The International Accounting Standards Board (IASB) has launched a consultation on a revised framework for management commentary in accounts which aims to build on the latest developments in narrative reporting to focus on the information that investors need and ways to present it more clearly
To reflect the changes in the corporate reporting landscape, the International Accounting Standards Board has published a proposed framework for companies preparing management commentaries, which is a major overhaul of IFRS Practice Statement 1 Management Commentary issued in 2010.
The revisions come as research by the International Accounting Standards Board indicated that management commentaries did not provide investors and creditors with the information they needed. It was found that management commentaries often failed to focus on matters important to the entity’s prospects and contained too much generic information.
Management commentaries was also found to focus on short-term matters and provide insufficient discussion of matters, such as systemic risks or strategic challenges, that could affect the entity’s long-term prospects. They were also found to be fragmented or are difficult to reconcile to information in the entity’s financial statements or to information in other reports the entity has published.
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.
This would be delivered by a requirement for management commentary to provide information that is material to investors and creditors, and to focus on key matters. These would be matters that are fundamental to the company’s ability to create value and generate cash flows.
There would also be requirements to provide information that meets specified disclosure objectives. The disclosure objectives stem from the information needs of investors and creditors and include descriptions of the assessments that rely on information provided in management commentary.
The proposals would offer guidance that would provide examples of possible key matters and of information, including metrics, that management commentary might need to provide to meet the disclosure objectives.
And finally, it would be reinforced by requirements for information to possess specified attributes, such as completeness, balance and accuracy, and guidance to help management identify information that possesses those attributes.
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.
With this, the International Accounting Standards 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 of interest, such as sustainability.
On the proposed framework, Hans Hoogervorst, chair of the International Accounting Standards Board, said: ‘The proposed new framework provides a robust basis for bringing together in a single report financial, sustainability and other information about the matters that are fundamental to a company's long-term prospects.’
The Practice Statement would succeed the IFRS Practice Statement 1 Management Commentary for annual reporting periods beginning on or after the date of its issue, meaning that the Practice Statement would be effective for annual reporting periods ending at least one year after the date of its issue.
The closing date for comment is 23 November 2021. IFRS: Practice Statement: Exposure Draft ED/2021/6 - Management Commentary
Further guidance on international financial reporting can be found in the IFRS quick link in Croner-i Navigate