Development of Standards and Guidance for Management Commentary

Date recorded:

At the October 2002 meeting between the IASB and its liaison National Standard Setters, it was recommended that a project examining the potential for issuing a standard or guidance on Management Commentary (MC) by the IASB be undertaken. Accordingly, the IASB established a project team comprising representatives from the national standard-setters in Canada, Germany, New Zealand, and the United Kingdom. The concept of MC is similar to a Management Discussion & Analysis (MD&A;) required in the USA or an Operating and Financial Review required in the United Kingdom.

The project team tabled a discussion paper which begins with an overview of the project, including the motivation for undertaking the analysis, the importance of the project to the IASB and its constituency, and the key issues addressed. It then outlines the analytical steps undertaken by the project team. This includes highlighting areas where there was strong consensus among the project team and those areas where there was less agreement. The section also presents background information on what is meant by MC, the different ways MC is presented within financial reports and the approach different jurisdictions have taken to developing requirements around its form and content.

Whilst the discussion paper does not constitute a completed draft, it covers the core components that could be developed to the next stage of this project and has been drafted as a preliminary views paper. The Board discussed the issue of how to progress the project, especially whether the IASB would be taking ownership of the work done to date.

There was general agreement that whilst the IASB should take ownership and continue with this project as its own, there was not enough time to deliberate on the issues identified and the proposals made, so as to issue the discussion paper as presenting the preliminary views of the IASB. The Board's agenda at this time would not allow for resources to be channelled to this project. The Board agreed to expose the paper on the basis that it presents the results of the research process undertaken, not the preliminary views of the IASB, but the Board may suggest that certain questions or issues be raised with constituents.

The project team made the following conclusions in the discussion paper:

  • The IASB should issue a principles-based standard on MC, together with non-mandatory implementation guidance.
  • MC should be defined as "information that accompanies financial statements as part of an entity's financial reporting and explains the main trends and factors underlying the development, performance, and position of the business of an entity during the period covered by the financial statements, as well as the main trends and factors which are likely to affect the entity's future development, performance and position."
  • The objective of MC is to assist current and potential investors in assessing the strategies adopted by the entity and the potential for successfully achieving them.
  • The objectives, principles, and qualitative characteristics of MC should be clearly outlined. Specifically, management should prepare MC setting out their analysis of the business, which both supplements and complements the financial statements with an orientation to the future. MC should be comprehensive, focusing on matters that are relevant and important to investors, and should be understandable, neutral and balanced, comparable and reliable.
  • An MC standard should require certain entities to present an MC as part of their financial report. At a minimum the standard would apply to all entities that have publicly traded equity or debt securities, or are in the process of issuing equity or debt securities in public securities markets. The preferred objective is to require these entities to present MC to be able to assert compliance with IFRS. The project team acknowledges, however, that this is unlikely to be achievable in the short-term. Many jurisdictions have regulatory requirements that conflict with the MC model proposed here.
  • When an entity is required to present MC the standard should require the disclosure of information around five essential elements, being Nature of the business, Objectives and strategies, Resources, risks and relationships, Performance measures and indicators, and Results and prospects.
  • Non-mandatory implementation guidance accompanying the standard should be issued to assist with the preparation of MC. Such guidance would provide examples of what MC that complies with the proposed standard would look like in practice.
  • If the IASB does mandate MC the IASB should determine when it subsequently issues new standards, or revises existing standards, whether information should be disclosed in financial statements or MC.

The IASB did not debate all of the above issues. However some of the key comments made during discussions are as follows:

  • There was general consensus that the work performed so far and the quality of the report presented was of a high standard.
  • There was no clear indication as to whether the Board favoured developing a separate series of Standards dealing with MC or incorporating such requirements into IAS 1. Those in favour of the issuance of a Standard reiterated that the content of that pronouncement would only deal with principles and would to some extent, cover what is currently presented within many operational reviews as contained in annual reports.
  • Some Board members favour the inclusion of the MC as an integral part of the financial statements, however there were concerns regarding whether the MC would be a single report within the financial statements or whether the MC would be 'dispersed' within the footnotes of the financial statements and whether preparers would be left to make this decision. Concerns were also raised regarding the 'auditability' of such reports and the consequential increase in scope of financial reporting as a whole under IFRS if it were to include 'forward looking' commentary on management strategy amongst other issues.
  • It was suggested the MC standard or guidance be optional, that is, not a requirement under IFRSs, except possibly for entities within the scope of IAS 33 (which would mean that the standard would apply to all entities that have publicly traded equity or debt securities, or are in the process of issuing equity or debt securities in public securities markets).
  • Comments specific to the drafting of the discussion paper included some Board members stating a preference for the SEC objectives as regards the MD&A; compared to those objectives of a MC set out in the discussion paper, and others requested that the drafting be aligned more with IFRS as drafted, particularly the disclosure requirements.
  • Additional comments would be passed onto the project team outside of the meeting.

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