Amendments proposed to the IASB’s Management Commentary Practice Statement; What is management commentary? Who should apply the proposed Practice Statement?

The International Accounting Standards Board (IASB^®) issued an Exposure Draft on proposals to revise its International Financial Reporting Standards (IFRS^® Standards) Practice Statement 1 on Management Commentary. The revision was needed because of an increased interest in narrative reporting from users of financial statements. The revisions aim to make financial information more useful and to improve how financial information is communicated.

What is management commentary?

Management commentary is a report that complements an entity’s financial statements. It provides management’s insights into factors that:

• have affected the entity’s financial performance and financial position; and
• could affect the entity’s ability to create value and generate cash flows in the future.

Management commentary also provides information about management’s stewardship of the entity’s resources for users to assess how efficiently and effectively management used and protected these resources.

Who should apply the proposed Practice Statement?

The proposed Practice Statement does not specify which entities are required to prepare management commentary, how frequently it should be prepared, or the level of assurance to which the management commentary should be subjected. The proposed Practice Statement is also not mandatory for entities that apply IFRS Standards.

The IPSASB issued RPG (Recommended Practice Guideline) 2 on Financial Statement Discussion and Analysis, which is voluntary guidance when public sector entities prepare and present financial statement discussion and analysis. Compliance with RPG 2 is also not required for an entity to assert that its financial statements comply with International Public Sector Accounting Standards (IPSAS). 

Suppose an entity has prepared its financial statements on a basis other than IFRS, for example, IPSAS or Standards of GRAP. In that instance, it may be appropriate to consider the proposed Practice Statement to present management commentary that complements general purpose financial statements. 

Requirements when presenting management commentary

Entities may provide management commentary as a stand-alone report, or with other information, as part of a broader report. The proposed Practice Statement requires an entity to clearly distinguish the management commentary from other information provided in the same report or other reports published by the entity.

Management commentary should identify the financial statements to which it relates, along with the reporting period it and the related financial statements cover. If it is not part of the same report as the related financial statements, the entity should explain how and where the related financial statements can be accessed. If the related financial statements are not prepared under IFRS Standards, the management commentary should disclose the basis on which the financial statements are prepared.

What changes are proposed in the ED?

The IASB proposes an objectives-based approach for management commentary. The proposed amendments to the existing Practice Statement include:

• A requirement for management commentary is to provide information that is material to its users and focuses on critical matters. The matters also need to be fundamental to the entity’s ability to create value and generate cash flows over the long term.
• Requirements to provide information that meets specified disclosure objectives. These disclosure objectives, that cover six areas of content, are:
• the entity’s business model, i.e. how the entity creates value and generates cash flows;
• management’s strategy for sustaining and developing their business model, including the opportunities management has chosen to pursue;
• the resources and relationships on which the business model and strategy depend, including resources not recognised as assets in the entity’s financial statements;
• risks that could disrupt the business model, strategy, resources or relationships;
• factors and trends in the external environment that have affected or could affect the business model, strategy, resources, relationships or risks; and
• the entity’s financial performance and financial position, including how they have been affected, or could be affected in future by the matters discussed for the other areas of content.
• Guidance that provides examples of possible key matters and information for inclusion in the management report, along with commentary that management may need to provide to meet the disclosure objectives.
• Requirements for management information to possess specified attributes, such as completeness, balance and accuracy. Guidance is also proposed that will assist management in identifying the information that includes those attributes.

Are you interested in commenting on the proposals?

Comment on the proposed IFRS Practice Statement Exposure Draft ED/2021/6 Management Commentary, is due on 23 November 2021.

The Exposure Draft is available on the IFRS’s website IFRS – Home, and comment can be submitted electronically on https://www.ifrs.org/projects/open-for-comment/, or via email to commentletters@ifrs.org.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.