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Management commentary

Date recorded:

Cover Paper (Agenda Paper 15)

Back­ground

The Board formally added a project to revise its Management Commentary Practice Statement (Practice Statement) to its agenda in November 2017. The next project step will be an Exposure Draft, however, the Board is still considering individual parts of the Practice Statement.

Approach to guidance on qualitative characteristics (Agenda Paper 15A)

Background

The Board previously agreed that the objective of management commentary should be to give context for the financial statements by providing primary users with the historical financial and operational information and analysis that is useful in assessing the prospects for the entity’s future net cash inflows and in assessing management’s stewardship of the entity’s economic resources. The staff assert that information in the management commentary must possess the qualitative characteristics identified in the Conceptual Framework in order for management commentary to meet its proposed objective to provide useful information.

The Practice Statement just lists the qualitative characteristics and says that they are used in the Practice Statement with the meanings specified in the Conceptual Framework. It does not provide any guidance on how to consider the qualitative characteristics in preparing management commentary. The staff think that it is important to provide more guidance on the qualitative characteristics in the revised Practice Statement to improve preparers’ understanding of what makes information in management commentary useful and help address gaps in practice.

The staff anticipate that the revised Practice Statement should:

  • a) include a brief description of each qualitative characteristic based on its description in the Conceptual Framework, instead of just listing them and referring to the Conceptual Framework. Because some preparers of management commentary may not be familiar with the concepts and principles in the Conceptual Framework.
  • b) provide specific guidance on considering particular qualitative characteristics where such guidance is needed due to the nature of information included in management commentary.

At this meeting, the staff present their recommendations for guidance on considering the qualitative characteristic of relevance, and specifically on making materiality judgements, in preparing management commentary (see Agenda Paper 15B). At a future meeting, the staff will present their recommendations for guidance on the fundamental qualitative characteristic of faithful representation and the enhancing qualitative characteristics.

Board discussion

The Board acknowledged that the Practice Statement should be a stand-alone document as the objective of management commentary is different to that of financial statements and both preparers and users of the management commentary are different to those of financial statements. One Board member said that even though the Practice Statement is a stand-alone document, materiality should not be incorporated as the concept is already present in IFRS Standards. Another Board member said the language should be detached from the Conceptual Framework as otherwise the user group for the management commentary could be alienated. The Vice-Chair said that the Practice Statement should not only focus on projected cash inflows, but also on projected cash outflows. This would be especially relevant for start-ups which might have a prolonged period of cash outflows. One Board member said that it will be challenging to keep the management commentary tied to the financial statements as the discussion in the management commentary can become quite broad.

Making relevance and materiality judgements (Agenda Paper 15B)

Background

The staff analysed in Agenda Paper 15A that it is important to provide more guidance on the qualitative characteristics in the revised Practice Statement to improve preparers’ understanding of what makes information in management commentary useful and help address gaps in practice.

This paper discusses what guidance should be included in the revised Practice Statement on considering the qualitative characteristic of relevance, and specifically on making materiality judgements, in preparing management commentary and asks the Board for decisions.

Staff analysis

The staff think that the revised guidance on management commentary should remain principles-based rather than prescribe a detailed list of requirements or industry-specific or subject-matter-specific disclosures or metrics. This is because information in management commentary should be specific to the entity and reflect its unique facts and circumstances while meeting information needs of primary users of management commentary.

The staff have developed recommendations for guidance on making materiality judgements in preparing management commentary using the Materiality Practice Statement as a starting point.

Staff recommendations

Recommendation 1:

The staff recommend introducing in the revised Practice Statement guidance on making materiality judgements in preparing management commentary that would:

  • (a) incorporate key elements of the guidance from the Materiality Practice Statement supported, where necessary, by cross-references to further guidance in the Materiality Practice Statement;
  • (b) provide additional guidance where it is necessary because the nature of management commentary differs from the nature of financial statements; and
  • (c) focus on explaining the materiality process, in particular on identifying material information.

Recommendation 2:

Further, the staff recommend that the guidance on identifying material information in the revised Practice Statement would:

  • (a) recognise the guidance on content elements in the Practice Statement as a general source of identifying such information;
  • (b) provide the following guidance on considering primary users’ common information needs in identifying material information:
    • (i) make an explicit link between identification of material information and the objective of management commentary—i.e. providing information that is useful in assessing the prospects for future net cash inflows to the entity and in assessing management’s stewardship of the entity’s economic resources; and
    • (ii) describe practical sources that could help management identify matters that may need to be discussed in management commentary; and
  • (c) explain how to consider what information about the matter needs to be provided in each content element to deliver a coherent narrative.

Recommendation 3:

Finally, the staff recommend including in the revised Practice Statement guidance on the other steps of the materiality process that would prompt management to:

  • (a) consider the likelihood of the matter crystallising, not just the size of the impact, in assessing the quantitative factors when making materiality judgements;
  • (b) consider the appropriate level of aggregation when assessing what information an entity needs to provide in management commentary; and
  • (c) highlight the links between different pieces of information when organising the information within management commentary.

Board discussion

The Board broadly agreed with Recommendation 1, however one Board member said that materiality should not be included in the Practice Statement as preparers are generally aware of the materiality concept and often the preparers of the management commentary are the same as the preparers of financial statements. Some Board members disagreed with this view as it could be the investor relations department or the legal department preparing the management commentary, however one Board member acknowledged that most people are aware of the materiality concept, even if they are not accountants, so suggested to keep the section brief. He also suggested to refrain from using any accounting jargon in the Practice Statement.

As regards the diagram in the agenda paper, many Board members found that helpful and agreed that this could be adapted and included in the Practice Statement. Some of the Board members stated that the concept of narrative coherence in the diagram would enhance the Practice Statement.

On Recommendation 2, the Board agreed with the overall direction. The Board members found the examples in the agenda paper helpful, however some thought the examples were not balanced enough. The examples focused on what the entity was trying to achieve, but did not touch on what could go wrong. Also, the examples do not show how the entity would transition from the status quo to the aspired status. One Board member suggested to add the concept of obscuring to the Practice Statement.

As regards Recommendation 3, one Board member found that the guidance on future developments was too precise as it would be difficult to predict the future in such a precise manner. It should moreso address the big picture. Some of the Board members agreed with this view and stated that the guidance for past and future information needs to be different or at least it should be acknowledged that for future information an entity would not be expected to provide granular information.

Board decision

13 out of 14 Board members voted in favour of Recommendation 1.

All Board members voted in favour of Recommendations 2 & 3.

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