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Management commentary in financial accounting: assessing

its value, role and objectives
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Management commentary in financial accounting:
assessing its value, role and objectives
D. Coetsee & M.E. Pietersen
ABSTRACT
This article assesses the role that management commentary, as set out
in the Discussion Paper on Management Commentary of the Interna-
tional Accounting Standards Board (IASB), plays in achieving the
proposed new objectives of financial reporting of decision-usefulness
and focusing on assessing the future cash flows of an entity proposed
by the IASB's Framework Discussion Paper of 2006. The following two
conceptual issues are specifically addressed in this article: (1) the need
for the IASB to issue guidance on management commentary and (2) the
role that management commentary plays in achieving the objective of
focusing on future cash flows. This article demonstrates that the debate
surrounding the financial reporting application of management com-
mentary is far from over. However, narrative information on the main
trends and factors of the development, performance and position of an
entity's business proposed in the Discussion Paper on Management
Commentary could enhance the ability of the user of financial
statements to assess the future cash flow of entities.
Key words: decision-usefulness, financial reporting, future cash flows, management

commentary, objectives of financial reporting
The issuing of the Discussion Paper on Management Commentary (hereafter MC

Discussion Paper) by the International Accounting Standards Board (IASB) in 2005
(IASB 2005) again highlighted the debate on how narratives should support the
financial information provided by preparers in financial statements. This also raised
the question of how the views of management should be incorporated into financial
reports.
In other parts of International Financial Reporting Standards (IFRSs), such as the
determination of fair value, the consensus seems to be that market-related
information is far more appropriate than the entity-specific information provided
by management. International Accounting Standard 39 (IAS 39) Financial
Instruments: Recognition and Measurement, Application Guidance, paragraph AG76
Prof. D. Coetsee and Prof. M.E. Pietersen are in the Department of Accountancy, University of Johannesburg. E mail:
dcoetsee@uj.ac.za; maritap@uj.ac.za.
18 Southern Africa Business Review Volume 12 Number 1 2008

Management commentary in financial accounting: assessing its value, role and objectives
(IASB 2007c) in particular states that valuation techniques should incorporate all
factors that market participants would consider in setting a price. However, IAS 1
Presentation of Financial Statements (issued in September 2007) is bringing certain
commentary by management within the ambit of financial statements. IAS 1
specifically states that significant judgements made by management in applying
accounting policies (IASB 2007c: para.122), and key assumptions concerning the
future and other key sources of estimation uncertainty that could cause material
adjustments to the carrying amount of assets and liabilities (IASB 2007c: para. 125)
should be disclosed.
The most significant development in this regard is the disclosure of risk and the
management thereof in terms of IFRS 7 Financial Instruments: Disclosure (IASB
2007c), a requirement that includes qualitative and quantitative information about
exposure to certain risks. The foregoing discussion illustrates that certain narrative
disclosures of the commentary by management are already included in the scope of
financial statements. This raised the question of whether management commentary
should be included in the ambit of financial statements or in the ambit of other
reporting outside the scope of the audited section of the financial statements. More
critically, the question could be raised whether the IASB has crossed the borders of
reporting in financial statements by requiring that risk management procedures and
policies should be disclosed in terms of IFRS 7.
Certainly, these disclosure requirements could be regarded as part of the objective
of the new discussion paper Preliminary Views on an Improved Conceptual Framework
for Financial Reporting: the Objective of Financial Reporting and Qualitative
Characteristics of Decision-useful Financial Reporting Information (hereafter Framework
Discussion Paper), issued by the IASB in July 2006 (IASB 2006), to provide
information that is useful in making investment, credit and similar resource
allocation decisions. Further, this disclosure could also be regarded as being in line
with the focus of the Framework Discussion Paper to provide information that enables
users to assess the amount, timing and uncertainty of an entity's future cash flows. In
this regard, it is important to note that the Framework Discussion Paper focuses on the
broader concept of financial reporting, and not on financial statements only, which is
the focus of the existing conceptual framework, Framework for the Preparation and
Presentation of Financial Statements (IASB 2007c). This raises the question of whether
management commentary could be regarded as a contributing factor in determining
the future cash flows of an entity.
RESEARCH OBJECTIVE AND DESIGN

The research objective of this article is to assess the role that management
commentary (MC) plays in achieving the proposed new objective of financial
reporting, namely, focusing on future cash flows. In achieving this objective, this
Southern African Business Review Volume 12 Number 1 2008 19
article addresses two conceptual issues: (1) the need of the IASB to issue guidance on
management commentary and (2) the role that management commentary plays in
achieving the objective of focusing on future cash flows. In discussing the proposed
object of focusing on future cash flows, the placement of stewardship is also discussed.
Currently, guidance on narratives that support the financial information provided
in financial statements is addressed differently cross the globe. Such guidance is
addressed mainly by security exchange regulations or by legislation. This is referred to
as different regulatory frameworks (Sean & Tarca 2007). In 2003, the International
Organisation of Securities Commissions (IOSCO) issued the report General
Principles and Disclosure of Management's Discussions and Analysis and Results of
Operations (IASB 2005: para. B1). Canada and the United States of America (USA)
have issued guidance through their securities regulation bodies: Canada through the
provincial securities regulating bodies and the USA through its Securities and
Exchange Commission (Sean & Tarca 2007). The United Kingdom's legislation
requires quoted companies to prepare an operation and financial review (Sean &
Tarca 2007). The European Union has issued various legal instrument directives
called Accounting Directives (IASB 2005: para. B12).
In addition to following principles similar to those of the European Union's
directives, Germany issued an accounting standard ± (GAS 15) Risk Reporting ± that
requires information to help users to understand the risk affecting the future
development of companies (IASB 2005: para. B17).
It is within the context of this framework of different narrative reporting guidance
that this article strives to make a contribution. The question whether narrative
reporting guidance should be provided by standard-setters is not resolved. Specifically,
the IASB has stated in the Framework Discussion Paper that the issue of management
commentary will only be addressed at a later stage of its framework project (IASB
2006: para. BC1.43).
This article therefore engaged in exploratory research that involved comparing
the two identified discussion papers, the MC Discussion Paper and Framework
Discussion Paper, in order to achieve the objective of assessing the role of management
commentary in financial reporting. Limited academic research has been done on
both these discussion papers. Therefore, the secondary research data used in this
article to compare the identified discussion papers are the 116 comment letters
received by the IASB in 2006 on the MC Discussion Paper and the IASB's 2007
summary of the 179 comment letters received on the Framework Discussion Paper
(IASB 2007a). These comment letters represent the views of various role players
across the globe.
The need to issue guidance on MC
In evaluating the first issue ± the need for the IASB to issue guidance on
management commentary ± this article focuses on responses received by the IASB in
the MC comment letters to the following questions (IASB 2005):
1. Do you agree that MC should be considered an integral part of financial reports?

If not, why not?
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?
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.
Integral part of financial reporting

Overwhelming support has been given in the comment letters to the position that
MC should be regarded as an integral part of financial reports. Overall, this support
was based on the assumption that financial reports are being regarded as wider than
the financial statements themselves and that management commentary should be
seen as a supplement to financial statements. Most of the respondents (who were few
in number) that answered in the negative to the first question have interpreted
financial reports as equivalent to financial statements (Group of 100 2006; Korea
Accounting Association 2006). The impression obtained throughout this research is
that certain questions have been answered differently, since the concepts are
interpreted differently, and that the effect of such different interpretations should
always be considered in any evaluation. In this regard, the IASB could play a major
role in educating people. Furthermore, the Caiteur Group (2006), although agreeing
that MC is an integral part of financial reports, wished to draw the IASB's attention to
a potential pitfall of describing MC as `financial reporting'. In their view, there is a
real risk that such a description could be highly restrictive and potentially limit the
future scope of MC to address increasingly complex business issues and reporting.
Microsoft (2006) believes that a broken financial reporting model exists in that the
current financial model is not updated for the move to the information age, and that
MC could help to address this issue.
Uncertainty about what financial reporting entails is also expressed in comments
on the Framework Discussion Paper. Many of those that supported the decision to
address the objective of financial reporting more broadly agreed that financial
statements should be central to financial reporting, while most of the respondents that
objected to expanding the scope to financial reporting were concerned that the
boundaries of financial reporting had not yet been determined (IASB 2007a: para. 17
to 19). This summary of the comment letters (IASB 2007a: para. 77) also states that
issues surrounding the objective of financial reporting are more subjective and more
difficult to resolve than other issues raised by the Framework Discussion Paper.
However, in their re-deliberation, the IASB confirmed the decision that the objective
should focus on financial reporting as a whole (IASB 2007b: 3), which should include
management commentary.
A priority of the IASB

In contrast to question 1, the IASB has not obtained overwhelming support to take
on MC as a priority. Only 50±60% of the respondents have positively confirmed that
the development of the requirements of MC should be the priority of the IASB.
Approximately a further 15% indicated that the IASB could consider MC as a long-
term priority (UNICE 2006; CPA Australia 2006; HoTARAC 2006), as a lower
priority (Mazars 2006; KPMG 2006; Telstar 2006) or as a research agenda topic
(Syngenta 2006). Others also state that if the IASB issues guidance on MC, such
guidance should focus on areas that have a direct link with financial statements
(CESR 2006).
The two main reasons, discussed below, for not obtaining overwhelming support
for the development of the MC project are, firstly, the view that the IASB has more
burning issues to consider and, secondly, the fact that other bodies could deal with the
development of MC.
As regards the first reason for not classifying MC as a priority of the IASB,
Deloitte (2006) believes that resources should be directed at improving aspects of
financial reporting that are more contentious and current and that the MC project
should not be undertaken until sufficient staff resources and the IASB's time can be
made available (see also ICAEW 2006; Irish Bankers Federation 2006; Nestle SA
2006). CNC's (2006) view is that a stable platform of IFRSs, based on financial
statements only, is considered to be a sufficiently ambitious project. British American
Tobacco (2006) believes that the IASB's focus of providing ``high quality,
understandable and enforceable global standards'' will be diluted if they also
consider MC.
Interestingly, Ernst & Young (2006) believe that the MC Discussion Paper does not
clearly address the following basic question: ``Do you agree that IAS 1 should be
amended so as to require general purpose financial statements to include a related
narrative report in order to present fairly the financial position of the entity?'' Their
view is that this question of the placement of MC should be addressed before the
IASB considers a current project on MC.
Relating to the second reason for not regarding MC as a priority of the IASB, the
view of the Irish Bankers Federation (2006) is that robust narrative business reporting
already exists in ``varying guises'' (see the discussion in the section on the research
objective and design for more detail). CNC (2006) also confirms this view and
declares that most of its constituents consider that MC is essentially a matter for the
financial market regulators, whose current requirements are considered to be
sufficient (see also ACTEO, AFEP & MEDEF 2006). IOSCO (2006) states that it has
already developed international standards on MC and that national disclosure
requirements exist in several member countries as a result of securities regulations or
company law, which have been developed over years. However, IOSCO (2006)
recognises that the IASB could provide valuable insights on how issuers could
improve their MC disclosure and requests that, if the IASB takes on the project, a
dialogue between the IASB and securities regulators would be useful in creating
consistency. BDI (2006) urges that MC should be a joint project of the IASB, the
Financial Accounting Standards Board (FASB), regulators and national legislators.
PriceWaterhouseCoopers (PWC 2006) goes further and suggests that both IOSCO
and the US Securities and Exchange Commission should be involved and also asks
the question whether the IASB is necessarily the most appropriate body to lead the
development of MC. Syngenta (2006) believes that an explicit mandate is needed
from IOSCO for the IASB to intervene in the MC arena.
Several respondents have indicated that more research is needed on MC. The
Korea Accounting Association (2006) feels that the MC Discussion Paper is based on
the requirements of only a few jurisdictions, and specifically indicates that the current
requirements of Asian countries are not considered and that there are differences of
culture among different jurisdictions. The Quoted Companies Alliance (QCA 2006)
also maintains that there is a very substantial divergence of culture even between the
major nations. In the authors' view, this confirms the need for broad consultation.
Christian Nielsen (2006) specifically states that the MC Discussion Paper lacks some of
the important themes in the present narrative reporting debate and suggests that
state-of-the-art research on topics such as competencies and intellectual capital,
corporate governance, and environmental and social perspectives should also be
considered. The University of Waikato (2006) also indicates that little research has
been done on how MC will benefit organisations and their investors, including cost
and benefits. Others argue that, for all these reasons, it would be difficult to formulate
a common set of requirements for MC (British American Tobacco 2006).
Accepting issues surrounding their role in management commentary, the IASB
has indicated (IASB 2006: para. BC1.43) that the extent to which, and how, financial
reports should include management commentary will be addressed in one of the last
phases of the joint framework project.
The appropriate format

Response to the second part of question 2 also confirms that more debate is needed
on the form, if any, that MC should take. Approximately 55% of the respondents who
answered this part of the question indicated that they would prefer the development
of non-mandatory guidance to the development of a standard. Nevertheless,
significant responses were received for the standard option. Other respondents argue
that a separate framework should be developed for MC (SAICA 2006; CIPFA 2006;
ACT 2006) or that MC should form a key component of the new Conceptual
Framework (PWC 2006). The Sustainable Working Group (SWG 2006) even goes as
far as to believe that the IASB should consider creating a new Board which, as a
priority, could develop a comprehensive framework for MC. Others argue that MC
should be part of the code of best practices for listed companies (University of
Waikato 2006), or that the IASB could describe best practices for MC (Basel
Committee on Banking Supervision 2006). However, others fear that requiring
certain disclosures, or even a best practice statement, could result in a mechanical
box-ticking approach (IMA 2006).
The assurance function

Fewer than 25% of the respondents indicated, in respect of question 3, that MC
disclosure should be a requirement in order to assert compliance with IFRS. The
main reason for rejecting this compliance is considered to be the assurance or audit
function. HSBC Holdings (2006) maintains that a different measure of assurance is
needed for MC. Legal and General (2006) is concerned about the forward-looking
role of information without protection of directors through ``safe-harbour provisions''
(see also CIMA 2006). The Basel Committee on Banking Supervision (2006) regards
MC as a useful management tool that provides information to the market as a
complement to audited financial statements and considers MC to be an essential part
of management's financial reporting.
This debate illustrates that management commentary is regarded as a part of
financial reporting but that different views exist about the role the IASB should play
in this regard, the way MC should be integrated into financial reporting, and what
the assurance function should be.
THE ROLE MC PLAYS IN ACHIEVING THE OBJECTIVE OF

FOCUSING ON FUTURE CASH FLOWS
Since MC is regarded as an integral part of financial reporting, the role that it plays in
achieving the objective of the Framework Discussion Paper of focusing on future cash
flows is assessed in this part of the article by comparing its objective with that of the
MC Discussion Paper. Before making this comparison, however, changes in the
proposed Framework Discussion Paper to the objectives of the current IASB's
Framework ± Framework for the Preparation and Presentation of Financial Statements ±
are assessed.
Assessing the current and proposed objectives of the IASB's Frame-

work: decision-usefulness and focus on cash flows
The main focus of the objectives of both the IASB's Framework and the Framework
Discussion Paper is decision-usefulness. The Framework Discussion Paper is more
specific: in the IASB's Framework (IASB 2007c: para. 12), the term èconomic
decisions' has been replaced by ìnvestment, credit and similar resource allocation
decisions' (IASB 2006: para. OB2). On the question of whether decision-usefulness

should be the main objective of financial reporting, only 14% of the respondents to
the Framework Discussion Paper that commented specifically on this issue agreed that
decision-usefulness should be the single, overriding objective of financial reporting
(IASB 2007a: para. 40). The bulk of the 86% that disagreed on this issue proposed
that stewardship should also be considered (IASB 2007a: para. 43). Respondents that
did not comment on the objective of financial reporting noted that they were unable
to form an opinion on the proposed objective of financial reporting until the IASB
determines what constitutes financial reporting (IASB 2007a: para. 21).
The focus of the decision-usefulness objective of the Framework Discussion Paper,
however, is shifted to assessing an entity's future cash flow (IASB 2006: para. OB3).
Previously, the IASB's Framework only stated (IASB 2005: para. 15) that economic
decisions require an evaluation of the ability of an entity to generate cash and of the
timing and certainty of such cash. It is noted in the Comment Letter Summary (IASB
2007a: para. 20) on the Framework Discussion Paper that some respondents questioned
whether an objective that focuses primarily on assessing an entity's ability to generate
net cash inflows can provide an adequate basis for other types of reporting, especially
reporting on non-financial information. It is this shift in the focus of the objective of
financial reporting that will be debated further in assessing the objective of the MC
Discussion Paper.
Although the IASB's Framework focuses only on financial statements and
specifically states that reports by directors, statements by the chairman, discussion and
analysis by management and similar items are excluded from financial statements
(IASB 2007c: para. 7), the preface to International Financial Reporting Standards
(IASB 2007c: para. 7) states that `òther financial reporting comprises information
provided outside financial statements that assists in the interpretation of a complete
set of financial statements to improve users' ability to make efficient economic
decisions''. The IASB has thus always confirmed that MC is a tool to assist the
objective of financial statements.
The Framework Discussion Paper (IASB 2006: para. OB16) confirms that financial
statements are a central feature of financial reporting, but does not refer directly to the
balance sheet, income statement and cash flow statement, which means that the name
and content of these statements may change. The Framework Discussion Paper
proposes that information about the financial position (IASB 2006: para. OB18 and
OB20) and the financial performance (IASB 2006: para. OB18 and OB22) of an
entity are essential and help in assessing future cash flows. Financial performance,
defined as changes in economic resources and claims, could be measured in two
ways: with accrual accounting (IASB 2006: para. OB23) and by changes in cash flows
(IASB 2006: para. OB24). The Framework Discussion Paper (IASB 2006: para. OB25)
proposes that financial reporting should also provide information about changes in
economic resources and claims that do not affect cash, for instance exchange
transactions, which could mean that additional information needs to be provided.
Assessing the current and proposed objectives of the IASB's Frame-

work: stewardship
The Framework Discussion Paper explains more directly the role of management's
explanations and other information. It specifically states that management's
explanations and other information that is needed to understand the financial
information should be included (IASB 2006: para. OB26). Management's
explanations are thus given a supportive role. However, the Framework Discussion
Paper does not state how the information should be included. As indicated previously,
this will be the focus of future phases of the framework project (IASB 2006: par
BC1.43).
The Framework Discussion Paper (IASB 2006: OB28) also states that the objective
of financial reporting should include information assessing management stewardship,
as well as how well management has discharged its stewardship responsibilities. The
IASB's Framework (IASB 2007c: para. 14) only states as part of the objective of
financial statements that such statements should show results of the stewardship of
management, or the accountability of management for the resources entrusted to it, to
assist in making resource allocation decisions. However, as stated before, most of the
respondents to the question addressing the objective of financial reporting in the
Framework Discussion Paper proposed that the objective of financial reporting should
include both stewardship/accountability and decision-usefulness (IASB 2007a: para.
43). The stewardship controversy is also confirmed by academic and non-academic
writings (Staunton 2003; Singleton-Green 2006).
Respondents who disagreed that the focus of the proposed objective of financial
reporting of assessing future cash flows should indeed include a stewardship/
accountability objective provided different reasons, such as that the proposed objective
was defined more narrowly than in the existing frameworks, that the focus on
assessing cash flows would not provide sufficient information to assess entities'
management, and that the focus on future cash flows would not adequately cover the
needs of a wide range of users (IASB 2007a: para. 44).
Respondents also disagreed with the way in which stewardship is described in the
Framework Discussion Paper (IASB 2007a: para. 46). Some stated that financial
reporting should provide a foundation for a constructive dialogue between
management and shareholders. Others felt that stewardship entails assessing
management's performance and integrity and includes an emphasis on historical
performance and transactions, which balance the forward-looking intent of the focus
on future cash flows.
This remains in our view a question of balance: if too great a focus is placed on
assessing the future cash flow prospects, it might result in the exclusion of
information that is useful for stewardship-type decisions. The role of management
commentary can only be adequately addressed once the objective of financial
reporting is addressed.
It is worth mentioning that the IASB and the FASB did not discuss the
respondents' comments on stewardship in their re-deliberations, but plan to address
the topic separately at future meetings (IASB 2007b; FASB 2007).
To bridge the gap between that which financial statements are able to achieve and
the objectives of financial reporting as a whole, it is necessary for the financial reports
to include additional information, such as management commentary. Certain aspects
of information included in the objective of financial reporting, such as management's
explanation and their stewardship function, might be better served under manage-
ment commentary.
Comparison of the proposed objectives of the Framework Discussion

Paper and MC Discussion Paper
The definition of MC (IASB 2005) in the MC Discussion Paper confirms certain
aspects discussed in the foregoing comparison of the Framework Discussion Paper with
the IASB's Framework. Firstly, the MC definition confirms that MC accompanies
financial statements as part of an entity's financial reporting. Secondly, the MC
definition confirms the presentation and disclosure of an entity's financial
performance and position, but requires an explanation of the main trends and
factors underlying them. Additional information should, however, also be provided
about the main trends and factors underlying the development of the entity's
business. This development is a new focus introduced by the MC Discussion Paper.
Lastly, the MC definition also confirms a future-orientated perspective.
The MC definition illustrates that the focus of the Framework Discussion Paper
and that of the MC Discussion Paper differ slightly. While the focus of the Framework
Discussion Paper is on assessing the future cash flow, the MC definition focuses on an
explanation of the main trends and factors that are likely to affect the future financial
development, position and performance of an entity. The authors believe that a
discussion of the main trends and factors affecting the development, position and
performance of an entity's business is essential in assessing the future cash flow of an
entity, and will contribute to this proposed focus of the Framework Discussion Paper.
This wider application could be regarded as part of management's explanations
and other information needed to enable users to understand the information provided
(IASB 2006: para. OB26). However, the Framework Discussion Paper specifically states
that this disclosure will only be addressed in future phases of the framework project
and indicates that the following three potential aspects of management's perspective
should be dealt with later (IASB 2006: para. BC1.43):
. Whether management's perspective or intent should affect recognition or
measurement
. The extent to which, and how, financial reports should include management
commentary
. Whether some information in financial reports should be presented in a way that
is consistent with how management views the business.
This indicates that issues surrounding the objective of management commentary

are more complicated and can only be resolved when other broader issues are
resolved. It is against this background that this paper debates the objectives of
management commentary. This also confirms the view of some respondents to the
MC Discussion Paper, already discussed, that the IASB has certain burning issues
which should be resolved first.
The MC Discussion Paper (IASB 2005) provides three objectives for which major
support has been given by auditing firms (Deloitte 2006; KPMG 2006; PWC 2006),
local standard setting institutions (ICAA 2006; ICAI 2006; ICAEW 2006; SAICA
2006) and other institutions (Basel Committee on Banking Supervision 2006; CIMA
2006; IOSCO 2006). However, the view of the New Zealand Treasury (2006) is that
the objective and scope of MC needs to be placed in the context and scope of financial
reports.
The first objective of the MC Discussion Paper (IASB 2005) is to interpret and
assess the related financial statements in the context of the environment in which the
entity operates. This objective is in line with the principle of the Framework
Discussion Paper (IASB 2006: para. OB26) that management should provide
explanations and other information to enable users to understand the information
provided and is also in line with the principle of the MC Discussion Paper (IASB 2005)
that MC should supplement and complement financial information.
The second and third objectives of the MC Discussion Paper could be regarded as
part of the integrated objective of the Framework to assess management's stewardship
and how well it has discharged its stewardship responsibilities (IASB 2006: para.
OB28). The second objective (IASB 2005) is to assess what management views as the
most important issues facing the entity and how it intends to manage those issues,
and the third objective (IASB 2005) is to assess the strategies adopted by the entity
and the likelihood that they will be successful. Identifying the main issues facing an
entity and the strategies to resolve them together will, in the authors' view, assess
management's stewardship.
Some respondents have requested that the second objective, which identifies the
major issues of an entity, needs clarification (FEE 2006) or should be broadened
(IDW 2006) to include strengths, weaknesses, opportunities and risks, as well as risk
management strategies (SAICA 2006; VO È B 2006).
Requests have also been received to explain the third objective in more detail
(GEFIU 2006). The word `strategies' could be replaced with the word `development',
the focus of the definition (IDW 2006). Caution has been expressed about the use of
the word `likelihood', as it creates a new expectation gap for success (IDW 2006; UBS
AG 2006).
These three objectives of the MC Discussion Paper provide no indication of how the
main focus of the Framework Discussion Paper, the assessment of future cash flow,
should be achieved. In the authors' view, the three objectives only support the main
focus of the Framework Discussion Paper. Interestingly, Sumita (2006), although agreeing
with the importance of the three objectives, believes that the larger and main purpose of
MC is to enhance the predictability of the entity's performance in the future.
One of the underlying principles the MC Discussion Paper (IASB 2005) is that MC
should have an orientation towards the future, which is thus regarded as the key focus
of the MC Discussion Paper. However, different respondents have indicated that more
explanation of this future-orientated principle is needed, since it is the principle that
will cause the most difficulty in practice (ACCA 2006; Mazars 2006). The fact that
safe harbour clauses do not exist for management in all jurisdictions is considered to
be a major concern (Syngenta 2006; HSBC Holdings 2006). Auditability is also
considered to be a concern (Keidanren 2006).
A further principle (IASB 2005) identified in the MC Discussion Paper is that MC
should be provided through the eyes of management. This again highlights the
unresolved issue of whether some information in financial reports should be
presented in a way that is consistent with how management views the business (IASB
2006a: para. BC1.43). Although most respondents to the MC Discussion Paper agree
with this principle, OIC (2006) suggests that the `management view' principle should
be explained more clearly to prevent the presentation of an overly positive picture (see
also University of Waikato 2006). Several respondents are concerned with what is
meant by `management', and whether it should be considered as the board of
directors, the governing body or the executive team (Hong Kong Institute of Certified
Public Accountants 2006; QCA 2006; RSM International 2006).
The remaining principle (IASB 2005) of the MC Discussion Paper that MC
information should supplement and complement the financial statements is
confirmed throughout this research and needs no further explanation.
The three objectives and principles of the MC Discussion Paper emphasise the
close interrelationship between the financial statements and the MC information, and
underline the importance of providing an analysis through the eyes of management.
The definition and the objective of MC both build on a forward-looking orientation,
in contrast to the IASB's Framework, which tends to lean towards the presentation
and disclosure of past events and the portrayal of accrual-accounting financial
information. However, the Framework Discussion Paper proposes a new focus on
assessing future cash flows. Supplying narrative information explaining the main
trends and factors of an entity's development, position and performance should be
helpful to users in making economic resource allocation decisions. Forward-looking
information should also increase the decision-usefulness of financial statements when
management comments on the trends and factors that affect the future cash flows of
an entity.
While overall support has been received for the objectives of the MC Discussion
Paper, more debate is needed on whether it should focus exclusively on the needs of
investors. CPA Australia (2006) states that MC should not provide another layer of
regulation or confusion for users: instead, the IASB should undertake a deeper
analysis of the needs of users and how they could be met. Many respondents also
stated that the focus on investors only is too narrow (OIC 2006; DASB 2006) or too
wide (Hermes 2006; Group of 100 2006). In contrast, the Framework Discussion Paper
proposes that, although accepting the focus on a wide range of users, the primary
users of financial reporting should be investors and creditors (IASB 2006: para.
BC1.15). Collins, Fraser & Stevenson (2006) believe that clearer justification is needed
if the focus on providing information to investors is retained for MC.
CONCLUSION
This article addressed two conceptual issues: (1) the need of the IASB to issue
guidance on management commentary and (2) the role that management
commentary plays in achieving the objective of focusing on future cash flows.
With respect to the first conceptual issue, overall support is provided in the MC
comment letters that management commentary should be regarded as an integral part
of financial reporting. However, the need for the IASB to provide guidance is more
problematic. A little over 50% of the respondents to the MC Discussion Paper indicated
that MC should be a priority of the IASB. The reasons for negative responses with
respect to the urgent role that the IASB should play in providing guidance on MC are
that the IASB has other burning and important issues to resolve, that guidelines exist,
and that more research is needed. The IASB has indirectly confirmed the first and last
of these concerns (namely, that they have more urgent and important issues to resolve
and that more response is needed) and proposed that the issue will only be addressed
in the disclosure phase of the joint framework project. Consultation is definitely
needed with regulating bodies and other bodies that have issued guidelines on MC.
By enlarging the scope in the new framework project to financial reporting and
confirming this in their re-deliberations, the IASB has indicated that it is considering
resolving the issues surrounding MC.
This article also demonstrates that MC could play a significant role in achieving
the new focus of the framework project of assessing the future cash flow of an entity.
Narrative information about the main trends and factors of the development,
performance and position of an entity's business will definitely enhance the ability to
assess the future cash flow of an entity. In particular, the Framework Discussion Paper
does not address issues surrounding developments in an entity, which could be
regarded as a shortfall of the document.
The objective and principles of the MC Discussion Paper are also in line with the
proposed requirement of the Framework Discussion Paper that management's
explanations and information should be provided to enable users to understand
the information provided, and are also in line with the proposal that the objective of
financial reporting should encompass the provision of information that is useful in
assessing management stewardship. However, major support is provided by
respondents to the Framework Discussion Paper with respect to the view that
stewardship/accountability should be classified as a separate objective of financial
reporting.
Overall support is also obtained throughout this research for the view that MC
should supplement and complement financial statements. However, concerns are
expressed about the placement of information in the financial statements themselves
or in MC, and about the details of what future-orientated information should be
provided and which management structures should be included in the concept of
`through the eyes of management'. The IASB should resolve these issues if it intends
continuing with the focus of financial reporting to assess the future cash flows of an
entity. This is in contrast to the current IASB's Framework, which tends to lean
towards the presentation and disclosure of past events and the portrayal of accrual-
accounting financial information. Forward-looking information should also increase
the decision-usefulness of financial statements when management is commenting on
those trends and factors that affect the future cash flows of an entity.
In summary, this article demonstrates that the debate surrounding the financial
reporting application of management commentary is far from over. The IASB has
indicated that it will only discuss the issue of management commentary in later
phases of the Conceptual Framework Project. Hopefully, this article will stimulate
further debate.
REFERENCES
ACCA (Association of Certified Accountants). 2006. Comment letter CL70 received on the
Discussion Paper on Management Commentary. [Online] Available at: http://www.ias-
b.org/uploaded_files/docume/16_230_MC-CL70.doc. Accessed: 23 August 2006.
ACT (Association of Corporate Treasurers). 2006. Comment letter CL69 received on the
Discussion Paper on Management Commentary. [Online] Available at: www.iasb.org/
uploaded_files/documents/16_230_MC-CL69.doc. Accessed: 23 August 2006.
ACTEO, AFEC & MEDEF (French associations). 2006. Comment letter CL41 received on
the Discussion Paper on Management Commentary. [Online] Available at: www.iasb.org/
uploaded_files/documents/16_230_MC-CL41.pdf. Accessed: 23 August 2006.
Basel Committee on Banking Supervision. 2006. Comment letter CL105 received on the
BDI (Federation of German Industries). 2006. Comment letter CL90 received on the
British American Tobacco. 2006. Comment letter CL100 received on the Discussion Paper on
Management Commentary. [Online] Available at: www.iasb.org/uploaded_files/docu-
ments/16_230_MC-CL100.pdf. Accessed: 23 August 2006.
Caiteur Group. 2006. Comment letter CL82 received on the Discussion Paper on Management
Commentary. [Online] Available at: www.iasb.org/uploaded_files/documents/
16_230_MC-CL82.pdf. Accessed: 23 August 2006.
CESR (Committee of European Securities Regulators). 2006. Comment letter CL109
received on the Discussion Paper on Management Commentary. [Online] Available at:
www.iasb.org/uploaded_files/documents/16_230_MC-CL109.pdf. Accessed: 23 August
2006.
CIMA (Chartered Institute of Management Accountants). 2006. Comment letter CL40
www.iasb.org/uploaded_files/documents/16_230_MC-CL40.doc. Accessed: 23 August
2006.
CIPFA (Chartered Institute of Public Finance and Accountancy). 2006. Comment letter
CL66 received on the Discussion Paper on Management Commentary. [Online] Available
at: www.iasb.org/upload_files/documents/16_230_MC-CL66.doc. Accessed: 23 August
2006.
CNC (Conseil National de la ComptabiliteÂ). 2006. Comment letter CL34 received on the
Collins, W., Fraser, I. & Stevenson, J. 2006. Comment letter CL24 received on the Discussion
Paper on Management Commentary. [Online] Available at: www.iasb.org/uploaded_files/
documents/16_230_MC-CL24.pdf. Accessed: 23 August 2006.
CPA Australia. 2006. Comment letter CL13 received on the Discussion Paper on Management
Commentary. [Online] Available at: http://www.iasb.org/uploaded_files/documents/
DASB (Dutch Accounting Standards Board). 2006. Comment letter CL18 received on the

Deloitte. 2006. Comment letter CL7 received on the Discussion Paper on Management
Ernst & Young. 2006. Comment letter CL29 received on the Discussion Paper on Management
FASB (Financial Accounting Standards Board). 2007. Minutes of the June 27, 2007
Conceptual Framework Board Meeting. [Online] Available at: http://www.fasb.org/
board_meeting_minutes/06-27-07_cf.pdf. Accessed: 14 July 2007.
FEE (European Federation of Accountants). 2006. Comment letter CL27 received on the
b.org/uploaded_files/documents/16_230_MC-CL27.pdf. Accessed: 23 August 2006.
GEFIU (German Financial Executives Institute). 2006. Comment letter CL63 received on
the Discussion Paper on Management Commentary. [Online] Available at: http://
2006.
Group of 100. 2006. Comment letter CL20 received on the Discussion Paper on Management
Hermes (Hermes Pension Management Ltd). 2006. Comment letter CL56 received on the
b.org/uploaded_files/documents/16_230_MC-CL56.doc. Accessed: 23 August 2006.
Hong Kong Institute of Certified Public Accountants. 2006. Comment letter CL86 received
on the Discussion Paper Management Commentary. [Online] Available at: http://
2006.
HoTARAC (Heads of Treasuries Accounting and Reporting Advisory Committee). 2006.
Comment letter CL102 received on the Discussion Paper on Management Commentary.
[Online] Available at: http://www.iasb.org/uploaded_files/documents/16_230_MC-
CL102.pdf. Accessed: 23 August 2006.
HSBC Holdings. 2006. Comment letter CL95 received on the Discussion Paper on
Management Commentary. [Online] Available at: http://www.iasb.org/uploaded_files/
documents/16_230_MC-CL95.doc . Accessed: 23 August 2006.
IASB. 2005. Discussion Paper on Management Commentary. IASB: London.
IASB. 2006. Discussion Paper on Preliminary Views on an Improved Conceptual Framework for
Financial Reporting: the Objective of Financial Reporting and Qualitative Characteristics of
Decision-useful Financial Reporting Information. London: IASB.
IASB (International Accounting Standards Board). 2007a. Information for Observers: Phase A:
Objective of Financial Reporting and Qualitative Characteristics Comment Letter
Summary. [Online] Available at: http://www.iasb.org/NR/rdonlyres/98ECF91C-648C-
421F-AB9B-6 CF0702b03aobs.pdf. Accessed: 23 July 2007.
IASB. 2007b. IASB Update. June. IASB: London.
IASB. 2007c. International Financial Reporting Standards (IFRSs) including International
Accounting Standards (IASs) and Interpretations as at 30 November 2007. IASB: London.
ICAA (Institute of Chartered Accountants in Australia). 2006. Comment letter CL21 received
on the Discussion Paper on Management Commentary. [Online] Available at: http://
2006.
ICAEW (Institute of Chartered Accountants in England and Wales). 2006. Comment letter
CL17 received on the Discussion Paper on Management Commentary. [Online] Available
at: http://www.iasb.org/uploaded_files/documents/16_230_MC-CL17.pdf. Accessed: 23
August 2006.
ICAI (Institute of Chartered Accountants in Ireland). 2006. Comment letter CL35 received
on the Discussion Paper on Management Commentary. [Online] Available at: http://
2006.
IDW (Institut der Wirtschaftspru Èfer). 2006. Comment letter CL12 received on the Discussion
Paper on Management Commentary. [Online] Available at: http://www.iasb.org/
IMA (Investment Management Association). 2006. Comment letter CL61 received on the
b.org/uploadeded_files/documents/16_230_MC-CL61.doc. Accessed: 23 August 2006.
IOSCO (International Organisation of Securities Commissions). 2006. Comment letter CL81
http://www.iasb.org/uploaded_files/documents/16_230_MC-CL81.pdf. Accessed: 23
August 2006.
Irish Bankers Federation. 2006. Comment letter CL23 received on the Discussion Paper on
documents/16_230_MC-CL23.doc. Accessed: 23 August 2006.
Keidanren, N. 2006. Comment letter CL44 received on the Discussion Paper on Management
16_230_MC-CL44.doc. Accessed: 23 August 2006.
Korea Accounting Association. 2006. Comment letter CL42 received on the Discussion Paper
on Management Commentary. [Online] Available at: http://www.iasb.org/uploaded_files/
documents/16_230_MC-CL42.pdf. Accessed: 23 August 2006.
KPMG. 2006. Comment letter CL75 received on the Discussion Paper on Management
Legal and General. 2006. Comment letter CL39 received on the Discussion Paper on
Mazars. 2006. Comment letter CL72 received on the Discussion Paper on Management
Microsoft. 2006. Comment letter CL84 received on the Discussion Paper on Management

NestleÂ SA 2006. Comment letter CL106 received on the Discussion Paper on Management
New Zealand Treasury. 2006. Comment letter CL43 received on the Discussion Paper on
Nielsen, C. 2006. Comment letter CL2 received on the Discussion Paper on Management
OIC (Organismo Italiano di Contabilita). 2006. Comment letter CL14 received on the
b.org/uploaded_files/documents/16_230_MC-CL14.doc. Accessed: 23 August 2006.
PWC (PriceWaterhouseCoopers). 2006. Comment letter CL89 received on the Discussion
QCA (Quoted Companies Alliance). 2006. Comment letter CL65 received on the Discussion
RSM International (RSM Robson Rhodes LLP). 2006. Comment letter CL99 received on the
SAICA (South African Institute of Chartered Accountants). 2006. Comment letter CL37
http://www.iasb.org/uploaded_files/documents/16_230_MC-CL37.doc. Accessed: 23
August 2006.
Sean, S.S.Y. & Tarca, A. 2007. The impact of regulatory frameworks on management
commentary reports. Version 28 February 2007. [Online] Available at: www.lico.pt/
eaa2007_1140_final.pdf. Accessed: 11 January 2008.
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Staunton, J. 2003. À statement of accounting concepts for level 1 of the Conceptual
Framework?' Abacus, 39(3): 398 414.
Sumita, T. 2006. Comment letter CL30 received on the Discussion Paper on Management
SWG (Sustainable Working Group). 2006. Comment letter CL94 received on the Discussion
Syngenta (Syngenta International AG). 2006. Comment letter CL91 received on the
Telstar. 2006. Comment letter CL85 received on the Discussion Paper on Management
UBS AG 2006: Comment letter CL49 received on the Discussion Paper on Management
UNICE (Voice of Business in Europe). 2006. Comment letter CL5 received on the Discussion
University of Waikato. 2006. Comment letter CL96 received on the Discussion Paper on
È
VOB (Association of German Public Sector Banks). 2006. Comment letter CL55 received on
the Discussion Paper on Management Commentary. [Online] Available at: http://
2006.
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Management commentary in ﬁnancial accounting: assessing

Article · January 2008

Daniël Coetsee Marita. Elizabeth. Pietersen

SEE PROFILE SEE PROFILE

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D. Coetsee & M.E. Pietersen

Key words: decision-usefulness, financial reporting, future cash flows, management

The issuing of the Discussion Paper on Management Commentary (hereafter MC

18 Southern Africa Business Review Volume 12 Number 1 2008

RESEARCH OBJECTIVE AND DESIGN

1. Do you agree that MC should be considered an integral part of financial reports?

Integral part of financial reporting

A priority of the IASB

The appropriate format

The assurance function

THE ROLE MC PLAYS IN ACHIEVING THE OBJECTIVE OF

Assessing the current and proposed objectives of the IASB's Frame-

decisions' (IASB 2006: para. OB2). On the question of whether decision-usefulness

Assessing the current and proposed objectives of the IASB's Frame-

Comparison of the proposed objectives of the Framework Discussion

This indicates that issues surrounding the objective of management commentary

32 Southern Africa Business Review Volume 12 Number 1 2008

34 Southern Africa Business Review Volume 12 Number 1 2008

36 Southern Africa Business Review Volume 12 Number 1 2008

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