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Panel discussion on management commentary at the WSS meeting

  • WSS (World Standard Setters) (mid blue) Image
  • MCCG (Management Commentary Consultative Group) Image

02 Oct 2018

At the World Standard-Setters (WSS) meeting currently held in London, IASB Board member Nick Anderson chaired a panel discussion on the IASB's project to update the IFRS Practice Statement 'Management Commentary'.

The members of the panel were all members of the IASB's Management Commentary Consultative Group (MCCG): Kris Peach, Chair of the Australian standard-setter AASB; Ryoko Ueda, Mizuho International; and Andreas Barckow, President of the German standard-setter ASCG.

Given that all panelists are members of the MCCG, which had its first meeting last Friday, the discussion opened with the question why the panelists had put their name forward to be a member of the Board’s consultative group on the management commentary project and what perspective and insights they hoped to bring to the debate. Ms Peach explained that she believed the project to be a crucial one for the IASB and that standard-setters needed to be part of the wider debate to ensure a common approach. Ms Ueda noted management commentary as the bridge between investors and companies. And Mr Barckow explained that Germany has had a mature standard on management commentary in place for 15 years and that he hoped to help develop an international standard by sharing experiences, insights, and lessons learned.

As the most pressing issues that the Board should address in revising the practice statement, the panelists noted that in order to be able to tell their story consistently, companies need a framework that allows for comprehensive and complete reporting that connects financial and non-financial information. It was also noted that what is currently missing is reporting on risks beyond the risk of financial instruments. In this context and in connection with the question of whether standard-setters have a mandate to venture into non-financial reporting it was also noted that much of the non-financial information is in fact not non-financial but pre-financial as it will have an impact and will appear in a company's financial statements at a later point of time, so the question of what to report was more of a timing issue.

The discussion then turned to two crucial questions. Should the approach of the project focus on comparability, which in the end might lead to very comparable statements that are, however, mostly boiler-plate and therefore useless, or should a management approach be favoured that would come at the price of less comparability? Panelists agreed that a fine balance between the two positions needed to be observed. And should the practice statement be made mandatory to foster consistent application and comparability? Panelists noted that all other IASB pronouncements are mandatory and that the practice statements are odd animals in the IFRS literature. It was noted that the practice statement should become mandatory in the long run, however, it was also agreed that this could only be achieved in stages.

As the quality of management commentaries varies enormously across the corporate world panelists were asked what can be done to raise the bar for everyone. Suggestions included the recommendation to beef up the compliance statement in IAS 1 so that companies would have to state whether the practice statement had been applied and companies would be made aware that there is good guidance is out there. And the suggestion was made to collect examples of best practice and make them available. The user representative noted the importance of dialogue with users to understand what they want and need.

A question from the audience triggered a discussion around integrated reporting versus management commentary. The IIRC framework was referenced. It was noted in the panel that the IIRC framework was one of the sources the IASB can draw on but that there were many more sources available. In this context, the staff of the IASB also referred back to the scope of the project, which had been explained in introducing the panel discussion (see slide 3 of the agenda paper for the discussion). The same reference was made again when a question of ESG reporting versus management commentary came up. As regards ESG factors, it was also noted that you can look at them through two lenses: financial reporting and public policy. In this context, it was noted that the Conceptual Framework is the strong backbone of the IASB's project in that it will help to determine the degree that ESG factors need to be considered in management commentary to make sure that the statement provides consistent, concise, comparable, relevant, neutral, and useful information about whether the company and its business model are sustainable in the long run. 

Returning to the questions prepared for the discussion, panelists were asked on the style of presentation of management commentary. Ms Ueda made an ardent statement stating that while narrative reporting is very different from financial reporting, the connecting aspect needed to be quality: that both forms of reporting need to be clear and concise and need to fill users' needs. Mr Barckow noted that the approach of thinking about management commentary and somehow making reporting in that format more similar to financial reporting, i.e. thinking about financials first and then supplementing it with a management commentary was maybe thinking about things the wrong way round. Maybe the management commentary should come first and then the thinking about how the general report on the company's strategy and long-term goal is supported by and reflected in financials should follow.

Lastly, the standard-setters on the panel were asked whether they were not afraid of duplicating requirements that already existed in their jurisdiction. Ms Peach stated that while there were requirements in place in Australia the overarching framework that would make sure that all of the reported information is material, important, verifiable, reliable, neutral, and balanced was still missing. So far, she said, she had not seen anything that would duplicate or even be in conflict with the local requirements. Mr Barckow, who noted that he was happy to license the German standard internationally, noted that it was much easier for national standard-setters to develop standards and frameworks as they are working against one legal background only, a comment that was supported by the IASB staff who said that one of the big challenges of the project was to develop a framework that can be applied rigorously and consistently around the world.

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