Sweep Issues (Agenda Paper 15)

The purpose of this paper was so that the staff could ask the Board for decisions on two sweep issues that have arisen through preparation of the Exposure Draft (ED).

These issues are the application of the Practice Statement by entities not applying IFRS Standards, and the nature of the characteristic of ‘freedom from error’.

The paper also invited comments from the Board with regard to refined wording proposed to the disclosure objectives tentatively approved by the Board in previous meetings

Questions 1 & 2

At the September 2020 meeting, the Board tentatively decided that the revised Practice Statement would retain the status of the existing Practice Statement in the sense that it would not be an IFRS Standard. An entity would be able make a statement of compliance with IFRS Standards with respect to its financial statements even if the management commentary does not comply with the Practice Statement.

The staff questioned if the inverse should also be true, i.e. an entity can assert that its management commentary complies with the Practice Statement even if its financial statements are not prepared in accordance with IFRS Standards.

The staff identified three potential options; the Board could permit an entity to assert that its management commentary complies:

• a. only if the entity has prepared its financial statements in accordance with IFRS Standards;
• b. only if the entity has prepared its financial statements either in accordance with IFRS Standards or applying similar concepts; or
• c. without specifying any criteria for the basis of preparation of the related financial statements.

The restrictions of the first two options could be justified if meeting the overall objectives of management commentary relies on the provision of specific information required by IFRS Standards, or financial statements being prepared applying similar concepts as in IFRS Standards.

As the requirements of the Practice Statement are that management commentary should meet particular objectives, rather than provide specific information, compliance with only the Practice Statement should be sufficient to meet the objective of management commentary.

Accordingly, the staff recommended that the Practice Statement should specify no criteria for the basis of preparation of the related financial statements, so that if the management commentary complies with the Practice Statement, an entity should be able to state this fact even if the accounts are not prepared in accordance with IFRS Standards.

Due to the risk that including a statement of compliance with an IFRS Practice Statement could be interpreted also as a statement of compliance with IFRS Standards, the staff also proposed that, if an entity’s financial statements are not prepared in accordance with IFRS Standards, they should be required to state in management commentary under what basis they are prepared.

The Board were asked to vote on both of these proposals.

Discussion and voting

The Board held a brief discussion on this sweep issue, and were broadly in support of the staff recommendations, which were seen to be in line with the previous decision that the Practice Statement is separate from the IFRS Standards, rather than being an optional Standard.

There were some reservations that, in allowing non-IFRS reporters to assert compliance with an IFRS Practice Statement, the ‘IFRS brand’ may appear on annual reports prepared on an inappropriate basis.

When asked to vote, the Board voted 9:4 in favour on Question 1, and 12:1 in favour on Question 2.

Question 3

The Board have previously tentatively decided that information in management commentary should possess the qualitative characteristics of useful financial information as set out in the Conceptual Framework, albeit with simpler terminology.

In the July and September 2019 meetings, the Board decided how to incorporate the concepts of relevance, completeness and neutrality into the ED. Currently, these are presented as materiality, completeness and balance. However, no decision has been made on incorporating the characteristic of ‘freedom from error’.

Members of both the Board and the Management Commentary Consultative Group generally find it important that management commentary should possess a similar characteristic to ‘freedom from error’. However, there were some concerns that this concept may be too strong or difficult to apply, and discourage management commentary on judgemental areas for fear of being erroneous.

The staff have reviewed various narrative reporting frameworks for guidance, and note that ‘freedom from error’ and ‘accuracy’ are terms that are sufficiently familiar and explainable in narrative reporting contexts to be used in the Practice Statement without causing misunderstanding.

The staff believe the term ‘accuracy’ is simpler and more positive than ’freedom from error’, and therefore will recommend that the Practice Statement includes ‘accuracy’ as a required characteristic of management commentary, but with an explanation that it does not mean “perfectly accurate in all respects”. The degree of required accuracy will vary depending on the nature of the information.

The staff recommended that the Practice Statement should give examples of the manifestation of ‘accuracy’ in various types of information.

The Board were asked to vote on these recommendations.

Discussion and voting

Board members were supportive of the broader staff recommendation to include a concept akin to “freedom from error” within the Practice Statement. However, there was some debate on the terminology to be used, with some agreeing with the staff that ‘accuracy’ is a more accessible and positive concept, whereas others felt it predisposed to the disclosure quantitative information, and others still that the idea seemed circular in definition, and preferred ‘freedom from material error’ because of its similarity to the Conceptual Framework.

When asked to vote, the Board voted 10:3 in favour with the staff recommendation, but emphasised that the Practice Statement should make it clear that ‘accuracy’ applies both to quantitative and qualitative information.

Question 4

In the paper, the staff provide background on the wording of proposed disclosure objectives.

The Board has tentatively decided to propose an overall objective for management commentary, based on the objective of general purpose financial reporting set out in the Conceptual Framework. The Board has also tentatively decided to propose disclosure objectives and supporting guidance for the six areas of content in management commentary.

The staff have taken feedback on the working draft of the ED from the Board, and in response propose changes to the wording of certain disclosure objectives through:

• refining the wording of the overall objective of management commentary;
• strengthening the wording of the headline disclosure objectives for the six areas of content;
• strengthening the wording of the ‘assessment’ paragraphs in the disclosure objectives for the six areas of content; and
• refining the wording of the specific disclosure objectives for the areas of content.

(NB: these refinements are set out in detail in Appendix B to Agenda Paper 15).

The Board were invited to comment on the refinements to the wording of the disclosure objectives.

Discussion

There were limited comments from Board members on the suggested refinements. Board members were supportive of the proposed refinements, especially regarding the change to provide insights on an entity’s ability to “create value” as well as generate cash flows.

There was one note of caution, regarding the danger that creating such a set of disclosure objectives may result in management commentary becoming a ‘checklist’ exercise.