Management Commentary

IFRS Practice Statement 1

Management Commentary
A framework for presentation
IFRS Practice Statement 1 Management Commentary was issued in December 2010 for
application from 8 December 2010. The text of the Basis for Conclusions is contained in
Part C of this edition.

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CONTENTS
from paragraph
INTRODUCTION IN1

IFRS PRACTICE STATEMENT 1 MANAGEMENT

COMMENTARY
OBJECTIVE 1
SCOPE 2
IDENTIFICATION OF MANAGEMENT COMMENTARY 5
USERS OF MANAGEMENT COMMENTARY 8
FRAMEWORK FOR THE PRESENTATION OF MANAGEMENT COMMENTARY 9
Purpose 9
Principles 12
PRESENTATION 22
ELEMENTS OF MANAGEMENT COMMENTARY 24
Nature of the business 26
Objectives and strategies 27
Resources, risks and relationships 29
Results and prospects 34
Performance measures and indicators 37
APPLICATION DATE 41
APPENDIX
Defined terms

FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION

BASIS FOR CONCLUSIONS

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IFRS Practice Statement 1 Management Commentary is set out in paragraphs 1–41 and the
Appendix. Terms defined in the Appendix are in italics the first time they appear in the
Practice Statement. Definitions of other terms are given in the Glossary for International
Financial Reporting Standards. The Practice Statement should be read in the context of
its objective and the Basis for Conclusions, the Preface to International Financial Reporting
Standards and the Conceptual Framework for Financial Reporting.

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Introduction

Purpose of the Practice Statement

IN1 The IFRS Practice Statement Management Commentary provides a broad,

non-binding framework for the presentation of management commentary that
relates to financial statements that have been prepared in accordance with
International Financial Reporting Standards (IFRSs).

IN2 The Practice Statement is not an IFRS. Consequently, entities applying IFRSs are
not required to comply with the Practice Statement, unless specifically required
by their jurisdiction. Furthermore, non-compliance with the Practice Statement
will not prevent an entity’s financial statements from complying with IFRSs, if
they otherwise do so.

What is management commentary?

IN3 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. Users routinely use
the type of information provided in management commentary to help them
evaluate an entity’s prospects and its general risks, as well as the success of
management’s strategies for achieving its stated objectives. For many entities,
management commentary is already an important element of their
communication with the capital markets, supplementing as well as
complementing the financial statements.

How to apply the Practice Statement

IN4 The Practice Statement is prepared on the basis that management commentary
lies within the boundaries of financial reporting because it meets the definition
of other financial reporting in paragraph 7 of the Preface to International Financial
Reporting Standards. Therefore management commentary is within the scope of
the Conceptual Framework for Financial Reporting. Consequently, the Statement
should be read in the context of the Conceptual Framework.

IN5 The Practice Statement sets out the principles, qualitative characteristics and
elements of management commentary that are necessary to provide users of
financial reports with useful information. However, the form and content of
management commentary may vary by entity. Thus, the Statement also
provides principles to enable entities to adapt the information they provide to
the particular circumstances of their business, including the legal and economic
circumstances of individual jurisdictions. This flexible approach will generate
more meaningful disclosure by encouraging entities that choose to present
management commentary to discuss those matters that are most relevant to
their individual circumstances.

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IN6 The Practice Statement refers to ‘management’ as the persons responsible for the
decision-making and oversight of the entity. They may include executive
employees, key management personnel and members of a governing body.1

1 See paragraphs BC31 and BC32 for additional information.

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IFRS Practice Statement Management Commentary

Objective

1 The objective of the Practice Statement is to assist management in presenting

useful management commentary that relates to financial statements that have been
prepared in accordance with International Financial Reporting Standards
(IFRSs).

Scope

2 The Practice Statement applies only to management commentary and not to

other information presented in either the financial statements or the broader
financial reports.

3 The Practice Statement should be applied by entities that present management

commentary that relates to financial statements prepared in accordance with
IFRSs.

4 The Practice Statement does not mandate which entities should be required to
publish management commentary, how frequently an entity should do so or the
level of assurance to which management commentary should be subjected.

Identification of management commentary

5 When management commentary relates to financial statements, an entity

should either make the financial statements available with the commentary or
identify in the commentary the financial statements to which it relates.

6 Management should identify clearly what it is presenting as management

commentary and distinguish it from other information.

7 When management commentary is presented, management should explain the

extent to which the Practice Statement has been followed. An assertion that
management commentary complies with the Practice Statement can be made
only if it complies with the Statement in its entirety.

Users of management commentary

8 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.

Framework for the presentation of management commentary

Purpose
9 Management commentary should provide users of financial statements with
integrated information that provides a context for the related financial
statements. Such information explains management’s view not only about what

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has happened, including both positive and negative circumstances, but also why
it has happened and what the implications are for the entity’s future.

10 Management commentary complements and supplements the financial

statements by communicating integrated information about the entity’s
resources and the claims against the entity and its resources, and the
transactions and other events that change them.

11 Management commentary should also explain the main trends and factors that
are likely to affect the entity’s future performance, position and progress.
Consequently, management commentary looks not only at the present, but also
at the past and the future.

Principles
12 Management should present commentary that is consistent with the following
principles:
(a) to provide management’s view of the entity’s performance, position and
progress; and

(b) to supplement and complement information presented in the financial

statements.

13 In aligning with those principles, management commentary should include:

(a) forward-looking information; and

(b) information that possesses the qualitative characteristics described in

the Conceptual Framework for Financial Reporting.

14 Management commentary should provide information to help users of the

financial reports to assess the performance of the entity and the actions of its
management relative to stated strategies and plans for progress. That type of
commentary will help users of the financial reports to understand, for example:
(a) the entity’s risk exposures, its strategies for managing risks and the
effectiveness of those strategies;

(b) how resources that are not presented in the financial statements could
affect the entity’s operations; and
(c) how non-financial factors have influenced the information presented in
the financial statements.

Management’s view
15 Management commentary should provide management’s perspective of the
entity’s performance, position and progress. Management commentary should
derive from the information that is important to management in managing the
business.

Supplement and complement the financial statement information

16 Management commentary should supplement and complement the financial
statements with explanations of the amounts presented in the financial
statements and the conditions and events that shaped that information.
Management commentary should also include information about the entity and

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its performance that is not presented in the financial statements but is

important to the management of the entity.

Forward-looking information
17 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.

18 Management should include forward-looking information when it is aware of

trends, uncertainties or other factors that could affect the entity’s liquidity,
capital resources, revenues and the results of its operations. Such information
should focus on the extent to which the entity’s financial position, liquidity and
performance may change in the future and why, and include management’s
assessment of the entity’s prospects in the light of current period results.
Management should provide forward-looking information through narrative
explanations or through quantified data, which may—but are not required
to—include projections or forecasts. Management should disclose the
assumptions used in providing forward-looking information.

19 Management should explain how and why the performance of the entity is short
of, meets or exceeds forward-looking disclosures made in the prior period
management commentary. For example, if management stated targets for
future performance in previous reporting periods, it should report the entity’s
actual performance in the current reporting period and analyse and explain
significant variances from its previously stated targets as well as the
implications of those variances for management’s expectations for the entity’s
future performance.

Qualitative characteristics of useful information

20 Information in management commentary should possess the fundamental
qualitative characteristics of relevance and faithful representation. Information in
management commentary should also maximise the enhancing qualitative
characteristics of comparability, verifiability, timeliness and understandability.

Materiality
21 Management should include information that is material to the entity in
management commentary. Materiality will be different for each entity.
Materiality is an ‘entity-specific aspect of relevance’; thus information that is
relevant for an entity will also be material.

Presentation

22 Management commentary should be clear and straightforward. The form and

content of management commentary will vary between entities, reflecting the
nature of their business, the strategies adopted by management and the
regulatory environment in which they operate.

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23 Management commentary should be presented with a focus on the most

important information in a manner intended to address the principles described
in this Practice Statement. Specifically:
(a) Management commentary should be consistent with its related financial
statements. If the financial statements include segment information, the
information presented in the management commentary should reflect
that segmentation.

(b) When practicable, management should avoid duplicating in its

management commentary the disclosures made in the notes to its
financial statements. Reciting financial statement information without
analysis, or presenting boilerplate discussions that do not provide
insight into the entity’s past performance or prospects, is unlikely to
provide information that is useful to users of the financial reports and
may create an obstacle for users to identify and understand the most
significant matters facing the entity.
(c) Management should also avoid generic disclosures that do not relate to
the practices and circumstances of the entity and immaterial disclosures
that make the more important information difficult to find.

Elements of management commentary

24 Although the particular focus of management commentary will depend on the

facts and circumstances of the entity, management commentary should include
information that is essential to an understanding of:

(a) the nature of the business;

(b) management’s objectives and its strategies for meeting those objectives;

(c) the entity’s most significant resources, risks and relationships;

(d) the results of operations and prospects; and

(e) the critical performance measures and indicators that management uses
to evaluate the entity’s performance against stated objectives.

25 The elements are not listed in a specific order. They are, however, related and
should not be presented in isolation. Management should provide its
perspective on the business and its analysis of the interaction of the elements to
help users to understand the entity’s financial statements and to understand
management’s objectives and strategies for achieving those objectives.

Nature of the business

26 Management should provide a description of the business to help users of the
financial reports to gain an understanding of the entity and of the external
environment in which it operates. That information serves as a starting point
for assessing and understanding an entity’s performance, strategic options and
prospects. Depending on the nature of the business, management commentary
may include an integrated discussion of the following types of information:
(a) the industries in which the entity operates;

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(b) the entity’s main markets and competitive position within those
markets;
(c) significant features of the legal, regulatory and macro-economic
environments that influence the entity and the markets in which the
entity operates;

(d) the entity’s main products, services, business processes and distribution
methods; and

(e) the entity’s structure and how it creates value.

Objectives and strategies

27 Management should disclose its objectives and strategies in a way that enables
users of the financial reports to understand the priorities for action as well as to
identify the resources that must be managed to deliver results. For example,
information about how management intends to address market trends and the
threats and opportunities those market trends represent provides users of the
financial reports with insight that may shape their expectations about the
entity’s future performance. Management should also explain how success will
be measured and over what period of time it should be assessed.

28 Management should discuss significant changes in an entity’s objectives and

strategies from the previous period or periods. Discussion of the relationship
between objectives, strategy, management actions and executive remuneration
is also helpful.

Resources, risks and relationships

29 Management commentary should include a clear description of the most
important resources, risks and relationships that management believes can
affect the entity’s value and how those resources, risks and relationships are
managed.

Resources
30 Management commentary should set out the critical financial and non-financial
resources available to the entity and how those resources are used in meeting
management’s stated objectives for the entity. Disclosure about resources
depends on the nature of the entity and on the industries in which the entity
operates. Analysis of the adequacy of the entity’s capital structure, financial
arrangements (whether or not recognised in the statement of financial position),
liquidity and cash flows, and human and intellectual capital resources, as well
as plans to address any surplus resources or identified and expected
inadequacies, are examples of disclosures that can provide useful information.

Risks
31 Management should disclose an entity’s principal risk exposures and changes in
those risks, together with its plans and strategies for bearing or mitigating those
risks, as well as disclosure of the effectiveness of its risk management strategies.
This disclosure helps users to evaluate the entity’s risks as well as its expected
outcomes. Management should distinguish the principal risks and uncertainties
facing the entity, rather than listing all possible risks and uncertainties.

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32 Management should disclose its principal strategic, commercial, operational

and financial risks, which are those that may significantly affect the entity’s
strategies and progress of the entity’s value. The description of the principal
risks facing the entity should cover both exposures to negative consequences
and potential opportunities. Management commentary provides useful
information when it discusses the principal risks and uncertainties necessary to
understand management’s objectives and strategies for the entity. The principal
risks and uncertainties can constitute either a significant external or internal
risk to the entity.

Relationships
33 Management should identify the significant relationships that the entity has
with stakeholders, how those relationships are likely to affect the performance
and value of the entity, and how those relationships are managed. This type of
disclosure helps users of the financial reports to understand how an entity’s
relationships influence the nature of its business and whether an entity’s
relationships expose the business to substantial risk.

Results and prospects

34 Management commentary should include a clear description of the entity’s
financial and non-financial performance, the extent to which that performance
may be indicative of future performance and management’s assessment of the
entity’s prospects. Useful disclosure on those matters can help users to make
their own assessments about the entity’s performance, position, progress and
prospects.

Results
35 Management commentary should include explanations of the performance and
progress of the entity during the period and its position at the end of that
period. Those explanations provide users of the financial reports with insight
into the main trends and factors affecting the business. In providing those
explanations, management should describe the relationship between the
entity’s results, management’s objectives and management’s strategies for
achieving those objectives. In addition, management should provide discussion
and analysis of significant changes in financial position, liquidity and
performance compared with those of the previous period or periods, as this can
help users to understand the extent to which past performance may be
indicative of future performance.

Prospects
36 Management should provide an analysis of the prospects of the entity, which
may include targets for financial and non-financial measures. This information
can help users of the financial reports to understand how management intends
to implement its strategies for the entity over the long term. When targets are
quantified, management should explain the risks and assumptions necessary for
users to assess the likelihood of achieving those targets.

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Performance measures and indicators

37 Performance measures are quantified measurements that reflect the critical
success factors of an entity. Indicators can be narrative evidence describing how
the business is managed or quantified measures that provide indirect evidence
of performance. Management should disclose performance measures and
indicators (both financial and non-financial) that are used by management to
assess progress against its stated objectives. Management should explain why
the results from performance measures have changed over the period or how
the indicators have changed. This disclosure can help users of the financial
reports assess the extent to which goals and objectives are being achieved.

38 The performance measures and indicators that are most important to

understanding an entity are those that management uses to manage that entity.
The performance measures and indicators will usually reflect the industry in
which the entity operates. Comparability is enhanced if the performance
measures and indicators are accepted and used widely, either within an industry
or more generally. Management should explain why the performance measures
and indicators used are relevant.

39 Consistent reporting of performance measures and indicators increases the

comparability of management commentary over time. However, management
should consider whether the performance measures and indicators used in the
previous period continue to be relevant. As strategies and objectives change,
management might decide that the performance measures and indicators
presented in the previous period’s management commentary are no longer
relevant. When management changes the performance measures and indicators
used, the changes should be identified and explained.

40 If information from the financial statements has been adjusted for inclusion in
management commentary, that fact should be disclosed. If financial
performance measures that are not required or defined by IFRSs are included
within management commentary, those measures should be defined and
explained, including an explanation of the relevance of the measure to users.
When financial performance measures are derived or drawn from the financial
statements, those measures should be reconciled to measures presented in the
financial statements that have been prepared in accordance with IFRSs.

Application date

41 An entity may apply this Practice Statement to management commentary

presented prospectively from 8 December 2010.

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Appendix
Defined terms
This appendix is an integral part of the Practice Statement.

forward-looking Information about the future. It includes information about

information the future (for example, information about prospects and
plans) that may later be presented as historical information
(ie results). It is subjective and its preparation requires the
exercise of professional judgement.

management A narrative report that relates to financial statements that have

commentary been prepared in accordance with IFRSs. Management
commentary provides users with historical explanations of the
amounts presented in the financial statements, specifically the
entity’s financial position, financial performance and cash
flows. It also provides commentary on an entity’s prospects
and other information not presented in the financial
statements. Management commentary also serves as a basis for
understanding management’s objectives and its strategies for
achieving those objectives.

progress Reflects how the entity has grown or changed in the current
year, as well as how it expects to grow or change in the future.

The following terms are used in the Practice Statement with the meanings specified in the
Conceptual Framework for Financial Reporting:
(a) comparability

(b) faithful representation

(c) materiality
(d) relevance
(e) timeliness

(f) understandability

(g) verifiability.

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