A welcome move by the International Accounting Standards Board (IASB) to discourage the use of all the waffle in the narrative sections of the annual report. But will it work…?
IASB/IFRS Exposure Draft (ED2021/6) have produced a revised practice statement for preparers of the Management Commentary.
What is the Management Commentary?
It covers content which typically appears in the Strategic Report section of the annual report. This includes the business model, summary of the company’s strategy, key performance metrics, risks and key information on the company’s approach to ESG issues.
When was it last revised?
The IASB last revised its good-practice guidance on the Management Commentary in 2010. An update is well overdue.
The 2021 draft update is more comprehensive and more explicit in what is expected of preparers.
It approaches the issue from the point of view of investors (and other stakeholders) and their information needs. It calls for companies to address these by providing clear and comprehensive information.
How will it be better?
In the introduction it draws attention to the fact that the Management Commentary has tended to be treated as a repository for hyperbole, management ‘puff’, obfuscation and incomplete and/or confusing information . All of limited use to investors.
The new guidance represents a serious attempt to deal with this issue. It sets out examples of the information that might be considered for inclusion. It also encourages companies to focus on ‘materiality’ – reporting on issues that are genuinely important and omitting trivia. The intention is that companies should follow the IASB’s guidance on a comply-or-explain basis.
What is the weakness?
There is no formal requirement for companies to take much notice of the IASB’s guidance on the Management Commentary as the narrative sections of the annual report do not (yet) have to be audited or undergo any other form of independent assurance.
That is not the fault of the guidance document.
Hope for the future?
It is, at the very least, an important attempt to provide a clear codification of what should be included in the Management Commentary and the general principles of good practice for drafting and presentation.
It also provides a benchmark against which investors can hold companies to account over the quality of their narrative reporting. On this basis we welcome and support the IASB’s Exposure Draft.