Neutrality in MD&A, or: good but a little devilish?

At a recent meeting of the Accounting Standards Advisory Forum, the group discussed the ongoing Management Commentary project.

Among the issues set out in the underlying agenda paper was the staff’s proposal “that the revised Practice Statement will describe how management could apply (various) aspects of neutrality that could alter a user’s assessments.” The concept of neutrality being applied here is the same as in the conceptual framework: “A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasized, deemphasized or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users.” The paper highlighted various aspects of neutrality (for example, the overall tone and content), along with accompanying proposed approaches (for example, that the entity should consider whether the management commentary as a whole provides a balanced view to support an assessment of the entity’s prospects for future net cash inflows and management’s stewardship of its economic resources).

The proposals on this point solicited an enjoyable mixed bag of comments, some of which I’ll reproduce here:

  • (One) member said that an entity’s management would be biased while providing information about their company and as a result, neutrality can be hard to achieve. The staff commented that the principle of neutrality is important so that negative information is not obscured but is given the same prominence as good news. The member responded that giving the full picture of the entity’s performance is different from neutral presentation, which assumes independence of mind. He noted he would expect management commentary to include an appropriate view of risks of the business. In his view, a balanced view is not neutral, and balance may be a better word.
  • (Another) member said they agree with the sentiment of neutrality but are concerned with the word as it has a connotation of impartiality, which would imply not discussing the positives nor the negatives. The member noted that companies tend to be hesitant to report negative news because of market reactions, but in the member’s view, what is important is for management to say what they are doing to rectify the issues where they are not performing so well.
  • (Another) member added that the word neutrality is understandable for standard setters, but it might not communicate the message that the Practice Statement is trying to convey to management. She said that the term ‘balanced view’ resonates more.
  • (Another) member said that while wording may be an issue, in his view neutrality is not being ‘middle of the road’ but instead it is about being balanced and factual, and explaining both sides of the equation to enable users to make their own judgments.

Responding to all this, an IASB board member “recognized that it can be hard to tell management to be neutral, and that preparers are not neutral by nature when talking about their own company, but the use and definition of the word for management commentary is the same as in the Conceptual Framework. The Board member said that emphasising neutrality is needed to address the prevalent issue shown from recent studies that the tone of management reports is biased and overly positive…”

It’s interesting perhaps that a “neutral personality” might not be universally viewed as such a good attribute. As one online source succinctly puts it: “To be neutral means to be a walking dead human being. empty with character not knowing who you are. Listen to what your inner self needs and desires and be it. the idea is how to live and experience life for real.” On that same page though, another commentator sees it as denoting a virtuous balancing of traits: “good but a little devilish, to laugh naturally instead of it being fake, standing up for yourself without being a bully, being funny without being a total clown…” This confirms the somewhat shifting nature of the term, as evident (albeit more soberly!) from the comments above.

The reference to “character” reminds me of our earlier musings on that topic. But I wonder if it’s not asking too much of an MD&A (and of the individuals charged with writing it), to coalesce all these nuanced desires and concerns within a single narrative document. Consider as a thought experiment an alternative structure in which an MD&A is written by an independent individual, provided with appropriate resources and access, and then supplemented with management annotations, bringing out where management disagrees with interpretation, emphasis, and so on. This would be more unwieldy of course, but perhaps productively so, if the unwieldiness serves as a window into inherent complexity. As a further reference point, we might reflect on how learning on a challenging topic is likely to be more easily absorbed and understood through a process of debate and synthesis rather than through uni-directional address…

Of course, I don’t really think the IASB’s project will go in such a direction. But at the very least, I hope the practice statement will find a way to encourage openness, experimentation and flexibility. After all, if those are good qualities in business itself (and I think they generally are) then they should be equally desirable when talking about business…

The opinions expressed are solely those of the author

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