Ed Management Commentary.fm
June 2009
Exposure Draft ED/2009/6
Management Commentary
Comments to be received by 1 March 2010
Exposure Draft
MANAGEMENT COMMENTARY
Comments to be received by 1 March 2010
ED/2009/6
This exposure draft Management Commentary is published by the International
Accounting Standards Board (IASB) for comment only. The proposals may be
modified in the light of the comments received before being issued in final form.
Comments on the exposure draft should be submitted in writing so as to be
received by 1 March 2010. Respondents are asked to send their comments
electronically to the IASB website (www.iasb.org), using the ‘Open to Comment’ page.
All responses will be put on the public record unless the respondent requests
confidentiality. However, such requests will not normally be granted unless
supported by good reason, such as commercial confidence.
The IASB, the International Accounting Standards Committee Foundation
(IASCF), the authors and the publishers do not accept responsibility for loss caused
to any person who acts or refrains from acting in reliance on the material in this
publication, whether such loss is caused by negligence or otherwise.
Copyright © 2009 IASCF®
ISBN: 978-1-907026-14-0
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EXPOSURE DRAFT JUNE 2009
CONTENTS
paragraphs
INTRODUCTION
INVITATION TO COMMENT
[DRAFT] MANAGEMENT COMMENTARY
OBJECTIVE
1–3
SCOPE
4–5
IDENTIFICATION OF MANAGEMENT COMMENTARY
6–7
FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF
MANAGEMENT COMMENTARY
8–23
Users
9
Time frame
10
Purpose
11
Principles for the preparation of management commentary
12–20
Presentation
21–23
CONTENT ELEMENTS OF A DECISION-USEFUL MANAGEMENT
COMMENTARY
24–39
Nature of the business
26
Objectives and strategies
27
Resources, risks and relationships
28–32
Results and prospects
33–35
Performance measures and indicators
36–39
APPENDIX: DEFINED TERMS
APPROVAL BY THE BOARD OF MANAGEMENT COMMENTARY
BASIS FOR CONCLUSIONS
ALTERNATIVE VIEWS ON EXPOSURE DRAFT
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Introduction
Summary
Management commentary provides a context within which to interpret the
financial position, financial performance and cash flows of an entity. It also
provides an opportunity to understand management’s objectives and its
strategies for achieving those objectives. Users of financial reports in their
capacity as capital providers routinely use the type of information provided in
management commentary as a tool for evaluating an entity’s prospects and its
general risks, as well as the success of management’s strategies for achieving its
stated objectives.
For many entities, management commentary is already an important element of
their communication with the capital markets, supplementing as well as
complementing the financial statements. This exposure draft presents the
International Accounting Standards Board’s proposals for a broad framework for
the preparation and presentation of management commentary to accompany
financial statements prepared in accordance with International Financial
Reporting Standards (IFRSs). It is for the management of an entity to decide how
best to apply this framework in the particular circumstances of its business.
How to use this document
The proposals presented in this exposure draft will not result in an IFRS.
Accordingly, it would not be a requirement for an entity to comply with the
framework for the preparation and presentation of management commentary as
a condition for asserting compliance with IFRSs.
The Board’s proposals are intended to provide a basis for the development of good
management commentary. It offers a non-binding framework which could be
adapted to the legal and economic circumstances of individual jurisdictions.
The exposure draft is prepared on the basis that management commentary lies
within the boundaries of financial reporting and, therefore, is within the scope of
the conceptual framework for financial reporting. In developing its proposals for
management commentary, the Board took into account its recent work on the
objective and qualitative characteristics of financial reporting.* Consequently,
this exposure draft should be read in the context of the Phase A Framework
exposure draft, published in May 2008.
*
See the exposure draft An improved Conceptual Framework for Financial Reporting: Chapter 1:
The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of
Decision-useful Financial Reporting Information, IASB (May 2008) [for brevity, referred to in
this exposure draft as Phase A Framework ED].
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Invitation to comment
The International Accounting Standards Board invites comments on its proposals
for a type of disclosure labelled management commentary. The Board seeks comment
on whether the framework for the preparation and presentation of management
commentary proposed in the exposure draft would improve the usefulness of the
information provided in an entity’s financial reporting and help users of financial
reports make decisions in their capacity as capital providers.
The Board invites comments on all matters addressed in this exposure draft and,
in particular, on the questions set out below. Respondents need not comment on
all issues and are encouraged to comment on additional issues the Board should
consider. Comments are most helpful if they:
(a)
respond to the issues as stated and indicate the specific paragraph or
paragraphs to which the comments relate;
(b)
contain a clear rationale; and
(c)
include any alternative the Board should consider.
Respondents’ comments will help the Board when it develops a final document
on management commentary. In considering the comments, the Board will base
its conclusions on the merits of the arguments for and against each alternative,
not on the number of responses supporting each alternative.
Respondents should submit comments in writing so as to be received no later
than 1 March 2010.
Questions for respondents
Status of the final work product
The exposure draft proposes a framework for the preparation and presentation of
management commentary. The Board believes that its proposals provide a basis
for the preparation and presentation of management commentary that will be
useful to the users of financial reports. However, the Board intends to publish a
guidance document, not an International Financial Reporting Standard (IFRS).
Question 1
Do you agree with the Board’s decision to develop a guidance document for the
preparation and presentation of management commentary instead of an IFRS?
If not, why?
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Content elements of a decision-useful management commentary
The proposed framework for the preparation and presentation of management
commentary is intentionally general. This reflects the Board’s view that a flexible
approach elicits more meaningful disclosure by encouraging entities that choose
to prepare management commentary to discuss those matters most relevant to
their individual circumstances. Consequently, the proposed framework for the
preparation and presentation of management commentary sets out the
principles, qualitative characteristics and content elements necessary to provide
existing and potential capital providers with decision-useful information.
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?
Application guidance and illustrative examples
The Board does not intend to include application guidance or illustrative
examples in the final management commentary guidance document. The Board
is concerned that such detailed guidance could be interpreted as either a floor
(minimum requirements for content) or a ceiling (the only disclosures for
inclusion in management commentary). The Board believes that the
development of application guidance or illustrative examples to help
management apply the proposed framework for management commentary is
best left to other organisations.
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?
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[Draft] Management Commentary
Objective
1
This guidance prescribes a framework for the preparation and
presentation of management commentary to assist management in
preparing decision-useful management commentary to accompany
financial statements prepared in accordance with International Financial
Reporting Standards (IFRSs).
2
Management commentary prepared in accordance with this framework
can provide users of the financial statements with historical and
prospective commentary on the entity’s financial position, financial
performance and cash flows, and a context for understanding
management’s objectives and its strategies for achieving those objectives.
3
Management commentary prepared in accordance with this framework
is within the boundaries of financial reporting and, therefore, is within
the scope of the conceptual framework for financial reporting.*
Scope
4
[Draft] Management Commentary (Guidance) has been developed to apply to
publicly traded entities. However, it does not mandate which entities
should be required to publish management commentary, how frequently
an entity should do so or the level of assurance to which management
commentary should be subjected.
5
Governments, securities regulators, stock exchanges and accountancy
bodies often require entities whose debt or equity securities are publicly
traded to publish management commentary. Management commentary
encompasses reporting that is described in various jurisdictions as
management’s discussion and analysis (MD&A), operating and financial
review (OFR), or management’s report.
*
This exposure draft is prepared in the light of the Board’s recent thinking on the
objectives of financial reporting and the qualitative characteristics and constraints of
decision-useful financial reporting information [referred to in this exposure draft as
Phase A Framework ED]. The Board expects to finalise its proposals on those topics and
publish the first chapter of the Conceptual Framework for Financial Reporting in
Q3 2009.
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Identification of management commentary
6
When an entity prepares management commentary to accompany IFRS
financial statements, it should not make that commentary available
without those financial statements.
7
Management should identify clearly what it is presenting as management
commentary and distinguish it from other information in the same
financial report.
Framework for the preparation and presentation of
management commentary
8
An entity’s management should apply paragraphs 9–39 when preparing
management commentary to accompany financial statements prepared
in accordance with IFRSs.
Users
9
The needs of existing and potential capital providers, as the primary users
of the financial reports, are paramount when management considers
what information to include in management commentary.*
Time frame
10
Management commentary should communicate information about an
entity’s economic resources, claims on those resources and the
transactions and other events and circumstances that change them.†
It also should explain the main trends and factors that are likely to affect
the entity’s future performance, position and development.
Consequently, management commentary looks not only at the present,
but also at the past and the future.
*
From Objective of general purpose financial reporting, Phase A Framework ED, paragraph OB2.
†
From Information about an entity’s resources, claims on those resources and changes in resources
and claims, Phase A Framework ED, paragraphs OB15–OB25.
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Purpose
11
Management commentary prepared in accordance with this framework
should provide existing and potential capital providers with information
that helps them place the related financial statements in context.
Management commentary that fulfils that purpose explains
management’s view on not only what has happened, but also why
management believes it has happened and what management believes
the implications are for the entity’s future.
Principles for the preparation of management
commentary
12
Management commentary prepared in accordance with this framework
can help users of the financial reports assess the performance of the
entity and the actions of its management relative to stated strategies and
plans for development. That type of commentary may help users of the
financial reports to understand, for example:
(a)
the entity’s risk exposures, its strategies for managing risks and the
effectiveness of those strategies;
(b)
how resources that are not presented in the financial statements
could affect the entity’s operations; and
(c)
how non-financial factors have influenced the information
presented in the financial statements.
13
In developing its commentary, management should bear in mind the
principles that underpin decision-useful management commentary.
Commentary that is aligned with those principles:
(a)
provides management’s view of the entity’s performance, position
and development;
(b)
supplements and complements information presented in the
financial statements; and
(c)
has an orientation to the future.
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Management’s view
14
Management has a unique perspective on the entity. That perspective has
value for users of financial reports. Generally, the information that is
important to management in managing the business is the same
information that is important to users of the financial reports for
assessing financial performance and prospects.
Supplement and complement the financial statement
information
15
In supplementing financial statements, management commentary
includes additional explanations of amounts presented in the financial
statements and explains the conditions and events that shaped that
information.
16
In complementing financial statements, management commentary
includes financial and non-financial information about the entity and its
performance that is not presented in the financial statements.
Orientation to the future
17
Having an orientation to the future is about communicating, from
management’s perspective, the direction the entity is taking. For example,
management can provide useful information to users of the financial
reports by setting out its objectives for the entity and its strategies for
achieving those objectives. The extent to which management commentary
is oriented towards the future either through the use of narrative
explanations or quantified data (for example, projections or forecasts), will
be influenced by the regulatory and legal environment within which the
entity operates. Information with an orientation to the future is described
in this document as forward-looking information.
18
Management should include forward-looking information when
management is aware of trends, uncertainties or other factors that could
affect the entity’s liquidity, capital resources, revenues and results of
operations. Forward-looking information is useful when it focuses on the
extent to which the entity’s performance is indicative of future results
and includes management’s assessment of the entity’s prospects in the
light of that performance.
19
Management should discuss the extent to which forward-looking
disclosures made in the prior period management commentary have
been borne out. That discussion should explain how and why the
performance of the entity is short of, meets or exceeds the
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forward-looking disclosures made in the previous management
commentary. For example, if management stated targets for future
performance in previous reporting periods, it should report the entity’s
actual performance in the current reporting period and analyse and
explain significant variances from its previously stated targets as well as
the implications of those variances for management’s expectations for
the entity’s future performance.
Qualitative characteristics of decision-useful information and
constraints on financial reporting
20
The degree to which the information in management commentary is
useful depends on that information’s qualitative characteristics. To be
useful, information in the financial reports must possess the
fundamental qualitative characteristics of relevance and faithful
representation.* The enhancing qualitative characteristics of comparability,
verifiability, timeliness and understandability should be maximised.† Two
pervasive constraints limit the information provided by management
commentary: materiality and cost.§
Presentation
21
The form of management commentary will vary between entities,
reflecting the nature of their business, the strategies adopted by
management and the regulatory environment in which they operate.
22
Management commentary, like other disclosures, should be clear and
straightforward. Reciting financial statement information without
analysis or presenting boilerplate discussions that do not provide insight
into the entity’s past performance or prospects as understood by
management is unlikely to provide information that is useful to users of
the financial reports.
23
Management commentary should be presented with a focus on the most
important information, in a manner intended to address the principles
described in this [draft] Guidance. Specifically:
(a)
Management commentary should be consistent with its related
financial statements. If the financial statements include segment
*
From Fundamental qualitative characteristics, Phase A Framework ED, paragraphs QC2–QCB11.
†
From Enhancing qualitative characteristics, Phase A Framework ED, paragraphs QC15–QCB24.
§
From Constraints on financial reporting, Phase A Framework ED, paragraph QC27–QC33.
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information, the information presented in the management
commentary should reflect that segmentation.
(b)
Management should avoid duplicating in its management
commentary the disclosures made in the notes to its financial
statements. Doing so may create an obstacle for users to identify
and understand the most significant matters facing the entity.
Generic disclosures that do not relate to the practices and
circumstances of the entity should also be avoided.
Content elements of a decision-useful management
commentary
24
Although the relevant focus of management commentary will depend on
the facts and circumstances of the entity, a decision-useful management
commentary includes information that is essential to an understanding
of:
(a)
the nature of the business;
(b)
management’s objectives and strategies for meeting those
objectives;
(c)
the entity’s most significant resources, risks and relationships;
(d)
the results of operations and prospects; and
(e)
the critical performance measures and indicators that
management uses to evaluate the entity’s performance against
stated objectives.
25
The content elements are related and should not be presented in
isolation. Management’s perspective on the business and its analysis of
the interaction of the content elements helps users understand the
entity’s financial statements as well as management’s objectives and
strategies for achieving those objectives.
Nature of the business
26
A description of the business helps users of the financial reports gain an
understanding of the entity and the external environment in which it
operates. That information serves as a starting point for assessing and
understanding an entity’s performance, strategic options and prospects.
Depending on the nature of the business, management commentary may
include discussion of matters such as:
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(a)
the industries in which the entity operates;
(b)
the entity’s main markets and competitive position within those
markets;
(c)
significant features of the legal, regulatory and macro-economic
environment that influence the entity and the markets in which
the entity operates;
(d)
the entity’s main products and services, business processes and
distribution methods; and
(e)
the entity’s structure and its economic model.
Objectives and strategies
27
Disclosure of objectives and strategies are most useful when they enable
users of the financial reports to understand the priorities for action as
well as the resources that must be managed to deliver results.
Management’s explanations about how success will be measured and
over what period of time it should be assessed may also be useful.
For example, how management intends to address market trends and
the threats and opportunities those market trends represent provides
users of the financial reports with insight that may shape their
expectations about the entity’s future performance. Discussion of the
relationship between objectives, strategy, management actions and
executive remuneration is also helpful.
Resources, risks and relationships
28
Management commentary that includes a clear description of the most
important resources, risks and relationships that management believes
affect the entity’s long-term value and how those resources, risks and
relationships are managed provides useful information for users of the
financial reports.
Resources
29
Disclosure about resources depends on the nature of the entity and the
industry in which the entity operates. Management commentary should
set out the critical financial and non-financial resources available to the
entity and how those resources are used in meeting management’s stated
objectives for the entity. Analysis of the adequacy of the entity’s capital
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structure, financial arrangements (whether or not recognised in the
statement of financial position), liquidity and cash flows, as well as plans
to address any identified inadequacies or surplus resources, are examples
of disclosures that can provide useful information.
Risks
30
Disclosure of an entity’s principal risk exposures, its plans and strategies
for bearing or mitigating those risks, and the effectiveness of its risk
management strategies, helps users to evaluate the entity’s risks as well
as its expected outcomes. It is important that management distinguish
the principal risks and uncertainties facing the entity, rather than listing
all possible risks and uncertainties.
31
Management should disclose its principal strategic, commercial,
operational and financial risks, being those that may significantly affect
the entity’s strategies and development of the entity’s value.
The description of the principal risks facing the entity should cover both
exposures to negative consequences and potential opportunities.
Management commentary provides useful information when it discusses
the principal risks and uncertainties necessary to understand
management’s objectives and strategies for the entity—both when they
constitute a significant external risk to the entity and when the entity’s
impact on other parties through its activities, products or services affects
its performance.
Relationships
32
Management provides information useful to users of the financial reports
when it identifies the significant relationships the entity has with
stakeholders, how those relationships are likely to affect the performance
and value of the entity, and how those relationships are managed. This
type of disclosure helps users of the financial reports to understand, for
example, whether a single customer, or a small group of principal
customers, represents a significant portion of an entity’s business and
whether that entity and its investors may be exposed to substantial risk if
that customer takes its business to a competitor.
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Results and prospects
33
Management commentary should include a clear description of the
entity’s financial and non-financial performance, the extent to which
that performance may be indicative of future performance and
management’s assessment of the entity’s prospects. Useful disclosure in
that area can help users to make their own assessments about the
assumptions and judgements used by management in preparing the
financial statements.
Results
34
Explanations of the performance and development of the entity during
the period and its position at the end of that period provide users of the
financial reports with insight into the main trends and factors affecting
the business. Those explanations are useful when they describe the
relationship between the entity’s results, management’s objectives and
management’s strategies for achieving those objectives. Discussion and
analysis of significant changes in financial position, liquidity and
performance compared with those of the previous period(s) can help
users to understand the extent to which past performance may be
indicative of future performance.
Prospects
35
An analysis of the prospects of the entity, including targets for financial
and non-financial measures, helps users of the financial reports to
understand how management intends to implement its strategies for the
entity over the long term. When targets are quantified, management
should explain the risks and assumptions necessary for users to assess the
likelihood of achieving those targets.
Performance measures and indicators
36
The disclosure of performance measures and indicators (both financial
and non-financial) that are used by management to assess progress
against its stated objectives can help users of the financial reports assess
the degree to which goals and objectives are being achieved. Performance
measures are quantified measurements that reflect the critical success
factors of an entity. Indicators can be narrative evidence describing how
the business is managed or quantified measures that provide indirect
evidence of performance.
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37
The performance measures and indicators that are most important to
understanding an entity are those that management uses to manage that
entity. The performance measures and indicators will usually reflect the
industry in which the entity operates. Comparability is enhanced if the
performance measures and indicators are accepted and used widely,
either within an industry or more generally.
38
Consistent reporting of performance measures and indicators increases
the comparability of management commentary over time. However,
management should consider whether the performance measures and
indicators used in the previous period continue to be relevant.
As strategies and objectives change, management might decide that the
performance measures and indicators presented in the previous period
management commentary are no longer relevant. When management
changes the performance measures and indicators used, the changes
should be identified and explained.
39
If information from the financial statements has been adjusted for
inclusion in management commentary, that fact should be disclosed.
If financial performance measures that are not required or defined by
IFRSs are included within management commentary, those measures
should be defined and explained and, when possible, reconciled to
measures presented in the financial statements.
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Appendix
Defined terms
This appendix is an integral part of [draft] Management Commentary.
comparability*
The quality of information that enables users to
identify similarities in and differences between two
sets of economic phenomena.
economic
Economic resources, claims on those resources, and
phenomena*
the transactions and other events and circumstances
that change them.
faithful
The correspondence or agreement between the
representation*
accounting measures or descriptions in financial
reports and the economic phenomena they purport to
represent. Faithful representation is attained when
the depiction of an economic phenomenon is
complete, neutral and free from material error.
forward-looking
Information about the future. It includes information
information
about the future that might subsequently be prepared
as historical information. It is subjective and its
preparation requires the exercise of professional
judgement.
management
Persons responsible for the decision-making and
oversight of the entity. This may include executive
employees and members of a governing body.†
management
A narrative report accompanying financial statements
commentary
prepared in accordance with IFRSs that provides users
with historical and prospective commentary on the
entity’s financial position, financial performance and
cash flows, and a basis for understanding
management’s objectives and its strategies for
achieving those objectives.
*
These definitions are taken from the Phase A Framework ED, published May 2008.
†
See paragraphs BC24 and BC25 for additional information.
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relevance*
A quality of information that makes it capable of
making a difference in the decisions made by users in
their capacity as capital providers. Information about
an economic phenomenon is capable of making a
difference when it has predictive value, confirmatory
value or both.
timeliness*
Having information available to decision-makers
before it loses its capacity to influence decisions.
understandability*
The quality of information that enables users to
comprehend its meaning.
verifiability*
A quality of information that helps assure users that
information faithfully represents the economic
phenomena that it purports to represent.
*
These definitions are taken from the Phase A Framework ED, published May 2008.
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Approval by the Board of Management Commentary
published in June 2009
The exposure draft Management Commentary was approved for publication by
eleven of the fourteen members of the International Accounting Standards Board.
Messrs Garnett, Kalavacherla and Leisenring voted against publication of the
exposure draft. Their alternative views on the exposure draft are set out after the
Basis for Conclusions.
Sir David Tweedie
Chairman
Thomas E Jones
Vice-Chairman
Mary E Barth
Stephen Cooper
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
Prabhakar Kalavacherla
James J Leisenring
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang
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Basis for Conclusions
This Basis for Conclusions accompanies, but is not part of, draft Management
Commentary.
Introduction
BC1
This Basis for Conclusions summarises the International Accounting
Standard Board’s considerations in developing the proposals in the
exposure draft Management Commentary (Guidance). Individual Board
members gave greater weight to some factors than to others.
BC2
The purpose of financial statements is to provide information about the
financial position, financial performance and cash flows of an entity that
is useful to a wide range of users in making economic decisions.*
Financial statements prepared for that purpose meet the common needs
of most users. However, financial statements do not provide all the
information that users need to make economic decisions because the
financial statements largely portray the financial effects of past events
and do not provide non-financial indicators of future performance.†
BC3
The purpose of the proposed Guidance is to establish a framework to
guide the preparation and presentation of information in management
commentary as a companion to the financial statements. The proposed
Guidance is intended to affect how management communicates
information on its performance, objectives and strategies to users of the
financial reports. The Board’s goal is to improve the usefulness of the
information provided in an entity’s management commentary so that,
when used in conjunction with the financial statements, users are better
able to make decisions in their capacity as capital providers.
*
I
AS 1 Presentation of Financial Statements, paragraph 9.
†
For example, IFRSs do not cover intangible assets such as human capital and processes.
Economic resources not captured in the financial statements may constitute a
significant source of value for the entity.
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Background
BC4
In late 2002 the Board set up a project team comprising representatives
from the national standard-setters in Canada, Germany, New Zealand and
the United Kingdom to examine the potential for issuing a standard or
guidance on management commentary. In October 2005 the Board
published the results of the project team’s research in a discussion paper
Management Commentary.
BC5
In the discussion paper, the project team presented its views on the users,
objective and qualitative characteristics of management commentary.
The project team also described essential content elements of
management commentary and a possible framework for use by
standard-setters in distinguishing between information that would
appear in management commentary and information that would appear
in the notes to the financial statements.
BC6
The Board developed the exposure draft after considering the proposals
contained in the discussion paper and respondents’ comments on those
proposals; developments in narrative reporting at the regulatory level in
a variety of local and regional jurisdictions; and the Board’s recent work
(Phase A Framework ED) on the objectives and qualitative characteristics
of financial reporting in its joint project with the US Financial
Accounting Standards Board (FASB) to improve the conceptual
framework.
Proposals
BC7
The following paragraphs summarise the Board’s rationale for its
proposals for:
(a)
the scope of the proposed guidance (paragraphs BC8–BC11);
(b)
identification of management commentary (paragraphs BC12–BC14);
(c)
the users of management commentary (paragraphs BC15–BC18);
(d)
the time frame covered by management commentary (paragraphs
BC19 and BC20);
(e)
the purpose of management commentary (paragraph BC21);
(f)
principles for the preparation of management commentary
(paragraphs BC22–BC33);
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(g)
presentation (paragraphs BC34–BC40); and
(h)
content elements of a decision-useful management commentary
(paragraphs BC41–BC43).
Scope
BC8
The Board considered whether the Guidance, when finalised, should be
issued as an International Financial Reporting Standard (IFRS) or
published as a guidance document distinct from IFRSs. In the light of
feedback received from respondents to the discussion paper, the Board
decided that the final product should be a guidance document rather
than an IFRS.
BC9
The Board’s proposals for a framework to guide the preparation and
presentation of management commentary are meant to foster good
practice in management commentary reporting by permitting an entity’s
management to exercise discretion in tailoring its commentary to the
entity’s particular circumstances. The Board noted that both the
Committee of European Securities Regulators (CESR) and the
International Organization of Securities Commissions (IOSCO) support
the publication of a guidance document on management commentary.
The Board also noted that a similar regime exists in the United Kingdom,
where a Reporting Statement on Operating and Financial Reviews (OFRs)
was published by the UK Accounting Standards Board (ASB) in January
2006.
BC10
The Board’s decision to develop its proposals for a framework to guide the
preparation and presentation of management commentary in the form of
a guidance document rather than an IFRS enables individual
jurisdictions to make their own judgements on:
(a)
whether entities should be required to include management
commentary in their financial reports to assert compliance with
IFRS financial statements;
(b)
the level of assurance to which management commentary should
be subjected;
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(c)
the necessity for ‘safe harbour’ provisions in relation to the
inclusion of forward-looking information;* and
(d)
the type of entity that should prepare management commentary.
BC11
In some jurisdictions, some entities are accustomed to preparing
management commentary-type reports because of local requirements or
regulations imposed by the public exchanges on which their securities
are listed. The Guidance published by the Board could prove useful to
other entities. Also, it could promote comparability across all entities
that prepare management commentary to accompany their IFRS
financial statements, thereby improving the usefulness of the financial
reports to users. The existence of IASB guidance may also encourage
regulators to adopt it as their own.
Identification of management commentary
BC12
The proposed Guidance applies only to management commentary and
not to other information presented in either the financial statements or
the broader financial reports. IAS 1 Presentation of Financial Statements sets
out requirements for the presentation of disclosures in the statement of
financial position, the statement of comprehensive income and the
statement of changes in equity. IAS 7 Statement of Cash Flows sets out
requirements for the presentation of cash flow information.
Additionally, each IFRS sets out disclosure requirements relevant to its
subject matter.
BC13
The Board observed that it is important that users of the financial reports
should be able to distinguish information that is prepared using the
proposed Guidance from information that is prepared using IFRSs, and
from information that may be useful to users but is not the subject of the
guidance described in the Guidance or the requirements in IFRSs.
BC14
The proposed Guidance is a non-binding framework for the preparation
and presentation of management commentary. Consequently, the Board
decided that preparers should not be expected to include in the financial
reports any formal confirmation that they have complied with the
framework set out in the Guidance. However, the Board noted that
including some comment on the extent to which the Guidance has been
followed may be helpful to the users of the financial reports.
*
A safe harbour is a provision of a statute or a regulation that reduces or eliminates a
party’s liability under the law, on the condition that the party performed its actions in
good faith. Legislators include safe harbour provisions to protect legitimate or
excusable violations.
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Users of management commentary
BC15
In July 2008 the Board revisited the conclusions of the discussion paper in
the light of its revised thinking for Phase A of the conceptual framework
project. The Board’s approach to management commentary is based on
the principle that a framework for management commentary should be
consistent with the conceptual framework for financial reporting. That
decision affected two aspects of the proposed Guidance: the users and the
qualitative characteristics (see paragraphs BC31–BC33) of management
commentary.
BC16
The discussion paper identified investors as the primary users of
management commentary. In most jurisdictions, the users of
management commentary are confined to investors, or a narrower group
such as current shareholders. In some jurisdictions there has been debate
about which users should be the focus of management commentary—
with many constituents taking the view that management commentary
should meet the needs of all stakeholders.
BC17
The Phase A Framework ED identifies existing and potential capital
providers as the primary users of financial reports. The primary user
group therefore includes both existing and potential equity investors,
lenders and other creditors, regardless of how they obtained, or will
obtain, their interests. The information provided by the financial reports
focuses on the needs of all capital providers, not just the needs of a
particular group.
BC18
The Board noted that if management commentary is expected to provide
context for a set of financial statements, it follows that the primary users
of each component of the financial reports should be the same.
Consequently, the focus of management commentary in the exposure
draft reflects existing and potential capital providers as its primary users.
Time frame covered by management commentary
BC19
The Board observed that even though an entity’s management
commentary relates to a set of financial statements covering a particular
reporting period, the content of that management commentary is not
necessarily bound to the reporting period described by the financial
statements. An important principle underpinning the information
provided within management commentary is that it has an orientation to
the future. The Board concluded that the inclusion of forward-looking
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information within management commentary helps users of the
financial reports assess whether past performance is indicative of future
performance and whether the development of the entity is in line with
management’s stated objectives.
BC20
The term ‘development’ is used to reflect how the entity has grown or
changed in the current year, as well as how it expects to grow or change
in the future. That usage stems from the European Union’s requirement
for ‘at least a fair review of the development of the company’s business
and of its position.’*
Purpose of management commentary
BC21
In determining the purpose for management commentary, the Board
looked to the objectives stated in existing regulations and guidance.
Guidance issued by the US Securities and Exchange Commission (SEC) in
December 2003 states that the purpose of Management’s Discussion and
Analysis (MD&A) is ‘not complicated.’ It is to provide readers with
information ‘necessary to an understanding of [a company’s] financial
condition, changes in financial condition and results of operations.’†
Put simply, the purpose of management commentary is to provide, from
management’s view, context for the financial statements.
Principles for the preparation of management
commentary
Management’s view
BC22
The principle of management’s view has its roots in regulation,
specifically in the MD&A requirements of the SEC. The first of the SEC
objectives for MD&A reporting is:
… to provide a narrative explanation of a company’s financial statements that
enables investors to see the company through the eyes of management.†
That requirement has also been enshrined in securities regulation in
Canada, and appears as the first principle in the United Kingdom’s
Reporting Statement on the Operating and Financial Review (OFR).
*
EU, Article 46 of the Fourth Directive.
†
SEC, Regulation S–K, Item 303.
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BC23
Research undertaken by PricewaterhouseCoopers (PwC) that involved
more than 3,100 participants across fourteen countries and sixteen
industries suggests that users’ needs are also consistent with the
principle of management’s view. The PwC research suggests that, with
few exceptions, the information important to management in managing
the business is the same information that is important to capital
providers in assessing performance and prospects.*
BC24
This principle raises the issue of what is meant by ‘management.’ IFRS 7
Financial Instruments: Disclosures uses the term ‘key management personnel’
as defined in IAS 24 Related Party Disclosures, meaning ‘those persons having
authority and responsibility for planning, directing and controlling the
activities of the entity, directly or indirectly, including any director
(whether executive or otherwise) of that entity.’†
BC25
The Board noted that determining who prepares and approves
management commentary is likely to depend on jurisdictional
requirements. For example, in the United Kingdom, the Companies Act
2006 requires a business review as part of the directors’ report. For quoted
companies, the requirements are reflected in the UK ASB’s OFR Reporting
Statement, which recommends an OFR to be the analysis of the directors.
Furthermore, it is the directors who are responsible for approving the
business review/OFR. There are similar requirements in Canada, France
and Germany.
Supplement and complement the financial statements
BC26
The Board noted that the principle of providing information to
supplement and complement the financial statements in effect
formalises a statement in the Preface to International Financial Reporting
Standards, namely that:
Other financial reporting comprises information provided outside financial
statements that assists in the interpretation of a complete set of financial
statements or improves users’ ability to make efficient economic decisions.§
BC27
The Board observed that management commentary meets the definition
of ‘other financial reporting’ described in the Preface.
*
PwC Trends 2005.
†
IAS 24, paragraph 9.
§
Preface, paragraph 7.
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Orientation to the future
BC28
The requirement for a focus on information that helps users of the
financial reports assess prospects is found in all of the jurisdictions
surveyed in the discussion paper. This principle has its roots in
regulation, specifically in the MD&A requirements of the SEC. The third
of the SEC objectives for MD&A reporting is:
… to provide information about the quality of, and potential variability of, a
company’s earnings and cash flow, so that investors can ascertain the
likelihood that past performance is indicative of future performance.*
BC29
This US regulatory requirement for the inclusion of information that
helps investors assess prospects is found in both Canadian securities
regulations and the European Modernisation Directive. The Directive has
in turn been transposed into legislation in EU Member States.
BC30
The Board observed that how, and the extent to which, management
commentary is oriented towards the future will be influenced by the
regulatory and legal environment within which the entity operates.
Explanations of past events can help users of the financial reports develop
expectations about the entity from its past performance and current
state. Although disclosure of forward-looking information is encouraged
in many jurisdictions, this does not necessarily mean forecasts or
projections. In some jurisdictions there are safe harbour provisions to
restrict liability claims or regulatory provisions, or both, that require
cautionary statements relating to forward-looking information.
Qualitative characteristics
BC31
Given that management commentary supplements and complements the
financial statements, the discussion paper proposed that management
commentary should be expected to meet, as much as possible, qualitative
standards similar to those applicable to the financial statements. At the
time when the discussion paper was being drafted, the conceptual
framework for financial statements described four qualitative
characteristics: relevance, understandability, reliability and comparability.
Rather than using the qualitative characteristics of reliability and
comparability, the discussion paper proposed the use of supportability,
balance and comparability over time as being more relevant to management
commentary.
*
SEC, Regulation S–K, Item 303.
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BC32
The Board observed that its work on Phase A of the conceptual framework
applies to the broader financial reports, not just financial statements.
When the Board decided that management commentary was within the
boundaries of financial reporting and within the scope of the conceptual
framework, it also decided that it would be inconsistent to develop
qualitative characteristics that are specific to management commentary.
Furthermore, the Board decided that it should resolve questions about
the applicability of the qualitative characteristics to management
commentary in Phase A of the conceptual framework project, not in the
management commentary project.
BC33
Consequently, the exposure draft refers to the qualitative characteristics
described in the Phase A Framework ED but does not contain application
guidance for those qualitative characteristics to management
commentary. Questions about the applicability of the qualitative
characteristics to management commentary will be resolved during the
finalisation of Chapter 1 of the Conceptual Framework for Financial
Reporting, the subject of which is the objective of financial reporting and
the qualitative characteristics and constraints of decision-useful
information.
Presentation
BC34
The Board considered the following three aspects of presentation when
developing its proposals for management commentary:
(a)
presentation of information within management commentary;
(b)
presentation of management commentary in relation to the
financial statements (ie positioning); and
(c)
presentation of disclosure within the financial reports.
Presentation of information within management commentary
BC35
The discussion paper proposed that it is management’s responsibility to
decide both the content of its management commentary and the best way
to present that content. Providing flexibility in both the content and
presentation of management commentary reduces the risk that
constituents will adopt a boilerplate approach to their preparation of
management commentary.
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BC36
Although the exposure draft maintains the premise that management is
best positioned to determine the presentation of management
commentary, the Board decided to formalise its intention that
management commentary should be consistent with the financial
statements, particularly in terms of its presentation of segment
information. The Board noted that, if the financial statements include
segment information, the information presented in the management
commentary should reflect that segmentation.
Positioning of management commentary relative to the
financial statements
BC37
The positioning of management commentary relative to the financial
statements varies across jurisdictions that require management
commentary-type reporting. In some jurisdictions, management
commentary accompanies the annual financial statements in a printed
report to shareholders; in other jurisdictions, management commentary
is contained within separate annual regulatory filings.
BC38
The Board considered whether it would be desirable to incorporate
management commentary within the financial statements, perhaps by
adding textual material and other information within the notes to the
financial statements. The Board rejected this idea on the ground that
management commentary should supplement and complement the
financial statements. Consequently, management commentary should
be part of a financial report that includes the financial statements and
not be placed within the financial statements.
BC39
The Board also decided to link management commentary to the financial
statements as a stand-alone document. Again, management commentary
is designed to supplement and complement information provided in a
related set of financial statements. Consequently, when management
commentary is prepared to accompany IFRS financial statements, it
should not be made available for use without those IFRS financial
statements. Conversely, IFRS financial statements can be made available
for use without a corresponding management commentary.
Presentation of disclosure within the financial reports
BC40
In October 2008 the IASB and the FASB published a discussion paper
Preliminary Views on Financial Statement Presentation. That discussion paper is
centred on resolving presentation issues within the primary financial
statements. Financial information included in the notes to the financial
statements and management commentary that may accompany the
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financial statements is outside the scope of the financial statement
presentation project. Consequently, the Board has not considered
whether its proposals for financial statement presentation may be
extended to include disclosure within management commentary.
Content elements of a decision-useful management
commentary
BC41
The Board noted that specifying disclosures for management
commentary may be more difficult than specifying information to be
disclosed in the notes to the financial statements. The types of activities
that are critical to an entity are specific to that entity. As a consequence,
regulators have tended to identify the elements that reflect the type of
content they expect to see in management commentary rather than
defining the elements themselves. Specifying a detailed list also
encourages a checklist compliance mentality, which the Board wishes to
avoid.
User needs
BC42
The five content elements described in paragraphs 24–39 are based on the
needs of capital providers as the primary users of management
commentary information. The table below relates the five content
elements to the needs of capital providers when using management
commentary to assess an entity’s performance and make financial
decisions.
Content elements
User needs
Nature of the
The knowledge of the business in which an entity
business
is engaged and the external environment in
which it operates.
Objectives and
To assess the strategies adopted by the entity and
strategies
the likelihood that those strategies will be
successful in meeting management’s stated
objectives.
continued...
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continued...
Content elements
User needs
Resources, risks
A basis for determining the resources available to
and relationships
the entity as well as obligations to transfer
resources to others; the ability of the entity to
generate long-term, sustainable net inflows of
resources; and the risks to which those
resource-generating activities are exposed, both
in the near term and in the long term.
Results and
The ability to understand whether an entity has
prospects
delivered results in line with expectations and,
implicitly, how well management has
understood the entity’s market, executed its
strategy and managed the entity’s resources,
risks and relationships.
Performance
The ability to focus on the critical performance
measures and
measures and indicators that management uses
indicators
to assess and manage the entity’s performance
against stated objectives and strategies.
BC43
The Board also observed that information in management commentary
will be of interest to users other than capital providers. As a result,
management may need to consider the extent to which commenting on
issues relevant to a wider user group may be appropriate given the degree
of those issues’ influence on the performance of the entity and its value.
The Board noted that management commentary should not, however, be
seen as a replacement for other forms of reporting addressed to a wider
stakeholder group.
Placement of disclosure within the financial reports
BC44
The Board noted that, currently, neither IFRSs nor the conceptual
framework includes principles to inform the Board’s approach for
establishing disclosure requirements. One question raised by
constituents centres on determining the appropriate location for
disclosure—does the information belong in the notes to the financial
statements or does it belong in management commentary? The
discussion paper included proposals for a framework to aid the Board in
determining where in the financial reports disclosures are most
appropriately presented.
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BC45
In December 2007 the Board decided to defer its work on a framework for
disclosure to Phase E of the conceptual framework project. The Board
noted that Phase E of the conceptual framework includes the
development of disclosure principles. Consequently, the Board views
Phase E of the conceptual framework as the appropriate project to resolve
questions about the placement of disclosures in the financial reports.
BC46
The Board acknowledges that until Phase E of the conceptual framework
is completed, overlap will exist between the type of information that is
disclosed in the notes to the financial statements and that which is
disclosed in management commentary. In the light of that overlap, the
Board determined it was more important to establish management
commentary as a disclosure tool within IFRSs than it was to immediately
resolve questions of placement for that information.
Application guidance and illustrative examples
BC47
The discussion paper contains both application guidance and illustrative
examples that are included to demonstrate the principles underpinning
the management commentary framework.
BC48
The Board decided not to include application guidance or illustrative
examples in the exposure draft for two primary reasons. First, the Board
noted the risk that its application guidance or illustrative examples
could be interpreted as either a floor (minimum requirements) or a
ceiling (the only disclosures for inclusion in management commentary).
Consequently, the Board decided that the risk of undue emphasis being
placed on the application guidance and illustrative examples outweighs
their utility. Second, the Board decided that the development of
application guidance or illustrative examples to help entities apply the
framework for the preparation and presentation of management
commentary is best left to other organisations.
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Alternative views on exposure draft
Alternative views of Robert P Garnett,
Prabhakar Kalavacherla and James J Leisenring
AV1
Messrs Garnett, Kalavacherla and Leisenring voted against publication of
this exposure draft for the reasons set out below.
AV2
The proposals in the exposure draft, if finalised, will result in
non-authoritative guidance that constituents can choose to follow or to
ignore. Consequently, these Board members do not believe that the
proposed guidance document will result in improvements in financial
reporting.
AV3
These Board members believe that management commentary cannot
satisfy the requirements of neutrality as defined in the Phase A
Framework exposure draft.* That exposure draft defines neutrality as the
absence of bias intended to attain a predetermined result or to induce a
particular behaviour. These Board members observe that management
commentary represents, by definition, management’s view of the entity.
AV4
These Board members also believe that, because the proposals in this
exposure draft will not result in an IFRS, following the same due process
as is required for an IFRS is an effective use of neither IASB resources nor
the resources of constituents who will feel some obligation to respond.
AV5
Mr Kalavacherla believes that the proposals in the exposure draft related
to forward-looking information cannot be put into operation without
application guidance. He believes that the omission of application
guidance for forward-looking information could result in management
commentary information that is misleading and thus not helpful to the
users of financial reports.
*
See the exposure draft An improved Conceptual Framework for Financial Reporting: Chapter 1:
The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of
Decision–useful Financial Reporting Information, IASB (May 2008) [for brevity, referred to in
this exposure draft as Phase A Framework ED].
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