The IASB has issued a revised Practice Statement on management commentary. 

It “intends for the revised Practice Statement to serve as a global benchmark for regulators to use in updating or developing their national requirements and guidance,” as well as providing “a comprehensive resource for companies to help meet investors’ information needs.” The former goal might be applicable in Canada as the core MD&A form, NI51-102F1, hasn’t been updated in over twenty years (although it’s regularly supplemented with staff notices and various commentary). One relevant area for examination might be the practice statement’s section on prospects for future cash flows:

• An entity’s management commentary provides information that helps users assess the entity’s prospects for future cash flows. In making their assessment, users estimate the present value of the entity’s future cash flows. This estimate involves assessing whether the net cash inflows are likely to provide the entity with a return that compensates it sufficiently for both the time that elapses before those cash flows occur (the time value of money) and the uncertainty in the amount and timing of the cash flows (risk).

In this context: “An entity’s activities create value for the entity if they enhance or preserve the net present value of the entity’s future cash flows. Conversely, an entity’s activities erode value for the entity if they reduce the net present value of the entity’s future cash flows.” However, this comes with the following important clarification:

• The term does not refer to the value an entity’s activities might create, preserve or erode for other parties (for example, customers, suppliers, employees or society at large), the economy or the natural environment. However, an entity’s ability to create value for itself —and hence to generate cash flows across all time horizons, including in the long term—is closely related to the value the entity’s activities create, preserve or erode for those other parties, the economy or the natural environment. Therefore, management commentary includes material information about the impacts of an entity’s activities on other parties, the economy and the natural environment if those impacts could affect the entity’s ability to create value for itself.

For example: “If an entity’s business model depends on a natural resource —such as water—degradation or depletion of that resource, including resulting from the entity’s own activities, could adversely affect the entity’s ability to create value and generate cash flows. In contrast, regeneration and preservation of that resource, including resulting from the entity’s own activities, could positively affect the entity’s ability to create value and generate cash flows.”

This is broadly aligned with with the notion of value creation in IFRS S1 and the Integrated Reporting Framework. For Canadian issuers preparing an MD&A form, the core form barely mentions environmental issues explicitly; however, regulators have issued various guidance on how it might inherently require the kind of disclosure cited above. For example, a CSA Staff Notice 51-358 commented as follows:

• In general, issuers should disclose material information relating to climate change-related risks in an (Annual Information Form) (risk factors relating to the issuer and its business that would be most likely to influence an investor’s decision to purchase the issuer’s securities) and MD&A (analysis of the issuer’s operations for the most recently completed financial year, including commitments, events, risks, or uncertainties that the issuer reasonably believes will materially affect its future performance).
• (For example) Physical risks resulting from climate change can be event-driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Issuers’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting their premises, operations, supply chain, transport needs, and employee safety.

The citing there of risks that the issuer “reasonably believes will materially affect its future performance” is likely narrower than the IASB’s concept of “ability to create value”: the difference might be conceptualized in part as relating to the selection of a discount rate to be applied to estimated future cash flows.  The MD&A form’s above-noted reference to “future performance” isn’t the same as “net present value of future performance,” and thus in contrast to the IASB doesn’t seem to require identifying and weighing the factors that might affect not only the gross future cash flows, but the risk attached to their achievement (a narrower point is that the Canadian regime contains two separate documents in which risk-related disclosure is required, not necessarily an aid to overall clarity and cohesion). No doubt many Canadian issuers already think in those broader terms when preparing the form, but it couldn’t hurt to make such a mindset more explicitly required.

We’ll look at other aspects of the new practice statement in the future…

The opinions expressed are solely those of the author.