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New IASB management commentary framework: What you need to know

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24th Jul 2009
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Dave Marlow, training consultant at CTG, evaluates the significance and pitfalls of new proposals to increase transparency in company financial reports.

The International Accounting Standards Board (IASB) has recommended a new framework for management narrative in financial reports, the text that business managers should use to outline how a firm's financial performance, position and cash flows relate to its overall objectives and strategies.

The IASB Management Commentary framework is based on a perfectly reasonable argument. Much of the narrative we see in financial reports – in the form of management’s discussion and analysis (MD&A), operating and financial review (OFR), or management report – does not throw additional light on the company’s performance or its financial results. Some do little more than repeat the notes to the accounts or are filled with corporate marketing messages that fudge the real issues.

The IASB rightly asserts that users of financial statements deserve a clear, factual and comprehensive strategic overview. It should include details of the organisation’s targets for the coming year, management’s plans to meet those targets and the extent to which past targets have been met, including useful ratios and analysis. It should help the reader to put the financial results into context and shed light on the competence and capability of the senior management team, which is just as important as the company’s products or branding in, for example, a prospective investor’s decision-making process.

Drawbacks
The guidelines suggest including an analysis of the opportunities and threats faced by the organisation and how it intends to deal with them. Many will deem this information to be too sensitive for inclusion in a publicly-available document.

Furthermore, these are guidelines, not an IFRS. Organisations can interpret whether and how they wish to implement the framework, so there will not be a common standard to compare organisational performance. Similarly, the content will continue to be too subjective to fall fully within the scope of the audit report, so it will not be verified to the extent of the audited financial information. Auditors will continue to read the management commentary to ensure it is consistent with the financial statements, but no more than that.

Also, the exposure draft does not target the people who will need to follow the guidelines. The management narrative is often written by non-accountants, such as senior managerial, operational, investor relations or corporate communications executives. When combined with the ‘guideline’ status of the framework, this means the finance director or chief financial officer (CFO) will have to communicate the recommendations internally, and persuade colleagues to apply them correctly.

Finally, and perhaps most importantly, whilst the guidelines pay lip service to achieving an unbiased narrative, it is difficult to imagine any such framework being able to surmount the natural tendency of management to portray the results in the most favourable light.

Next steps
We will have to wait until the IASB has collated comments on the exposure draft to see what elements are retained in the final framework. However, it is likely that the broad thrust of more in-depth, objective and analytical management commentary will be retained, so auditors, company accountants and CFOs can take action to pre-empt its introduction. So what should you be doing about Management Commentary? 

  • Communicate the details of the framework to the people who normally draft the narrative, explaining that guidance from the IASB tends to become standard practice so it must be taken into consideration.
     
  • This is a framework, not an IFRS, so you will need to persuade colleagues to come on board by talking about the benefits of compliance. Organisations that make the greatest effort to achieve compliance tend to be those in which investors place most trust, so forward-looking organisations will be able to improve external stakeholders’ perception of the company by communicating the fact they meet IFRS and the other elements of the IASB’s framework.
     
  • Colleagues will also need guidance to improve the impartiality and analytical content of the narrative. Read the exposure draft* and work with colleagues to see how far you can adhere to the main points. If possible, become involved and suggest where supplementary data and text may help to illustrate the narrative.
     
  • If your organisation cares about being transparent and informative, you will probably be following practice that is broadly comparable with the framework. Nevertheless, it is worth examining the exposure draft* to identify where you can make further improvements. 
     
  • If your colleagues are confused about what to include in the management narrative and don’t know what tone to adopt, that is probably adversely impacting the quality of your financial reports. Use the framework to provide them with the appropriate guidance. 

If you start to change entrenched attitudes now, then your organisation will be communicating with its shareholders in a more meaningful way by the time the framework comes into effect.

*The IASB’s exposure draft on Management Commentary is available for download. Click here to be redirected.

Dave Marlow is training consultant at CTG, a divison of ILX Group plc
 

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