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This article was first published in the October 2018 UK edition of Accounting and Business magazine.

One of the most recent additions to the workplan of the International Accounting Standards Board (IASB) is a project to look at management commentary.

Currently the standard-setter has a practice statement on the management commentary, which has been in place since 2010. The statement is not an international financial reporting standard but a broad, non-binding framework for the presentation of management commentary that relates to financial statements that have been prepared according to IFRS Standards.

With the corporate landscape changing dramatically since 2010, the IASB has decided to look at how its statement may need updating. Rather than break new ground, it has attempted to pull good practice together from other similar developments within the industry, particularly that of integrated and sustainability reporting.

The IASB remains geared towards the primary users of the financial statements. It recognises that the term ‘management commentary’ is fluid, and many countries refer to items such as sustainability and diversity under different headings. The commentary the IASB focuses on is the narrative report, which provides information relevant to broader financial value that is useful to primary users of financial statements.

In a nutshell, the IASB recognises that the management commentary should complement the financial statements by providing other financial information. This information should provide insight into the company’s strategy for creating shareholder value over time, its progress in implementing it, and the potential impact on future performance not yet captured by the financial statements.

The 2010 management commentary practice statement contains four areas (business model, financial analysis, non-financial information and forward-looking statements). At its recent IFRS conference, the IASB announced that each would be reviewed in this update.

Business model

The IASB believes that the management commentary should include qualitative and quantitative information on the operational position of the business as well as the factors that may affect its future development.

The management commentary should therefore cover the senior leadership’s strategy for how the business is going to take itself forward, in conjunction with how the company assesses the risks that are most relevant to the creation of shareholder value. The IASB believes that the management commentary is the appropriate place to explain how the business generates value and what factors are expected to materially affect this value creation in the short and longer term.

The examples given by the IASB could be to identify where the majority of the business’s sales come from – either in terms of sales, locations or customer type – and how management expects to build on this in the future.

It is at this point that the difficulty begins. All investors want specific disclosures about management’s strategy so they can make informed decisions. At the same time they recognise the value in not giving away key future strategic plans and placing them in publicly available documents. While the IASB has noble aims in value creation disclosure, it is difficult to see how a balance can be struck. As a result, any big shift away from boilerplate disclosures or unspecified grand plans may be unlikely.

Financial analysis

While the goal of greater disclosure of strategic plans seems unlikely to come to much, the area of financial analysis may be the one where the IASB can effect most change.

Current-year financial analysis within the management commentary should include an explanation of current-year financial performance and position. Even the briefest of examinations of financial statements across major entities shows that this often includes both IFRS and non-IFRS figures, with a wide variety of key performance measures identified by industry. The use of alternative performance measures (APMs) has been widespread for some time, and the IASB does not propose to require entities to disclose any specific alternative performance measures. Rather than focusing on the use of APMs, existing IASB projects such as one on primary financial statements are aiming to bring further disaggregation of information, particularly in the statement of financial performance.

This further disaggregation should lead to an enhanced level of detail within the financial statements themselves, which in turn may lead to an increased level of analysis within the management commentary.

Non-financial information

This section of the management commentary would cover the resources and relationships key to creating value in the business. In an ideal world, the IASB believes it would show historical operating information relevant to an understanding of future financial performance and position in the short, medium and long term.

Examples of useful short-term information in this section would be likely to include items such as the sales order book and headcount changes, whereas longer-term items would look at things such as customer wins/retention, store upgrade processes, research and development, and the retention of key staff.

During a discussion at the recent IFRS conference, the panel acknowledged that operational performance information may take a variety of forms. Conference attendees generally felt that some prescription would be useful on how market share would be reported, as currently entities define this through a variety of measures. Attendees also suggested that guidance would be useful on how sensitivities (such as the notional impact of dollar changes in metal pricing) were shown.

In these areas, the IASB could provide useful assistance. While the revised practice statement is unlikely to generate information on prescribed ratio calculations, it would be useful if it offered a recommendation as to the basis on how items such as market share should be calculated. While users of corporate reports want specific information, they also want comparable information and the IASB could render helpful assistance by providing detail for recommended practice here.

Forward-looking statements

The IASB made it very clear during the conference that it has no intention of asking entities to produce more forward-looking statements, accepting that any such request was often met with nervousness from crowds. Instead, it wants this area to focus more on explaining management’s statements on future prospects, including the factors expected to drive those prospects.

Examples of this could be explaining short-term forecasts such as sales growth percentage, or longer-term statements such as targets for market share or reductions in carbon emissions.

New contents

While the IASB is looking to retain the same framework of the four areas, there are some enhancements that it would like to see applied across the content elements:

  • long-term value creation, and the resources and relationships that support this
  • a focus on business model, and the linkage of content across the management commentary
  • materiality

Long-term value creation has already been discussed within the non-financial information section, but the IASB would like a greater discussion from management identifying the short-term, medium-term and long-term value the business aims to create.

This led to a discussion at the conference of intangible resources and relationships, which is a key topic in the modern reporting world. IASB chairman Hans Hoogervorst acknowledged that maybe the IASB should in future look again at IAS 38, Intangible Assets, in the modern context, as the standard was written in 1998. He also acknowledged that more intangibles are recognised under IFRS than under US GAAP right now, but pointed out that these are almost always held at historical cost, the relevance of which can be questioned given the developments in the business landscape in recent years.

The IASB has made it clear that the management commentary statement is not an attempt to fix a monetary value on these intangibles. Instead, it is likely to ask management to identify which intangible resources are the most important, and what the progress towards managing them has been.

In terms of the business model focus, this could deal with the disclosures being defined by what is important to the business, rather than boilerplate checklists. A good management commentary should show a common thread of the most important issues throughout the report. The IASB is keen to emphasise in its guidance that the provision of relevant information to the users of the commentary is absolutely key, rather than a minimum set of disclosures for management.

Finally, materiality is key in determining management commentary content. It is already a focus, looking at the IASB’s disclosure project. There is an updated definition ‘material’, and guidance on making materiality judgments. As these projects reach their conclusion, they will feed into the discussion on the effects on the management commentary.

Next steps

The IASB accepts this is a tricky area to step into, with countries operating their own regulations regarding this type of reporting. It recognises it is not something that is going to be handed down to preparers for them to apply in their financial statements. Instead, the IASB’s stated aim is to put together good practice and meet with standard-setters of varying countries, effecting change in that way.

It has asked national standard-setters around the world to provide information about the management commentary guidance applying to listed companies in their jurisdictions. The information gathered will help develop the agenda papers for the management commentary consultative group, which will aim to ballot an exposure draft in 2019.

Adam Deller is a financial reporting specialist and lecturer