Faithful representation in management commentary (Agenda Paper 15A)

In this session, staff presented what guidance, in principle, they believe should be included in the revised Practice Statement relating to faithfully represented information and requested the Board to vote on these recommendations.

The staff recommended that the revised Practice Statement should discuss faithful representation using three qualities of information—completeness, neutrality and freedom from error. Staff also made it clear that perfect information may not be achievable, but information included in the management commentary should maximise these three qualities.

Staff recommendations, Board discussions and decisions

The staff recommended that the revised Practice Statement:

• a) include guidance on the qualities that make up faithful representation—completeness, neutrality and freedom from error; and
• b) explain that perfection may not always be achievable, but these qualities should be maximised to the extent possible.

Board members were concerned that recommendation (b) above would inadvertently provide management with the ability to determine how hard they would work in order to provide information. Instead, they felt that staff should rephrase this objective to highlight that information should be faithfully represented to the extent possible given certain circumstances, for example, cost constraints.

Further, the language to be used in the revised Practice Statement was discussed at length—Board members would like the staff to ensure that the language used in the document be best suited to its intended audience rather than being written in a too technical fashion, i.e. accepted business terminology rather than accounting technical language.

The Board voted 14-0 in favour of these recommendations.

The staff further recommended that the revised Practice Statement includes a description of completeness based on paragraph 2.14 of the Conceptual Framework. In particular, that description would explain that:

• a) whether a depiction of a matter is complete is determined on the basis of primary users’ information needs. To be complete a depiction of a matter does not necessarily require management to provide all information it has about that matter; and
• b) a complete depiction of a matter should include material information about the nature of that matter and factors and circumstances that might affect it.

In their discussion, Board members again highlighted a concern regarding the language to be used in the revised Practice Statement.

The Board voted 14-0 in favour of these recommendations.

The staff also recommended that the revised Practice Statement:

• a) require that management commentary is neutral as a whole. To facilitate that:
  • i) due prominence in management commentary should be given to all matters that need to be discussed;
  • ii) the overall tone and language used in management commentary should contribute to an unbiased depiction of the entity’s performance and position.
• b) include a description of neutrality based on paragraph 2.15 of the Conceptual Framework. In particular, that description would explain that for the depiction of a matter to be neutral, information about that matter cannot be omitted, obscured, given undue prominence or otherwise manipulated to influence primary users’ understanding of the matter in a particular way.
• c) require that provision of a range of possible outcomes in management commentary should be supported by explanatory information to help primary users understand the likelihood of outcomes within that range.

The use of the term ‘neutral’ rather than a more generally understood term, such as ‘balanced’, caused much debate. Board members raised a concern regarding the use of the exact terms used in the Conceptual Framework in the revised Practice Statement. This is due to the objective of the Conceptual Framework, the nature of the language that would be used, the nature of the document in question (a Practice Statement rather than an accounting standard) and its intended audience.

While Board members felt that it may not be necessary to refer directly to the Conceptual Framework or use its precise terminology in the Practice Statement itself, they stated that, perhaps in the Basis for Conclusions, it would be useful to show how the recommendations in the revised Practice Statement tie to the relevant sections of the Conceptual Framework.

Staff clarified that the discussion highlighted a potential drafting issue and that many of the concerns raised could be addressed by appropriate drafting. The revised Practice Statement should seek to explain ideas simply, without using complicated language, and its core principles should be guided by the relevant sections of the Conceptual Framework.

When asked to vote, the Board voted 14-0 in favour of these recommendations.

Finally, the staff recommended that the revised Practice Statement:

• a) include a description of freedom from error based on paragraph 2.18 of the Conceptual Framework. In particular, that description would explain that free from error does not mean perfectly accurate in all respects. Rather, it means that there are no errors in:
  • i) how the reported information was produced; or
  • ii) how that information is described in management commentary.
• b) include guidance that explains that information based on judgement should be included in management commentary if it is material. In such cases, management commentary should:
  • i) distinguish information based on judgement from factual information; and
  • ii) explain the process and sources used to produce the information and its limitations and describe assumptions and methods of calculation used.

The discussion highlighted how complicated it would be for the type of information included in management commentary to be ‘free from error’ as described by staff. There was a strong recommendation by Board members not to use the term ‘freedom from error’ in the Practice Statement.

The Board did not vote on these recommendations but suggested that staff return to the Board in the future when they have considered this area further.