Management Commentary

On December 8, 2010 the International Accounting Standards Board (“IASB”) published an IFRS Practice Statement ‘Management Commentary’, a framework for presentation of management commentary to accompany financial statements.

The management commentary is intended to be a narrative report that provides a context for the financial statements by interpreting the financial position, performance and cash flows of an entity, as well as explaining its objectives and strategies for the future. Many jurisdictions already use similar narrative reports which are sometimes described as management’s discussion and analysis (MD&A), operating and financial review (OFR), business review or management’s report.

This practice statement published by the IASB provides a broad, non-binding framework for the presentation of management commentary and is designed to promote good practice in financial reporting, whilst also promoting comparability across entities that present management commentary.

In Australia, the AASB has designated the release as being of relatively low priority, having regard to the mandatory requirements for the directors to disclosure various commentary about performance and operations pursuant to sections 299 and 299A of the Corporations Act. The AASB has stated however that it supports the notion of consistency in management commentary and will consider how the document may be utilised in an Australian context.

1. What is the objective of this practice statement?
The objective of the Practice Statement is to assist management in presenting useful management commentary that relates to financial statements that have been prepared in accordance with IFRS.

The IASB believes that a practice statement might encourage entities that are not accustomed to presenting management commentary to provide such commentary for its users. The existence of a practice statement might also encourage jurisdictions to adopt it as their own. Therefore, although this Practice Statement is not binding, it is expected to promote comparability across all entities that present management commentary to accompany their IFRS financial statements.

2. Which entities should adopt this practice statement?
The Practice Statement 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.

The IASB believes that the Practice Statement may prove useful to both entities that are not accustomed to presenting management commentary as well as those entities that already provide such reports. For entities that are already accustomed to presenting reports setting out management commentary to comply with local requirements or regulations imposed by the public exchanges, this Practice Statement may be useful, provided it does not contradict those requirements or regulations.

Management cannot assert that their management commentary complies with the Practice Statement unless it is complied with in its entirety. If part of the Practice Statement has been complied with, the commentary should explain the extent of such compliance.

3. What is ‘Management Commentary’?
‘Management commentary’ is a narrative report that relates to IFRS compliant financial statements. Such narrative report will usually accompany the financial statements.

Management commentary provides users with historical explanations of the entity’s financial position, financial performance and cash flows as well as commentary on an entity’s prospects, objectives, strategies, targets and other forward-looking information.

4. Can one still be IFRS compliant although not complyingwith this practice statement?
Yes. The practice statement is not an international accounting standard. This means, entities applying IFRSs are not required to comply with the Practice Statement, unless specifically required by their jurisdiction. Non-compliance with the Practice Statement will not prevent an entity’s financial statements from complying with IFRSs, if they otherwise do so.

5. If the practice statement is not an IFRS, what is the link between IFRSs and Management Commentary?
Management Commentary meets the definition of ‘other financial reporting’ described in paragraph 7 of the Preface to IFRS and so the IASB decided that management commentary lies within the boundaries of financial reporting. This also means, that the Practice Statement should be read in the context of the Conceptual Framework.


An overview of the disclosures requirements of IFRS Practice Statement ‘Management Commentary’

The Practice Statement ‘Management Commentary’ allows management to determine the information to include in its management commentary considering the needs of the primary users of financial reports (namely, the existing and potential
investors, lenders and other creditors) as well as any other user group specific to the entity dependent on such information.

The Practice Statement sets out the principles, qualitative characteristics and elements of management commentary that are necessary to provide users of financial reports with useful information.

There are two broad principles established by the Practice Statement for providing management commentary.

Firstly, management commentary should be provided from the management’s viewpoint of the entity’s performance, position and progress and should be derived from the in formation that management uses in managing the business.

The second principle is that management commentary should be provided in a manner such that it supplements and complements the information presented in the financial statements, explaining the amounts presented in the financial statements and the conditions and events that shaped those amounts.

In line with these two principles management commentary should also include forward-looking information. Forwardlooking information does not mean that the management predicts the future, but instead sets out management’s objectives and its strategies for achieving those objectives in a manner that provides perspective of the entity’s direction. Forward-looking information should also cover trends, uncertainties or other factors that could affect the liquidity, capital resources, revenues and the results of its operations in the future.

Also in line with the above two principles, information in management commentary should possess qualitative characteristics of ‘relevance’, ‘faithful representation’, ‘comparability’, ‘verifiability’, ‘timeliness’ and ‘understandability’ as described in the Conceptual Framework.

Because the types of activities that are critical to an entity are specific to that particular entity, it is difficult to specify a list of disclosures for management commentary unlike specifying information to be disclosed in the notes to the financial statements. As a consequence, the IASB decided to identify five key elements that reflect the type of content that it expects to see in management commentary



DOs and DON’Ts...

• Should provide users with integrated information that provides a context for the related financial statements.
  
  
• Information provided in management commentary should explain management’s view not only about what has happened, including both positive and negative circumstances, but also why it has happened and what the implications are for the entity’s future.
  
  
• Should complement and supplement the financial statements by communicating integrated information about the entity’s resources and the claims against the entity and its resources, and the transactions and other events that change them.
  
  
• Should explain the main trends and factors that are likely to affect the entity’s future performance, position and progress.
  
  
• Should be consistent with its related financial statements.
  
  
• Should reflect the same segmentation where the financial statements include segment information.
  
  
• Should provide management’s perspective on the business and its analysis of the interaction between the elements of management commentary.
  
  
• Should define and explain any financial performance measures that are not required or defined by IFRS but which are used in the management commentary.
  
  
• Should reconcile any financial performance measures derived or drawn from the financial statements to those presented in the IFRS financial statements themselves.
  
  
• Entities should clearly identify what is being presented as management commentary and distinguish it from other information.
  
  
• When management commentary relates directly to financial statements, entities should either make those financial statements available with the commentary or identify in the commentary the financial statements to which it relates.
  
  
• Entities must explain the extent to which this Practice Statement has been followed in presenting management commentary.
  
  
• Avoid duplicating in the management commentary the disclosures made in the notes to the financial statements, when practicable.
  
  
• Should not merely recite financial statement information without analysis, or present boilerplate discussions that do not provide insight into the entity’s past performance or prospects. Such practices are unlikely to provide information that is useful to users of the financial reports and may create an obstacle for users to identify and understand the most significant matters facing the entity.
  
  
• Avoid generic disclosures that do not relate to the practices and circumstances of the entity and immaterial disclosures that make the more important information difficult to find.
  
  
• Should not present the elements of management commentary in isolation, rather than providing analysis of the interaction of the elements.
  
  
• Must not make an assertion that management commentary complies with this Practice Statement unless it complies with the Practice Statement in its entirety.

Contact

Rob Mackay
T +61 3 8635 1800
rmackay@moorestephens.com.au

www.moorestephens.com.au