As we discussed here, the IASB has issued a revised Practice Statement on management commentary. 

The document (of course!) contains a section on materiality:

• Information required by the objective of management commentary … and the disclosure objectives…shall be provided if it is material. In the context of management commentary, information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which include the management commentary and the related financial statements and which provide financial information about a specific reporting entity.

The project feedback statement notes: “Investors have told the IASB that management commentaries sometimes lack focus on matters that are important to a company’s prospects, including in the long term.” To the end of tackling this, on top of the definition of materiality, the statement layers an additional concept of “key matters”:

• It is likely that much of the material information needed to meet the objective of management commentary and the disclosure objectives for the areas of content will relate to key matters—that is, matters that are fundamental to the entity’s ability to create value and generate cash flows, including in the long term. If a matter is fundamental to the entity’s ability to create value and generate cash flows, users are likely to need more information about that matter than about matters that are not fundamental to that ability.
• However, material information does not necessarily relate to a key matter. Material information is included in management commentary even if it does not relate to a key matter.

These include:

• (a) key features of the entity’s business model—those that fundamentally underpin that ability;
• (b) key aspects of management’s strategy—those that are fundamental to sustaining and developing that ability;
• (c) key resources and relationships—those on which that ability fundamentally depends;
• (d) key risks—those that could fundamentally disrupt that ability;
• (e) key factors and trends in the external environment—those that have fundamentally affected or could fundamentally affect that ability; and
• (f) key aspects of the entity’s financial performance and financial position —those that are fundamental to understanding that ability.

The document goes on:

• Identifying key matters requires management to apply judgement. Because key matters are fundamental to the entity’s ability to create value and generate cash flows, they are likely to be matters that management monitors and manages.
• Other indications that a matter might be key include that the matter has been:
  • (a) discussed with the entity’s board or other governing body;
  • (b) discussed in the entity’s capital markets communications—for example, in presentations to investors and creditors; or
  • (c) raised by the entity’s customers, suppliers, employees or other stakeholders.
• Key matters are specific to the entity. Some matters might not be key for the entity even though users would generally expect them to be key for entities operating in the industry or jurisdiction in which the entity operates. In such cases, management considers whether any information about the matter is material. Material information could include an explanation of why the matter is not key for the entity.

It includes an illustration of the latter point:

• An entity manufactures goods. Management knows that users generally expect the key risks for manufacturers of goods of this type to include exposure to fluctuations in the price of a scarce commodity. Management has concluded that such fluctuations are not a key risk for the entity. Management judges that information about that conclusion is material. The management commentary explains that conclusion and provides data to support the explanation.

Having set up the “key matters” concept, the document’s appendix of requirements and guidance for six specified areas of content needs to laboriously specify for each of its examples that they illustrate either “a matter that might be key or information that might be material” (it cites “an overview of the entity and its range of operations” as something more likely to be the latter than the former). It’s all understandable of course, but also teetering on descending into over-fussiness – the illustration seems to be envisaging something like: We know you probably think we’re exposed to movements in the uranium price, given how we’re building all this nuclear stuff, but good news, we have a whole different way of doing it, so no problem! That is, one would hope that the information being teased out there would emerge rather more directly and organically.

More broadly, it ought to be well-established that all material information isn’t created equal and that some such information by its nature will warrant greater prominence and explanation. If some management commentaries don’t evidence that, it’s probably because of an overly legalistic and insufficiently stakeholder-oriented approach to their preparation. But the new category of “key matters” might only create something new for the lawyers to argue about, to no very useful end…

The opinions expressed are solely those of the author.