IASB issues guidance on talking about the business

"Management commentary" has been on the agenda of the accounting standard-setters for quite a while, but now there's movement. The International Accounting Standards Board has issues a report discussing the findings of its consultations on what such non-financial reporting should look like. This "broad, non-binding framework" suggests what companies should do to provide a narrative about the business to complement the numbers reported under international financial reporting standards. "Management commentary fulfils an important role by providing users of financial statements with a historical and prospective commentary on the entity's financial position, financial performance and cash flows," the IASB said. "It serves as a basis for understanding the management's objectives and strategies for achieving those objectives."

Nature of the commentary: For readers of corporate annual reports, the concept of a management commentary is already well understood. The "operating and financial review" that many UK companies provide, the "business review" that listed companies around the European Union are obliged to produce, the "management discussion and analysis" that UK companies need to present are all examples of the genre. But the IASB's intention is to make sure that genre doesn't turn into fiction. Sir David Tweedie, Chairman of the IASB, said: "Management commentary is one of the most interesting parts of the annual report. It provides management with an opportunity to add context to the published financial information, and to explain their future strategy and objectives. It is also becoming increasingly important in the reporting of non-financial metrics such as sustainability and environmental reporting."

For whose benefit? This question has long been the rub in financial reporting. Audited financial statements, for example, give comfort to creditors, including suppliers, employees, prospective employees and many other people than the shareholders for whom they are intended and who ultimately pay for the work done to produce them. Management commentaries are used by all sorts of people to assess the company as a business partner or even as a neighbour. The IASB's framework suggests taking this approach: "Management should determine the information to include in management commentary considering the needs of the primary users of financial reports. Those users are existing and potential investors, lenders and other creditors." The rest of you can look away now.

Look forward! Management commentaries aren't merely recitations of past performance. In a section called "Forward-looking information" the IASB writes: "Management commentary should communicate management's perspective of the entity's direction. Such information does not predict the future, but instead sets out management's objectives for the entity and its strategies for achieving those objectives. The extent to which management commentary looks forward will be influenced by the regulatory and legal environment within which the entity operates." Companies may, but are not required to, present forecasts or projections.

Source document: The IASB framework for presentation is a 28-page pdf file.