be addressed. On respondents’ suggestions to make resources and relationships a principle rather than a content area, the IASB would have to explore this in more detail as it was difficult to imagine how this would work.

On respondents’ comments to better utilise the International Reporting Council (now Value Reporting Foundations)’s International Integrated Reporting Framework (<IR> Framework), IASB members thought it was worth considering, however it was not a straight-forward exercise as the documents are quite different and therefore difficult to merge. The Chairman said that given the IFRS Foundation will become the custodian of the <IR> Framework, there could be internal cross references between the documents.

Respondents’ comments on commercial sensitivity were seen as valid by IASB members. The IASB would have to think about how to get the forward-looking information investors need without requiring preparers to disclose commercially sensitive information. Especially budget information and planned figures can be problematic to disclose for entities.

IASB members noted that many respondents would like to see governance as a content area but said it would have to be worked out as to how this interacts with jurisdictional requirements. The IASB could therefore only require high level disclosures like internal control processes. Also, IASB members agreed with respondents that more information on intangible assets could be provided, especially in light of the IASB’s very recent decision to initiate a comprehensive project on intangibles. On ESG matters, it was noted that any information required should be aligned to information required by the ISSB’s standards.

One IASB member suggested that for further analysis of the comments received, the staff should categorise these in three levels: (1) comments relating to broader narrative reporting; (2) comments relating to the connectivity between IASB and ISSB; (3) comments relating to content of the original Management Commentary Practice Statement.

Feedback summary—Long-term prospects, intangibles and ESG matters (Agenda Paper 15B)

This paper summarised feedback on the proposed requirements and guidance for reporting on matters of particular interest to investors (topical matters), namely matters that could affect the entity’s long-term prospects, intangible resources and relationships, and environmental, social and governance (ESG) matters.

More than half of the respondents commented on the proposed requirements and guidance on topical matters. Most of them broadly agreed that the proposals would provide a suitable and sufficient basis for reporting material information about topical matters.

Some respondents highlighted the need for connectivity between the requirements on topical matters, in particular on ESG matters, in the Management Commentary Practice Statement and in the future International Sustainability Standards Board (ISSB)’s requirements.

While broadly agreeing with the IASB’s proposals on topical matters, many respondents suggested further refinements, including suggestions for clarifying or expanding the proposed requirements and guidance on particular topical matters and related examples and for giving greater prominence to those requirements and guidance throughout the Practice Statement. Some of those respondents suggested specific sources that the IASB could consider in refining the proposals.

Many of those commenting on topical matters—including many standard-setters, accountancy bodies, accounting firms and investors—expressed a view that the Practice Statement should explicitly address reporting on governance-related matters in management commentary. Almost all of them suggested that reporting on governance-related matters should focus on how such matters could affect the entity’s ability to create value and generate cash flows and most made suggestions for governance-related information to be provided in management commentary.

Some respondents commenting expressed a view that the proposals would not provide a suitable and sufficient basis for reporting on topical matters. Some of them disagreed with the proposed focus on investors’ information needs. A few others expressed a view that the proposals did not provide a sufficiently clear conceptual basis for reporting on topical matters or that the proposals were not sufficiently specific or prominent.

IASB discussion

Agenda Papers 15A and 15B were discussed together. The discussion is summarised under Agenda Paper 15A.

Feedback summary—Making materiality judgements (Agenda Paper 15C)

This paper summarised feedback on the proposed definition of material information and guidance on making materiality judgements.

Some respondents commented on the proposal that the objective of management commentary, and hence the definition of material information, should focus on the information needs of investors. Most of those respondents agreed with the proposal, but some suggested that the objective should address the information needs of a broader range of stakeholders. There was little feedback on other aspects of the proposed definition of material information.

Many respondents commented on the proposed guidance on making materiality judgements. Most of those respondents expressed broad support for the guidance or questioned only specific aspects of it.

IASB discussion

IASB members noted that the concept of materiality was important to make management commentary manageable and useful to investors. The definition of ‘material’ should be aligned with that of financial statements although there are some differences. For example, materiality for management commentary would include future events. One IASB member suggested that the definition of ‘material’ should also be aligned with that in the ISSB’s EDs.

Feedback summary—Completeness, balance, accuracy and other attributes (Agenda Paper 15D)

This paper summarised feedback on the proposed requirements for information in management commentary to possess specified attributes—for example, completeness, balance, accuracy and coherence—and guidance to help management identify information that possesses those attributes, and the proposal to permit information to be included in management commentary by cross-reference to another report, subject to specified conditions and requirements.

Many respondents commented on the proposed requirements and guidance on the attributes of information in management commentary. Most of those respondents—including the investors commenting—broadly supported the proposals, either expressing unqualified agreement or suggesting only limited refinements. However, some respondents suggested that, before finalising the Practice Statement, the IASB should consider requirements and guidance to be issued in the future by the ISSB, or work with the ISSB to develop attributes that could be specified by both boards in their future requirements.

Some respondents suggested aligning the terms used for the proposed attributes more closely with the terms used for the qualitative characteristics of useful financial information specified in the Conceptual Framework.

Many respondents commented on the proposal to permit information to be included in management commentary by cross-reference to another report, subject to specified conditions and requirements. Most of these respondents supported the proposals. However, some respondents, including some investors, expressed concerns, in particular that extensive cross-referencing may make it more time-consuming and complex for investors to understand information in management commentary.

IASB discussion

IASB members acknowledged that comments on aligning the characteristics with the Conceptual Framework are sensible and it should be explored. However, one IASB member said that the characteristics should not constrain entities too much. For example, a narrow interpretation of comparability may restrict an entity in giving a full picture.

On cross-referencing, IASB members preferred a cautious approach. It will be important to find the right balance between cross-referencing and readability of management commentary. The IASB should also carefully consider the knock-on effect on digital reporting if the Practice Statement were to permit extensive cross-referencing.

Feedback summary—Metrics (Agenda Paper 15E)

This paper summarised feedback on the proposed requirements and guidance for reporting metrics.

Almost all respondents commenting on metrics, including all investors, broadly supported the proposals, either expressing unqualified agreement or suggesting some refinements. Many of them provided comments on one or more specific aspects of the proposals.

Almost all respondents commenting on the proposed approach to selecting metrics supported the non-prescriptive approach. Those respondents—including all investors commenting on the approach—agreed that metrics that are specific to an entity and reflect the industry in which it operates, and the entity’s other circumstances, are likely to be more useful to investors. A few respondents suggested that even stronger emphasis should be given to management’s perspective in selecting metrics, with some of them advocating for management’s perspective as the main principle for selecting metrics for management commentary.

A few respondents commented on linking the requirements for all metrics reported in management commentary to particular attributes of useful information and many of them agreed with the attributes the IASB chose as the basis for those requirements.

Many investors emphasised that the usefulness of metrics is further enhanced if the metrics are comparable both between periods for the same entity and between similar entities. However, a few respondents disagreed with the proposed requirements that were intended to help investors compare metrics included in management commentary with metrics reported by other entities.

Some respondents suggested refinements to the proposed requirements that would apply to all metrics or to the specific requirements that would apply to metrics based on adjusted financial statements measures or to metrics that play a role in determining management compensation.

Respondents commenting on the proposed requirements for forecasts and targets broadly agreed with those proposals, including the proposed approach of not requiring inclusion of forecasts and targets in management commentary unless an entity previously published a forecast or target for the reporting period.

IASB discussion

IASB members were pleased to see that respondents did confirm the desire for disclosing metrics in management commentary, although it was cautioned that some metrics may be commercially sensitive for entities and should therefore not be required. In the ISSB’s EDs, materiality is the only filter for determining whether to disclose or not disclose a metric. It follows that material metrics must be disclosed, even if they are commercially sensitive.

IASB members agreed with respondents that the Practice Statement should not include specific metrics.

Feedback summary—Identification, authorisation and statement of compliance (Agenda Paper 15F)

This paper summarised feedback on identifying management commentary and the related financial statements, definition of management and authorisation of management commentary, and statements of compliance.

Most of the respondents commenting supported the proposal that entities should be permitted to state compliance with the Practice Statement even if their financial statements are not prepared in accordance with IFRS Standards. Some of those respondents argued that such an approach may encourage wider application of the Practice Statement.

Some respondents suggested that without a definition of ‘management’, it is unclear whether the term is meant to include both executive management personnel and members of a governing body. Most of these respondents suggested separately defining the terms ‘management’ and ‘those charged with governance’ and clarifying the role of those charged with governance in authorising management commentary.

Most of the respondents commenting supported the proposals on unqualified and qualified statements of compliance. However, some respondents argued that due to the non-mandatory status of the Practice Statement, it should be for local regulators to require or permit a statement of compliance.  A few respondents were concerned that permitting a qualified statement of compliance could result in management commentary being unbalanced and potentially misleading to investors.

IASB discussion

On respondents’ comments that a mandatory statement of compliance is odd for a voluntary statement, IASB members disagreed. They said that if an entity applies the Practice Statement, it should explain to which extent it has applied it. It would have to be examined though how the statement of compliance interacts with different regulatory environments. There may be various degrees of compliance and it should be clear which degree of compliance allows an unqualified statement of compliance.

Feedback summary—Effects analysis (Agenda Paper 15G)

This paper summarised feedback on the IASB’s effects analysis included in the Basis for Conclusions on the Exposure Draft and on the adoption of the revised Practice Statement.

Many respondents, including almost all investors, commented on the need for the project and expressed support for a new comprehensive framework on management commentary that would address investors’ information needs. Many investors stated that the quality of management commentary varies greatly, including in jurisdictions with well-developed local laws and regulations.

Some respondents commented specifically on the IASB’s effects analysis. Many of these respondents agreed with the analysis without qualification. A few respondents disagreed with the IASB’s conclusion that the likely benefits of implementing and adopting the revised Practice Statement would significantly outweigh the likely costs of its implementation and ongoing application. They argued that it would be more efficient to use existing reporting frameworks such as the <IR> Framework.

Respondents who agreed with the IASB’s effects analysis highlighted the benefit of more useful information to investors. However, a few respondents observed that there is little evidence of entities applying the 2010 Practice Statement and stated that the expected benefits are difficult to assess because they would not be realised unless the revised Practice Statement is more widely applied. Some respondents commented on the interaction between the proposals for the revised Practice Statement and local laws and regulations. Most of these respondents stated that they were not aware of any legal or regulatory obstacles that would make it difficult for entities to comply with the revised Practice Statement.

Some respondents made suggestions for how the IASB could encourage adoption of the revised Practice Statement, including suggestions for further alignment with other reporting frameworks or issuing the final document as an IFRS Standard.

IASB discussion

Agenda Papers 15G-I were discussed together.

IASB members were pleased to see the support for the project and the comments that the revised Practice Statement would be an improvement on jurisdictional requirements. It was acknowledged though that the cost of implementing the revised Practice Statement are larger than initially anticipated by the IASB.

With regard to respondents’ comments that an effective date is odd for a voluntary document, IASB members disagreed and said that it would be important for preparers to know when they are expected to switch from the previous version of the Practice Statement to the revised one.

On transitional provisions, one IASB member thought that these would make sense.

On drafting, IASB members disagreed with the view that the examples should be incorporated into the main body of the Practice Statement. IAS 19 follows that approach and is difficult to read.

The Chairman encouraged the IASB to think about whether this should remain a Practice Statement or whether it should become a mandatory standard, given that the ISSB’s standards will also be mandatory in many jurisdictions.

Feedback summary—Effective date (Agenda Paper 15H)

This paper summarises feedback on the effective date proposed in the ED.

Many respondents commented on the proposed effective date. Many of the respondents commenting supported the effective date proposed in the ED. A few respondents argued that a longer transition period would be needed to implement the new objectives-based approach or to accommodate the provision of sustainability-related information. Some other respondents argued that a longer transition period could be needed depending on the status or content of the final document. Some respondents stated that the IASB should not finalise the revised Practice Statement and set the effective date until the interaction between the Management Commentary project and the future work of the ISSB is clarified.

Some respondents commented on the proposal to permit early application of the Practice Statement and supported the proposal. Some respondents asked the IASB to specify transitional provisions, in particular in relation to the provision of comparative information.

IASB discussion

Agenda Papers 15G-I were discussed together. The discussion is summarised under Agenda Paper 15G.

Feedback summary—Structure and drafting (Agenda Paper 15I)

This paper summarises feedback on the structure of the ED and on pervasive drafting matters not reported in other agenda papers.

Most respondents made no comment on the structure of the ED. However, some respondents suggested changes to the structure to help clarify the interaction between the requirement to focus on key matters and the requirement to provide material information, to give more prominence to the general reporting principles for management commentary within the proposed requirements—for example, the notion that management commentary provides management’s perspective, and the requirements for information in management commentary to possess specified attributes, or to give more prominence to requirements and guidance on matters of particular interest to investors—matters that could affect the entity’s long-term prospects, intangible resources and relationships and ESG matters.

Additionally, a few respondents suggested ways of making the proposed requirements and guidance clearer or more concise. Their suggestions included expanding the glossary to include more of the terms defined or described in the Practice Statement, reducing repetition within the requirements and guidance covering the six areas of content (Part B), and `moving more guidance to appendices.

IASB discussion

Agenda Papers 15G-I were discussed together. The discussion is summarised under Agenda Paper 15G.

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