This Comment Letter was sent by BDO Global Coordination B.V. to the International Accounting Standards Board on 4 March 2010, on behalf of BDO International.
Dear Sir
IASB Exposure Draft ED 2009/06: Management Commentary
We are pleased to comment on the above exposure draft (the ED) issued by the International Accounting Standards Board (IASB), on behalf of BDO.
Although we understand why the Board has issued the ED, we do not agree with the issue of guidance on management commentary without further research (see below). We believe that (at least at present) it is more appropriate for requirements for an entity’s management commentary to be set out in its local requirements, whether regulatory or otherwise, as these will deal with aspects such as forward looking statements and forecasts which can have particular implications, including litigation, in certain countries.
Although the IASB’s proposed guidance would be non-mandatory, it is quite possible that it would become a de facto minimum requirement, with questions then being raised as to why an entity has not included some or all of the IASB’s suggested content. We suggest that before guidance for management commentary is issued, a wider international project is carried out which examines the many issues (such as audit, legislative, cultural and legal) that may act as a barrier to its consistent application.
Furthermore given the number of important projects in the Board’s current work plan to June 2011 as part of the Memorandum of Understanding, and the very significant time pressure that the Board is likely to experience as these projects progress over the next 16 months, we believe that the development of non-authoritative management commentary is not currently a wholly effective use of IASB resources. If the Board does decide to proceed with this project, we strongly encourage the deferral of any further work until after the MoU projects have been completed.
We also note the references in the ED to definitions and terms set out in the exposure draft of the proposed revised Framework. While we appreciate that any guidance about management commentary would, when issued, need to take account of the Framework in existence at that point, the references in the management commentary ED would appear to pre-empt the outcome of revisions to the Framework, which we do not consider to be appropriate. We note that the basis of conclusions to the ED Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information noted that:
‘…the extent to which, and how, financial reports should include management commentary will be addressed in the phase dealing with the presentation and display of financial reporting information.’
Although we have suggested that the ED is not taken forward at this stage, we appreciate that the Board may wish to proceed with its proposals. Consequently, we have included our responses to the specific questions raised in the ED in the attached Appendix.
We hope that our comments and suggestions are helpful. If you would like to discuss any of them, please contact Andrew Buchanan at +44 (0)20 7893 3300.
Yours faithfully
Brussels Worldwide Services BVBA
Appendix
Question 1
Do you agree with the Board’s decision to develop a guidance document for the preparation and presentation of management commentary instead of an IFRS? If not, why?
While we agree that any document that the IASB issues in respect of management commentary should consist of non-mandatory guidance and not requirements set out in an IFRS, we do not agree with the Board’s decision to develop guidance on management commentary.
Although we agree management commentary is part of financial reporting and therefore, within the scope of the conceptual framework for financial reporting, in many jurisdictions the requirement to provide management commentary, as well as its form and content, is set out in Securities Legislation the enforcement of which is the responsibility of a Securities Regulator or similar Government Agency. The Board itself has noted in paragraph BC11 that in some (we believe that this should refer to ‘many’) jurisdictions, local requirements and regulations mean that listed entities are already compelled to prepare management commentary-type reports. We consider that, ultimately, it should be those local requirements and regulations that should determine the form and content of management commentary. While it could, of course, be argued that the IASB’s proposed document would be non authoritative, it would risk setting out a ‘minimum content’ that many might feel compelled to follow.
We note the references in the Basis for Conclusions to documents issued by the UK Accounting Standards Board, and in the US which are used to support the Board’s decision to issue the draft guidance. However, the guidance issued in the UK and the US is specific to those jurisdictions, containing references and background assumptions that are specific to those territories. In the context of management commentary, in particular forward looking information and forecasts, we consider that it is necessary for this type of guidance to be developed with regard to those references and background assumptions.
If the Board does consider it appropriate to issue guidance for management commentary, we suggest that a wider international project is carried out which examines the many issues (such as audit, legislative, cultural and legal) that may act as a barrier to its consistent application.
Question 2
Do you agree that the content elements described in paragraphs 24-39 are necessary for the preparation of decision-useful management commentary? If not, how should those content elements be changed to provide decision-useful information to users of financial reports?
We agree that the elements set out in those paragraphs are desirable.
However, we note that paragraph 34 refers to changes in financial position, liquidity and performance in comparison with previous years, with paragraph 38 referring to performance measures and indicators. We consider that in addition to these aspects, there should be a discussion of changes in objectives, strategies, resources, risks and relationships in comparison with the previous period.
While there is a focus on the value of management’s perspective in the disclosures, there is little discussion about the need for the information disclosed in management commentary to be free from bias. We consider this to be an essential part of guidance for management commentary, and note that this links to certain of the Alternative Views (see paragraph AV3).
The question of bias goes further than simply not over emphasising the positive or negative effect of certain information. It requires that all significant issues are reported, both good and bad, that have affected (or may in future affect) the reporting entity.
Question 3
Do you agree with the Board’s decision not to include detailed application guidance and illustrative examples in the final management commentary guidance document? If not, what specific guidance would you include and why?
We agree. The inclusion of detailed guidance would be likely to encourage a ‘tick box’ approach to disclosures, with standard and uninformative narrative statements, which should be avoided.
ED-2009-06 Management Commentary.pdf
BDO Comment Letter 2010 02.pdf