This Comment Letter was sent by BDO Global Coordination B.V. on behalf of CEO BDO International, to Alan Teixeira, Senior Project Manager at International Accounting Standards Board on 28 April 2006:
Dear Mr. Teixeira,
Discussion Paper: Management Commentary
We appreciate the opportunity to comment on the proposals of the International Accounting Standards Board (“IASB”) outlined in the above discussion paper.
While we are generally supportive of the proposals, we have two key concerns. We believe that:
1. the final standard or guidance should not require that the management commentary form part of the audited financial statements;
2. the final standard or guidance should not form part of International Financial Reporting Standards for the purposes of the explicit and unreserved statement of compliance with IFRS required under IAS 1(14).
For listed entities, the requirement for and content of a management commentary or equivalent is often addressed by the market regulator or by legal requirement. We believe that any IASB statement should be non-mandatory, so that the local regulators’ requirements are not overridden or exemptions lost (for example, exemptions permitting disclosures to be omitted if seriously prejudicial or safe harbour provisions).
The IASB has recently issued a full project time-table, which includes the development of standards for SMEs. As noted above, there are existing regulatory and legal requirements relating to management commentaries for listed entities in a number of jurisdictions. Given these factors, we do not consider that the management commentary project should be a priority for the IASB.
Our comments on the specific questions that you raise are set out in the Appendix to this letter.
We would be pleased to discuss our comments and observations with you further if this would be helpful.
Yours sincerely,
BDO Global Coordination BV
Frans Samyn
Chief Executive Officer
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Appendix
Question 1: Do you agree that MC should be considered an integral part of financial reports? If not, why not?
We believe the MC should be part of an annual report (or financial report) but not part of the financial statements and notes thereto. The final standard or guidance should not require that the MC should be considered part of the audited financial statements but that the MC should accompany and supplement the financial statements. The requirement for and content of a management commentary or equivalent and the need for audit is often addressed by the market regulator or by local legal requirements.
Question 2: Should the development of requirements for MC be a priority for the Board? If not, why not? If yes, should the IASB develop a standard or non-mandatory guidance or both?
As noted above we do not believe that the MC is a priority project at present, given the other projects on the IASB time-table.
Any MC statement should be non-mandatory guidance, not a standard, and should fall outside of IFRS for the purpose of an entity making an explicit and unreserved statement of compliance with IFRS.
Question 3: Should entities be required to include MC in their financial reports in order to assert compliance with IFRSs? Please explain why or why not.
No. As noted above we believe any MC standard should fall outside of IFRS for this purpose. IFRS should address financial statements and notes thereto, not additional narrative statements that may be published with the financial statements. We note that in the UK, the recent Operating and Financial Review Reporting Standard (now a Reporting Statement) was specifically issued as a separate series, distinct from Financial Reporting Standards, and is not part of applicable accounting standards to be applied to the financial statements.
Question 4: Do you agree with the objective suggested by the project team or, if not, how should it be changed? Is the focus on the needs of investors appropriate?
The MC should focus on the needs of present investors and be addressed to them (i.e. the members/ shareholders).
While this may meet the needs of future investors we believe the focus should be on the current investors.
Question 5: Do you agree with the principles and qualitative characteristics that the project team concluded are essential to apply in the preparation of MC? If not, what additional principles or characteristics are required, or which ones suggested by the project team would you change?
In general, yes.
We note that some of the terms used in section 3 such as “Supportability” and “Balance” differ from the terms “Faithful representation” and “Neutrality” used in the discussion on reliability in the framework. It was uncertain if the meaning was meant to be changed or whether the Discussion Paper is anticipating a change of wording in the framework.
Question 6: Do you agree with the essential content elements that the project team concluded that MC should cover? If not, what additional areas would you recommend or which ones suggested by the project team would you change?
Yes.
Further consideration could be given to safe harbour provisions, referred to briefly in paragraph 57, as well as to exemptions from disclosing information that may be seriously prejudicial to the entity. Many regulators already have such “seriously prejudicial” exemptions in place. For example, the UK RS 1 (referred to elsewhere in the discussion paper) includes such an exemption at paragraph 81.
Question 7: Do you think it is appropriate to provide guidance or requirements to limit the amount of information disclosed within MC, or at least ensure that the most important information is highlighted? If not, why not? If yes, how would you suggest this is best achieved?
No. It is the management’s commentary and it should be up to management to decide the level of detail required to convey their view of the business.
Question 8: Does your jurisdiction already have requirements for some entities to provide MC? If yes, are your local requirements consistent with the model the project team has set out? If they are not consistent, what are the major areas of conflict or difference? If you believe that any of these differences should be included in an IASB model for MC please explain why.
As noted, various jurisdictions around the world have requirements for some form of commentary, be it an MD&A, Operating and Financial Review or Business Review. Given this fact we do not believe the IASB should issue a mandatory statement on the subject or require compliance with its statement as a necessary step for compliance with IFRS.
Question 9: Are the placement criteria suggested by the project team helpful and, if applied, are they likely to lead to more consistent and appropriate placement of information within financial reports? If not, what is a more appropriate model?
We believe that the MC should be part of an annual report (or financial report) but not part of the financial statements and notes thereto.
Therefore, we would not support a requirement that certain disclosures required by IFRS (as opposed to a separate series of statements such as the MC) should be required to be made outside of the financial statements. Similarly, we would not support the suggestion that information required by the separate series of statements should be made in the financial statements. It may be that, for ease of interpretation, IFRS disclosures are shown in the MC and cross referred from the financial statements and notes.
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Discussion Paper, Comments due 28 April 2006: