Management commentary

Date recorded:

Cover paper (Agenda Paper 15)

In this paper, the staff provided a background and overview of the project to date, and summarise the content of the following papers to be discussed in October’s meeting.

The staff will begin to draft the Exposure Draft (ED) for the updated Practice Statement.

Overview of guidance on matters affecting long-term prospects, on intangible resources and relationships and on ESG matters (Agenda Paper 15A)

The staff assert that a short-term focus within general narrative reporting practice has led to a gap, with investors, creditors and other stakeholders increasingly requesting information about matters that could affect an entity’s long-term prospects, for instance, regarding intangible resources and relationships, or environmental, social and governance (‘ESG’) matters.

In response to these demands, there have been significant developments in the field of narrative reporting, including various initiatives at harmonisation of the multiple frameworks in this area, and research into how to report on this information.

To meet this growing demand for information on matters that may affect an entity’s long term prospects, promotion of information on these topics has been one focus area for the Management Commentary project.

Although trying to avoid a ’checklist’ exercise that will diminish the application of judgement, the Board wishes to promote the inclusion of information about intangible resources and relationships, and ESG matters within management commentary in order to meet the objective of management commentary.

It is expected that the proposals related to provision of this information will be included throughout the draft guidance rather than as separate guidance, due to the overlap between both the areas of the business these matters could affect, and overlap between the matters themselves.

The staff sought feedback from consultative groups who:

  • broadly supported a principles-based approach to guidance on information about intangible resources and relationships;
  • broadly supported the proposal that identification of relevant matters should be based on materiality to investors and creditors; and
  • broadly agreed that guidance on these matters need not be presented separately from the Practice Statement, though some argued it could be given more prominence by being within a separate section of the statement.

The staff papers included the working draft of their guidance on the provision of information about matters that could affect an entity’s long-term prospects, intangible resources and relationships, and ESG matters.

The staff asked for comments or questions on this overview of draft guidance, but no formal decisions were asked.

Board discussion

Board members were broadly supportive of the principles-based approach suggested by the staff. However, there were several items of feedback from Board members:

There was some concern that having the focus on a principles-based approach rather than providing specific guidelines may be a barrier to some entities as it may not be accessible to those who are not accustomed to applying a principles-based Practice Statement. There was also concern that without any illustrative guidance, the Practice Statement might be too abstract for preparers. The staff responded to these points, suggesting that an additional appendix or section could be incorporated in the Practice Statement which could provide a roadmap for preparers.

One Board Member suggested that it may be good keeping the structure of the Practice Statement as it had been suggested by the staff, as it has been subject to considerable thought, whilst at the same time documenting these additional considerations, including any interrelation with other Standards and areas, within a ‘Basis for Conclusions’ section.

There were also concerns about the use of language and terminology in the Practice Statement: phrases such as “forward-looking information” have specific meanings and responsibilities in certain jurisdictions, and the use of different terms to refer to singular concepts throughout the Practice Statement may be confusing for some preparers. The advice from Board members was that the Practice Statement should be tight and ‘boring’ in its use of terminology to avoid these issues.

It was also raised that, although the increased focus on long-term information is welcomed, there is a risk that year-on-year repetition of an entity’s long-term strategy will result in management commentary not being concise, and lead to users ‘blacklining’ sections of the reporting. It was suggested that long-term strategy could be documented externally from management commentary, and only changes or updates disclosed each year.

Similarly, it was suggested that, where an entity already produces a separate report, for example a report on ESG matters, it could be possible to integrate this information with the management commentary section of an annual report. However, another Board member highlighted that this may not be appropriate in situations where additional reports are released and authorised at a different time to the annual report.

One member of the Board questioned why additional prominence should be given specifically to intangible resources and relationships, rather than leaving the assessment of which information is important to management. The staff responded, clarifying that this was notable feedback from the various consultative groups with whom they had held discussions.

Finally, it was highlighted that this process, and any subsequent ED, would be a good opportunity to get feedback from real stakeholders about the information that they wish to see.

Overview of the likely effects of the proposals (Agenda Paper 15B)

In accordance with the Due Process Handbook (the Handbook), the Board assess the likely effects of any proposed new Standard. Although the handbook does not explicitly require this for non-mandatory Practice Statements, it does state that the Board should follow the same procedures as for developing Standards.

The staff think that explaining the likely effects of the proposals could be helpful for:

  • a) jurisdictions considering whether to adopt the revised Practice Statement; and
  • b) preparers choosing whether to apply it voluntarily

The Handbook suggests assessing the effects:

  • a) in comparison to the existing financial reporting requirements; and
  • b) in the light of the Board’s objective of financial reporting transparency.

The staff noted that due to limited adoption of the existing Practice Statement, it is difficult to assess the effects of the Board’s proposal through comparison, therefore the effects analysis focuses on assessing the effects of the proposals in the light of the Board’s objective of financial reporting transparency.

The staff identified the following as likely positive effects of the proposals:

  • a) improved focus on and provision of information on matters specific to the entity;
  • b) improved reporting on matters of particular interest to investors and creditors, namely matters that could affect the entity’s long term prospects such as intangible resources and relationships, and ESG matters;
  • c) improved coherence of discussion of matters identified;
  • d) improved qualitative characteristics of information presented, such as comparability, verifiability, completeness, and balance; and
  • e) improved quality of electronic reporting.

The staff also argued that the improved enforceability of the Practice Statement and the improved ability to gain assurance over the management commentary will provide a better basis for, and encouragement of, local regulators to mandate the revised Practice Statement.

The staff considered the likely costs of implementing the proposals to both the preparers and the investors and creditors.

The costs of implementing these proposals for preparers is considered to be variable: some entities with pre-existing internal systems in place to identify relevant information for management commentary are unlikely to incur significant extra costs in producing information under a revised Practice Statement; however, the costs may be significant for entities that currently do not prepare any management commentary.

The staff expect that there would be a cost saving for investors and creditors as the proposals should make it easier for them to analyse the information in management commentary under a revised Practice Statement.

In summary, the staff anticipate that the likely benefits of implementing and adopting the revised Practice Statement would significantly outweigh the likely costs of implementing the proposals and ongoing application.

Board members were asked if they have any comments or questions on this overview of the likely effects of the proposals and were not asked to vote on these matters.

Board discussion

Board members highlighted that the documentation of the benefits of adopting the revised Practice Statement could be more neutral, and more cognisant of the consequences and requirements, especially to entities that have not before adopted the Practice Statement.

It was also noted that, because of the limited adoption of the existing Practice Statement, feedback on the ED from a broad range of stakeholders will be of heightened importance.

Board members agreed with, and reiterated, the benefits to electronic reporting and subject tagging provided by the taxonomy of the revised Practice Statement. It was also noted that this is in line with the broader aim to improve the IFRS taxonomy.

Due process steps and permission for balloting (Agenda Paper 15C)

Question 1

The staff briefly outlined the background to the project, and summarise the process for publishing an ED.

The staff also discussed the proposals for the effective date and transition of the revised Practice Statement, recommending that the Practice Statement becoming effective for periods beginning on or after the date the Practice Statement is published gives sufficient time (at least one year) for entities to transition to the revised Practice Statement (e.g. if published on 1 December 2022, it would be effective on or after that date and the first management commentary following the revised Practice Statement would be 1 December 2023 at the earliest).

The staff also recommended that early adoption of the revised Practice Statement should be permitted.

The Board were asked to vote on the staff recommendations.

Board discussion

The Board broadly agreed with the staff recommendations, though queried the appropriateness of using language such as “effective date” for a voluntary Practice Statement, instead recommending “is available from [date]”, reflecting the Practice Statement’s status as an opportunity, not an obligation.

When asked to vote, the Board unanimously voted in favour.

Question 2

The staff outlined the steps taken so far in developing the proposals for the revised Practice Statement.

The staff discussed the appropriate length of any comment period. Though the staff do not think a period of comment shorter than the usual minimum is necessary, the staff will ask the Board for a decision on the length of any comment period at a later date.

The Board were invited to share any comments on the comment period.

The staff shared in an appendix confirmation that the required due process steps to date for the publication of the ED have been completed.

The Board were asked if they were satisfied that they had complied with all applicable due process steps and that it should begin the balloting process for the ED. They were also asked if any member intends to dissent to the ED.

Board discussion

Board members broadly agreed with the staff recommendations. There were no comments on the comment period. It was clarified that proceeding to the balloting process would not preclude the actioning of Board suggestions in response to Agenda Paper 15A.

When asked to vote, the Board voted unanimously in favour of starting the balloting process. When asked, no member of the Board announced an intention to dissent to the ED.

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