Management commentary

Comments from ACCA to the International Accounting Standards Board, March 2010.

ACCA is pleased to comment on the IASB's exposure draft (ED) on the above subject. Since the ED was published, ACCA has consulted its members internationally on the key issues raised within it, through a series of round-table debates and focus group meetings. The consultation was also considered by ACCA's Financial Reporting Committee and the views expressed in this letter take into consideration the opinions of the Committee, informed by the wider consultation with members.

General comments

We believe that the lack of any kind of guidance on management commentary (MC) does represent a gap in the IASB system and we therefore welcome the IASB moving forward on this project, especially as we are aware of the many competing and potentially higher priority projects attracting the attention of the Board. Many of these projects understandably deal with measurement and recognition issues relating to the financial crisis. However, we firmly believe that the recent financial crisis has also highlighted the need for quality contextual information to supplement the financial statements in order for users to fully understand how a business is performing. 

Regardless of whether a guidance document or an IFRS is finally issued by the Board, we believe that the conclusion of the project will have a positive impact on corporate reporting worldwide. It should help to increase comparability in financial reports across jurisdictions as well as providing a blueprint/benchmark for national authorities to use. The guidance/standard from the IASB will be particularly useful for those jurisdictions where there is not a well established framework for providing MC. 

We consider there is a case for the Board issuing a non-mandatory (along the lines of IAS34) standard for MC. It might encourage provision of MC by a larger number of companies and encourage greater quality of reports provided by making clear whether any such statement reached the IFRS benchmark or not. However, on balance we support the Board in initially producing guidance in the form of a best practice statement based on key principles, which would allow management to determine and then disclose the most useful information in their commentary. This would also help to avoid potential conflicts with other regulatory requirements regarding information akin to MC. This point was particular stressed by the focus groups from countries where such reporting is already mandatory under local regulations. For example members in Hong Kong echoed the views of members in the UK, when they suggested that were 'management commentary [to] be an IFRS where an IFRS compliant financial statement is required, conflict may arise for the compliance of Hong Kong Listing Rules. In view of this, all participants considered it more appropriate for the document to be a non-mandatory guidance so that flexibility is allowed in the preparation of the management commentary'.

Overall, we support the principles and the content elements proposed in the ED as being reasonable and necessary. However, we would like to see greater emphasis placed in the guidance on the need for management to include, to the extent they consider necessary, appropriate corporate social responsibility reporting. Not only is such information relevant to other stakeholders, but it is often sufficiently important to investors to need to be reported in the annual report.

Specific questions raised in ED

Question 1: Do you agree with the Board's decision to develop a guidance document for the preparation and presentation of the management commentary instead of an IFRS? If not, why?

We strongly believe that MC is a crucial part of the annual report and therefore of the financial reporting framework. By providing supplementary information, sound MC should help to contextualise the accompanying financial statements and improve their understandability. 

Clearly different jurisdictions have varying levels of guidance and authority associated with it. For many of the countries that already have well-developed guidance/requirements, there is not likely to be a major impact on the way they currently prepare MC information. However, as this form of guidance from the IASB is likely to have a level of authority, we believe that at a global level, it will help to enhance the standard of MC reporting, especially for those countries that do not have relatively advanced MC reporting requirements. 

By bringing consistency between MC reporting in these jurisdictions, there could also be a more level playing field for companies that have to provide such information, while other similar companies, based in other countries do not. 

In this respect, we acknowledge the alternative views on the ED, which question whether the IASB's objectives of enhancing consistency and comparability could be achieved if the framework is not made mandatory. Any requirements through an IFRS would help to guarantee this consistency, as well as encouraging greater quality and provision of MC by companies.

However, during our deliberations on this matter, which included views from members in a number of jurisdictions that do not presently have well developed MC guidance, there was support that such guidance would help MC reporting in their countries. Not only will companies already reporting under IFRS look at applying the guidance, but it could also provide regulators with a framework to develop more authoritative requirements in this area. 

Furthermore, given the varying levels of existing practice of MC reporting and how it is evolving around the world, a standard could create inconsistencies with any existing requirements and generate compliance issues. We therefore agree with the conclusions of the Board in developing non-mandatory guidance for the foreseeable future.

Question 2: Do you agree that the content elements described in paragraphs 24-39 are necessary for the preparation of a decision-useful management commentary? If not, how should those content elements be changed to provide decision-useful information to users of financial reports?

We support a principles based approach towards the content of MC. Proposing detailed requirements, even in a guidance document, could result in boilerplate information and a checklist mentality when preparing the MC for many companies. This would detract from the added value that the MC can offer. Furthermore, by keeping to a principles based approach, with high level guidance, the guidance would be more suitable for development by regulators in individual jurisdictions, while not creating inconsistencies with existing requirements in other countries. 

We therefore support the principles and content elements of MC outlined in the ED. These are suitably high level to allow management to provide an analysis of the business and to assist users to 'understand the entity's financial statements as well as management's objectives and strategies for achieving those objectives'. Clearly the Board has reviewed the requirements in jurisdictions where there is already a robust framework for management discussion and analysis as part of the reporting process. It is no surprise therefore that the proposals echo the MD&A requirements of the SEC and the business review requirements in the UK for example. 

However, we do note that the UK Companies Act 2006 and the Modernisation Directive (Directive 2003/51/EC) from the European Commission, also specifically expect listed companies to report on corporate social responsibility (CSR) issues from the perspective of the business. We believe that issues regarding sustainability reporting are increasingly important to equity shareholders as well as other users of corporate reports. Therefore the Board should refer to this explicitly within the content elements, although emphasis should be placed on whether such information is material to a holistic understanding of the accounts and the business. Otherwise, such CSR reporting may be better placed in other parts of the broader corporate reporting framework.

We also note that the UK Companies Act requirements, while emphasising the need to provide unbiased disclosure on factors likely to affect the future of the business, exempts companies from disclosing information on impending developments if it would, 'in the opinion of the directors, be seriously prejudicial to the interests of the company' (section 417(10) CA2006). We believe that such an exemption should also be included in the guidance from the IASB.

Question 3: Do you agree with the Board's decision not to include detailed application guidance and illustrative examples in the final management commentary guidance document? If not, what specific guidance would you include and why?

We agree that detailed application guidance is not necessary or desirable. The general, high level guidance in the ED allows for the right level of flexibility and opportunity to apply judgement as what is most relevant to both management and other users.

Other comments

Users of management commentary
We agree with the Board that if MC is to provide context for a set of financial statements within a set of financial reports, it should be aimed at the same set of primary users as the financial statements.

In our response to the IASB's exposure draft Objective of financial reporting and qualitative characteristics, dated 27 October 2008, we raised concerns about the perceived group of users (providers of capital in general) of financial reports being too wide. We would reiterate that in our view, the primary user group to be equity shareholders, and would also note that in its 2005 discussion paper on Management commentary, the IASB also identified investors as the primary users of MC itself.

As we noted in our comments letter on the discussion paper, dated 28 April 2006, we agree with an investor focus of MC, although recognise that many stakeholders should find the information useful as well. We would rather management be encouraged to bear in mind that the concerns of other stakeholders (for example employees or those monitoring CSR) can often be of sufficient importance to investors to need to be reported. Wider social concerns about an entity can affect its 'licence to operate' and therefore its ability to generate returns for investors. However, the materiality of these matters to the overall business and the financial reports should also be considered by management when making such disclosures.

Qualitative characteristics 
While we would support an overall consistency between the qualities of information provided in the financial statements and MC, we have concerns about how the characteristic of 'verifiability' would match up against MC from a practical viewpoint. As useful and relevant MC should include an element of prospective information, there is an inherent limit on how much assurance there can be on such information being verified both from the perspective of preparers and auditors. The fundamental qualitative characteristic of 'faithful representation' should suffice for MC in this context.

We do not agree with concerns raised in the alternative views regarding 'neutrality'. Regardless of the fact that MC is the management's view of the entity, we believe that financial reporting has to be neutral in order for it to be relevant and to provide faithful representation.