Management commentary – a major overhaul, but for how many?

IASB consults on a new framework for management commentary reflecting changes in corporate reporting landscape, announces a recent news release

Here’s how it sums it up:

  • Management commentary—in some countries referred to as management discussion and analysis—is a report that complements a company’s financial statements.
  • The proposed framework represents a major overhaul of IFRS Practice Statement 1 Management Commentary. It builds on innovations in narrative reporting and would enable companies to bring together in one place the information investors need to assess a company’s long-term prospects—such as information about the company’s intangible resources and relationships and about sustainability matters that affect the company.
  • Management commentary would thus not only explain a company’s financial statements but also give investors insights into factors that affect a company’s ability to create value and generate cash flows, including in the long term. It would be based on information used to manage the business, including financial and non-financial metrics used to monitor performance.
  • The proposed framework sets out disclosure objectives for information about the company’s business model, strategy, resources and relationships, risks, external environment and financial performance and position. The disclosure objectives are designed to enable companies to identify and provide information that is material to investors, and to enable regulators and auditors to assess compliance with the proposed framework. 
  • IFRS Standards do not require companies to provide management commentary—this is unchanged by the proposed new framework. However, regulators may require companies to provide management commentary in accordance with the proposed framework or companies may choose to do so. The Board envisages that companies would be able to apply the proposed framework along with national reporting requirements and in conjunction with frameworks that address particular topics, such as sustainability matters.

As the last paragraph indicates, the proposed framework may have greater impact in some jurisdictions than others. Where well-established MD&A requirements already exist, as in Canada, its main contribution for the foreseeable future may be as a source of ideas for enhancing existing documents, within the existing compliance structure. At an initial read, those potential enhancements might be numerous. To take an almost random example, the exposure draft proposes as one of its disclosure objectives: “Management commentary shall provide information that enables investors and creditors to understand management’s strategy for sustaining and developing the entity’s business model.” This should enable investors and credits to understand, among much else, the drivers of the strategy, including the opportunities management has chosen to pursue; the aims of the strategy; milestones on the path towards those aims; plans for reaching the milestones and achieving the aims; and so on.

In contrast, the Canadian regulatory form 51-102F1 doesn’t currently mention the entity’s strategy at all. That’s not to say the concept has been absent from Canadian MD&A. For example, many preparers were aware of CPA Canada’s preparation guide which contained among its principles that “the MD&A should explain management’s strategy for achieving short-term and long-term objectives,” and went on:

  • MD&A disclosure should provide the information that a reasonable investor would want to know in making an investment decision with a view to value accruing over time. This will involve integrating quantitative and qualitative information in a way that communicates the strategy for generating value for investors over time. To help investors understand the strategic direction of a company, management should consider disclosing objectives and the related strategies as well as indicating the resources available or to be obtained to help implement the action plans.

It’s probably more likely than not then that a Canadian entity, at least a larger one, already addresses its strategy in the MD&A. However, the IASB’s proposed new framework may nudge some of them to take such considerations further. As I said, that’s just one example.

It’s funny in a way that the most prominent traditional objective of an MD&A – to explain why this or that number in the accompanying financial statements went up or down – isn’t particularly prominent in the proposed framework. These are the six “areas of content” laid out in the document:

  • (a) the entity’s business model—how the entity creates value and generates cash flows;
  • (b) management’s strategy for sustaining and developing that business model, including the opportunities management has chosen to pursue;
  • (c) the resources and relationships on which the business model and strategy depend, including resources not recognized as assets in the entity’s financial statements;
  • (d) risks that could disrupt the business model, strategy, resources or relationships;
  • (e) factors and trends in the external environment that have affected or could affect the business model, strategy, resources, relationships or risks; and
  • (f) the entity’s financial performance and financial position—including how they have been affected or could be affected in the future by the matters discussed for the other areas of content.

Of course, these are all inter-related, and needn’t be addressed in the document in that order. Still, when Canadian regulators have found compliance deficiencies in MD&A, they’ve usually arisen from matters belonging within category (f). Might this change one day…?

More on this in the future…

The opinions expressed are solely those of the author

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