The IFRS Foundation is continuing to develop its revised practice statement on management commentary, with an exposure draft expected later in the year.
A recent meeting of the project’s consultative group focused on the meaning of the phrase “management’s view.” The current draft of the practice statement refers to the concept in the following passages:
- Management commentary […] explains 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.
- Management should present commentary that is consistent with the following principles: (a) to provide management’s view of the entity’s performance, position and progress…
- Management commentary should provide management’s perspective of the entity’s performance, position and progress.
The basis for conclusions on the existing practice statement cites “a study that 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. Consequently, the Board decided that management commentary should derive from the same information that is important to management.”
We can likely all see the merits of that approach, as well as its possible limitations. To put it overly colourfully, as I often like to do, management’s view might be blinkered or biased or insufficiently sophisticated, so that an MD&A accurately reflecting that view might raise as many questions as answers. Of course, such a communication might still be informative to readers, if only as a big warning flag to stay away, but the IFRS Foundation has higher aspirations than that, to coax management into self-diagnosing such weaknesses, and to generate commentary that transcends them. To illustrate the point, it set out the following (perhaps rather peculiarly specific) fact pattern:
- The staff considered whether application of ‘management’s view’ may lead to management commentary excluding information that would be useful to users on the grounds that it is not used or analysed by management in the exact same way or format as would be needed by primary users. For example, when an entity introduces a new product, the entity’s management may choose total revenue generated from selling that product as its KPI for monitoring the progress of transition to the new product. However, the management may not monitor statistics on the proportion of customers who have transitioned from the old to the new product but this information can be derived from data in the entity’s systems and would be useful to users in assessing the prospects for cash flows to the entity.
- In this case, some are concerned that management may decide not to provide information about the proportion of customers who have transitioned to the new product because that is not the KPI used by the management even if the management knows that such information could help users assess prospects for cash flows to the entity.
- To prevent exclusion of material information that could affect users’ assessments of prospects for cash flows to the entity the staff are considering whether to propose clarifying the description of ‘management’s view’. The clarification would be intended to explain that it may be necessary for management to provide material information that is not used directly in managing the business if it can be derived from analysis of data in the entity’s systems.
Of course, this isn’t a new challenge. The relevant Canadian regulatory instrument, Form 51-102F1, summarizes an MD&A as a “narrative explanation, through the eyes of management,” while also emphasizing that it provides a “balanced discussion…openly reporting bad news as well as good news.” Even though the requirement has now been in place in Canada in its current form for some fifteen years, the Ontario Securities Commission recently commented yet again on, among other things, issuers that make overly broad statements about having “adequate working capital to fund operations” without providing “insight beyond the numbers.” or on how variances in income statement line items are “stated with limited narrative discussion of the factors resulting in the variance and any trends or potential trends,” omitting “a detailed, analytical and quantified discussion of the various factors that affect revenues and expenses beyond the percentage change or amount.” The eyes of management, it seems, don’t always see that well, or maybe just don’t want to.
Against this backdrop, I sometimes muse that the best approach to management commentary might be a dialectical one: for example, a core document researched and written by an independent party on the basis of full access to management and its records; but then annotated by management to emphasize and explain areas of difference or disagreement. Although such a document might be a more cumbersome read, this would only be to suggest that for an organization of any complexity, an MD&A can only go down smoothly by rounding off the necessary sharp edges. And anyway, I’m not sure it would necessarily be a more cumbersome read (if you consider, for instance, how an interview format may often be more accessible than an essay one)…
I think it was Richard Pryor who told a joke about being caught by his wife with another woman, and flat-out denying there’s anything to see, demanding, “Who you gonna believe, me or your lying eyes?” That’s only one example, of course, of how we might doubt our own eyes. So how confident should you ever be of seeing accurately through someone else’s…?
The opinions expressed are solely those of the author