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In this article, we bring you the IFRS Practice Statement Exposure Draft issued by the International Accounting Standards Board (“IASB”) on Management Commentary. The Exposure Draft is open for public comments until 23 November 2021.
We first explain what is management commentary and whether they are part of the IFRS Standards. We subsequently touch on some of the important aspects that we believe entities will need to focus on when preparing management commentary. Take note that some of the principles highlighted in this article may or may not change upon the finalisation of the proposed Practice Statement.
What is Management Commentary?
The Exposure Draft explains that management commentary is “a report that complements an entity’s financial statements.” How does the commentary complement an entity’s financial statements? For this purpose, management commentary:
- Enhance investors‘ and creditors’ understanding of an entity’s financial performance and financial position. Management commentary derives from information used by management such as key metrics used to monitor the entity’s performance and position.
- Provide insights into factors that have affected the entity’s financial performance and financial position. Additionally, it also includes factors that could affect the entity’s ability to create value and generate cash flows in the future.
- Management’s stewardship through its efficiency and effectiveness in using and protecting the resources.
This exposure draft will supersede the current IFRS Practice Statement 1 Management Commentary upon its issuance.
What is the authority of the proposed Practice Statement?
One of the pertinent questions that IFRS users may have is whether the proposed Practice Statement is mandatory for entities to apply. Additionally, preparers may also be curious whether the financial statements prepared comply with IFRS if management commentary do not comply with the proposed Practice Statement.
Note that the proposed Practice Statement is not an IFRS standard. Having said this, financial statements comply with IFRS standards although they are not accompanied by management commentary. In addition, financial statements comply with IFRS standards even if the management commentary prepared does not comply with the proposed Practice Statement.
The proposed Practice Statement does not specify which entities that must prepare management commentary. It also does not include how frequent entities should prepare it. Nevertheless, local regulators and lawmakers may require certain entities in their jurisdictions to disclose management commentary. Having said this, companies may choose to comply with the Practice Statement voluntarily.
The requirements of the proposed Practice Statement
Now, let us take a look at some of the requirements in the proposed Practice Statement.
1. Identification of management commentary
Entities may prepare management commentary as a standalone document or together with other information in a larger report. If it is prepared together with other information, entities must identify and distinguish it clearly from other information.
Additionally, entities must also identify financial statements to which the management commentary relates. Management commentary must state the basis on which financial statements are prepared, if they are not prepared in accordance with IFRS Standards. Note that management commentary must cover the same period as the financial statements to which it relates.
2. Authorisation of management commentary
Entities must also disclose the date on which the management commentary was authorised for issue. Entities must also include the body or individual that provide such authorisation.
3. A statement of compliance
Similar to IFRS Standard, entities must include an explicit and unqualified statement of compliance if the management commentary comply with all the requirements of the proposed Practice Statement.
Where entities do not comply with the requirements in the proposed Practice Statement in full, entities may still include a statement of compliance. Such statement, however, must be qualified with the necessary identification of departures and reasons for those departures.
4. Areas of content
The proposed Practice Statement identifies six areas of content that entities must include in management commentary:
- Entity’s business model – this relates to how the entity creates value and generates cash flows.
- Sustaining and development of business model – includes management’s strategy for sustaining and developing the business model, including the opportunities that management has chosen to pursue.
- The resources and relationship on which the business model and strategy depend. For this, it also includes resources not recognised as assets in the financial statements.
- The associated risk that may disrupt the business model, strategy, resources or relationships.
- External factors and trends that have affected or could affect the business model, strategy, resources, relationships or risks.
- Entity’s financial performance and financial position including how they have been affected or could be affected in the future.
5. Disclosure objectives
For each of the areas of content, management commentary must provide information that meets disclosure objectives specified for each of them. For this, the disclosure objectives comprise:
- The headline objective which describes the overall information needs of investors and creditors for the area of content.
- Assessment objective which describes the assessment on information provided in the area of content.
- Specific objectives which describe the detailed information needs of investors and creditors for the area of content.
6. Key matters
In providing management commentary, the proposed Practice Statement requires entities to focus on key matters that are fundamental to the entity’s ability to create value and generate cash flows. This refers to those matters that are likely to be material and pervasive to investors and creditors.
Key matters are likely to relate to more than one area of content. Additionally, other indications that a matter might be key include matters that have been:
- Discussed with the entity’s board or other governing body.
- Discussed in the entity’s capital market communications.
- Raised by the entity’s customers, suppliers, employees or other stakeholders.
7. Long-term prospects, intangible resources and relationships and ESG matters
The proposed Practice Statement requires management commentary to provide material and entity-specific information about matters that could affect an entity’s long-term prospects. This includes information relating to unrecognised intangible resources and environmental, social and governance (‘ESG”) matters.
8. Materiality judgments
The proposed Practice Statement requires entities to include material information in the commentary. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that investors and creditors make on the basis of the management commentary and of the related financial statements. In identifying material information, entities apply judgment and it requires entities to consider both quantitative and qualitative factors.
Entities need to reassess materiality judgments at each reporting period because of the changes in the entity’s circumstances. Additionally, entities must also consider when to aggregate information in management commentary.
The information included must reflect events that occur between the end of the reporting period and the date on which the management commentary is authorised for issue.
However, if management commentary is authorised for issue after the authorisation of related financial statements, it includes events that have occurred in the intervening period. Because those events were not considered in preparing the financial statements, entities may need to distinguish them from events that were considered in the related financial statements.
The more detailed discussions are available in the proposed Practice Statement including discussion on achieving balance, accuracy, clarity and conciseness, comparability, verifiability and coherence of management commentary. Additionally, there are also examples of information that might be material in Chapter 15 of the proposed Practice Statement. The full detail of the Exposure Draft Practice Statement on Management Commentary is available on IASB’s website.