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The Bruce Column — Sunshine and the ideas behind management commentary

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25 May 2017

The concept of management commentary has long been perceived by the IASB like a worrying cloud hovering over financial reporting. But the sun may be about to break through. A speech by Hans Hoogervorst, Chairman of the IASB, looks likely to have confirmed that the weather has changed, reports our regular columnist, Robert Bruce.

The latest IASB thoughts on the subject come under the project of ‘wider corporate reporting’, in the form of a paper published a few weeks ago bearing the title ‘Implications for the Board: options for the work plan’. I looked back through my archive and found a column I had written for the Financial Times well over a decade ago. This weighed up the discussion paper published by the IASB then on the topic of, you have guessed it, management commentary. ‘The danger’, a member of the project team said at the time, ‘is that financial reporting becomes more complicated and difficult to follow’. The IASB then thought of management commentary as a tool to fill the gap, and provide explanations outside the existing reporting. 

Fifteen years ago it was felt, eventually, that the concepts of management commentary were not central to the IASB’s task. It was felt that it would be useful to explain the effects of IFRSs but it was not core to the IASB’s purpose. A Practice Statement was produced in 2010 but was seen as having limited effect.   Again in 2015, there were echoes of this mindset in the IFRS Foundation’s views that suggested that the Board should not broaden the scope of its work into areas outside the boundaries of traditional reporting. 

But the wind seems to have changed course.  And what the IASB Chairman said recently, in a speech in New York, has signaled a change in the weather.  Across the last decade the argument has sharpened. Reporting on human and intellectual capitals and climate change, for example, has become a mainstream demand.  When it was developed, the Management Commentary Practice Statement focused on providing complementary and supplementary information to the financial statements and many of the content elements it recommended are to be found in the Integrated Reporting <IR> framework. But integrated reporting is more than this. And the time may have come for an update to the IASB Practice Statement. 

The IASB Chairman made this very clear in his New York speech the other day. ‘Since the publication of our Management Commentary Practice Statement in 2010 the world has moved on’ he said.

Since then the <IR> framework has become widely adopted and the UK’s guidance on the concept of a strategic report is seen as mainstream.  In Hans Hoogervorst’s words: ‘They put more emphasis on interconnectivity among elements of an integrated report’.  They look at ‘how developments in the external environment have affected a company’s business model and strategy’, he said.  It is time for change.  And as Hoogervorst put it: ‘We are especially well placed to make sure there is a good fit and connectivity between financial reports and non-financial information which I believe to be essential to the success of integrated reporting’.  These are encouraging words.  Now more than ever people need integrated reporting-style reporting.  This consistent approach with management commentary would be very helpful. 

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