ACCA SBR ^UK Syllabus E. Interpret Financial Statements For Different Stakeholders - Transparency & Non-Financial Standards - Notes ^{5 / 12}

This has become more important recently as stakeholders are interested in:

1. Management of business

2. Future prospects

3. Environmental concerns

4. Social responsibility of company

How is this reported…?

• Operating and Financial Review (OFR) 

  Looks at results and talks about future prospects

• Corporate Governance Report
   
  Looks at how the company is directed and controlled

• Environmental and social report 

  Looks at the environment and social concerns and the sustainability of these

• Management Commentary
   
  Looks at the trends behind the figures and what is likely to affect future performance and position

IFRS Practice Statement Management Commentary

• On 8 December 2010 the IASB issued the IFRS Practice Statement Management Commentary.

  The Practice Statement provides a broad, non-binding framework for the presentation of management commentary that relates to financial statements prepared in accordance with IFRS. 

  The Practice Statement is not an IFRS. Consequently, entities are not required to comply with the Practice Statement, unless specifically required by their jurisdiction.

• Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity.

  It also provides management with an opportunity to explain its objectives and its strategies for achieving those objectives. 

  Management commentary encompasses reporting that jurisdictions may describe as management’s discussion and analysis (MD&A), operating and financial review (OFR), or management’s report.

• 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. 

  It serves as a basis for understanding the management’s objectives and strategies for achieving those objectives.

• The Practice Statement permits entities to adapt the information provided to particular circumstances of their business, including the legal and economic circumstances of individual jurisdictions. 

  This flexible approach will generate more meaningful disclosure about the most important resources, risks and relationships that can affect an entity’s value, and how they are managed.

• The purpose of an OFR is to assist users, principally investors, in making a forward-looking assessment of the performance of the business by setting out management’s analysis and discussion of the principal factors underlying the entity’s performance and financial position.

Typically, an OFR would comprise some or all of the following:

1. Description of the business and its objectives;

2. Management’s strategy for achieving the objectives;

3. Review of operations;

4. Commentary on the strengths and resources of the business;

5. Commentary about such issues as human capital, research and development activities, development of new products and services;

6. Financial review with discussion of treasury management, cash inflows and outflows and current liquidity levels.

The publication of such a statement would have the following advantages:

1. It could be helpful in promoting the entity as progressive and as eager to communicate as fully as possible with investors;

2. It could be a genuinely helpful medium of communicating the entity’s plans and management’s outlook on the future;

However, there could be some drawbacks:

1. If an OFR is to be genuinely helpful to investors, it will require a considerable input of senior management time. 

   This could be costly, and it may be that the benefits of publishing an OFR would not outweigh the costs;

2. There is a risk in publishing this type of statement that investors will read it in preference to the financial statements, and that they may therefore fail to read important information.

Sir David Tweedie, ex-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.
 
The publication of this Practice Statement will benefit both users and preparers by enhancing the international consistency of this important source of information.”