Management commentary - reading between the lines

We're now in that period of the year often referred to as the 'silly season' when sensible people head for the beach to savour the tranquillity of life without newspapers and the TV. Life takes on a whole new meaning - no need to be depressed each morning by reading about the state of the recession, government finances and the strife that engulfs so many parts of the world. Save for the odd peek at the Blackberry, it’s a carefree experience - while it lasts.    

It's at this time of the year that the broadsheets have to scour the world for news. Sometimes it’s hard to work out why an article has been written and who has let it slip through the editorial net. Sadly, I had some of these feelings when I read the recently released exposure draft from the IASB on Management Commentary. At first glance, this non-binding guidance seems perfectly sensible. In large part it replicates the Business Review introduced in the UK a few years ago. However, when you read between the lines, it raises some fundamental questions about the role financial reporting has within the wider corporate reporting model and consequently the role the IASB should play in this context.      

Let me start by putting my cards on the table, I am a full supporter of an integrated reporting model and believe that management commentary has a critical role to play in achieving this ambition. Put simply, without it, today’s financial reporting model would be little more than a jumble of numbers whose meaning is obscured to all but the technical few. Even the IASB’s Sir David Tweedie has been heard extolling the virtue of narrative reporting – particularly given the volatility in reported performance that IFRS has introduced, in large part because of the increased use of fair value accounting. Add to this current market practice - what is presented at analyst meetings, the use of non GAAP information etc – and the central role that management commentary needs to take becomes clear.

So it was with some relief that early in the exposure draft that I read the following statement: "Management commentary, prepared in accordance with this framework, is within the boundaries of financial reporting, therefore, is within the scope of the conceptual framework for financial reporting". This is great news for all those who support a progressive and integrated reporting model.

However as one reads on, the positioning of three board members poses some interesting questions about the direction of reporting and the role of the IASB. The three board members voted against the exposure draft for the following reasons:

• the fact that it will result in non-authoritative guidance, and therefore no improvement in financial reporting;
• that management commentary cannot satisfy the requirement of neutrality - i.e. the absence of bias;
• it is an ineffective use of the Board's time as it will not result in an IFRS.

While these are all understandable objections, their nature does raise some important questions that need to be bottomed out if the reporting model is to remain relevant. First, do we want a reporting model that embraces management's view of the business and its performance? Currently, what is presented to analysts is heavily coloured by non-GAAP information and management's analysis of the underlying performance as they see it. Do we ignore this information or do we embrace it in the mainstream of reporting?

Secondly, should standard setters, auditors and regulators be spending more time on management commentary and critical aspects of non-financial reporting around the market context, strategy, business models, risks and remuneration? If not, who should be responsible for these aspects of reporting as we have learnt from the credit crunch that to rely on financial reporting to explain all that's going on in a company would be a mistake.

As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.

David

Comments

[David Phillips]

Robin, sorry for my slow reply to your question but I've been away on holiday. I think you pose an important question regarding the IASB's positioning on the whole issue of greenhouse gas emissions. I think the management commentary paper has posed questions about the scope and remit of the IASB when it comes to the broader aspects of reporting beyond financial accounting. I for one believe we need to move quickly to some global consensus on carbon measurement and reporting or we will face the fragmentation of thinking and approaches, the impact of which is well understood given where we have been in the financial reporting and it is difficult to see how global thinking can be converged in this short term.

[Muhammad Ali]

Dear David,

I agree with you that numbers only could not tell the whole picture but should be accompanied by the management commentary to elaborate on it. At least in my experience people pay less time in narrative reporting and taking it as compliance exercise rather taking it as tool to inform users about how the company is performing and provide insight of management stewardship.
Hope recent management commentary exposure draft could spur the debate around jurisdiction and would understand how critical is management commentary to tell the accurate story of the company.
Reporting is not only number game, it is more than that.

[Robin Huttenbach]

David,

I was interested to learn that the IASB has produced an exposure guide on management commentary. In line with the dissenting opinions that you refer to, how might the IASB respond to the recent exposure draft from the Climate Disclosure Standards Board (CDSB) concerning the reporting of greenhouse gas emissions (http://www.cdsb-global.org/index.php?mact=News,cntnt01,detail,0&cntnt01articleid=8&cntnt01origid=15&cntnt01returnid=54) and to which PwC has contributed?