As we covered previously, the IASB issued an exposure draft of a proposed practice statement on Management Commentary, with comments requested by November 23, 2021.
It might be dispiriting to those working on the project that a large volume of the comments (based on my highly incomplete sample of them at least) amount to saying, basically, just don’t bother. Take for example the submission of Ernst & Young:
- Generally, we are concerned that the practice statement format is not well suited for the purpose intended by the Board, as it is not grounded in authoritative requirements, such as standards. Its primary purpose is to provide a platform for transparent and informative management reporting, and thus, in nature and function, it represents a framework for such reporting, rather than a practice statement.
- On this basis, we believe that the purpose of the ED might be better directed to local regulators to use as a tool as a starting point for developing their local requirements, rather than to preparers, which would further justify a framework format as opposed to authoritative guidance.
- Furthermore, our experience suggests that management commentary practice in most jurisdictions is driven by local requirements that are often not aligned with the current Practice Statement 1 (PS1). As such, the application of PS1 is not widespread, and it is questionable whether developing a new framework for this purpose may justify the effort required.
- There may be a significant overlap between the scope of PS1 and what might be expected from the newly set up International Sustainability Standards Board, ISSB. As we noted in (a previous comment letter), if sustainability disclosures that come out of the work by the ISSB are partly included in the Management Commentary section of the financial statements, we would expect both Boards may have to have (shared) responsibility in this regard. It would be onerous for stakeholders if PS1 were to be amended twice in a short space of time…
That point about alignment with the work of the ISSB was an especially common one. For example, the Value Reporting Foundation advised a pause in the project:
- This pause could be used to assess how the Management Commentary Practice Statement might be combined with the International Framework and the recommendations of the Task Force on Climate-Related Financial Disclosure (TCFD) to provide a robust conceptual basis for connecting the IASB and proposed ISSB. This would simplify the landscape and strengthen disclosure on certain key matters, for example on corporate governance and board oversight. We believe the pause would have two very clear advantages:
- First, it would provide sufficient time to align key conceptual issues and definitions that could be used by both Boards, for example the concepts of ‘value creation’ and ‘enterprise value’. We recommend that the IASB and ISSB use a common definition of ‘enterprise value’ as a means of identifying that information which has the greatest relevance to investor decision-making. It is our belief that, in creating value for its key stakeholders, a business will also create enterprise value over the long-term.
- Second, it would give time for the proposed ISSB to become established, including the appointment of key personnel, enabling a more strategic assessment of the conceptual and practical proposals for connecting the work of both Boards
The estimable Mervyn King found the draft “backward-looking” in its failure to acknowledge the multi-capital approach of integrated reporting, among other things. He said the draft “avoids the importance of the board in enterprise value creation and the draft is not assurance friendly.” The project, concluded King, “should be put aside to let the time be used to finalize an overarching framework to connect the financial to the so-called non-financial.” Accountancy Europe, while taking a more positive overall tone, also suggested a broader approach to the concept of value creation, and advised including a content area on governance, among other things. The Integrated Reporting Committee of South Africa commented: “We do not see the draft Practice Statement as a better alternative to the integrated report prepared in accordance with the best practice guidance of the International Framework. We strongly suggest the integrated report, as the ‘voice’ of the board, is best positioned to explain to investors and other stakeholders the entity’s process of value creation, preservation or erosion over time.” And on it goes.
Those aren’t the only reasons commentators came up with for pausing the project. BDO cited a need to “minimize the inconsistencies that we have observed between the disclosures in the management commentary section and the amounts reported and disclosed in the financial statements.” Ernst & Young gave some examples of that as well. Overall, it seems that many respondents would hardly mind if they never heard of the project again. Will the IASB judge it to be worth pressing on….?
The opinions expressed are solely those of the author.