International Standard Setters Have Their Say on MD&A

Although the IASB's first proposed guidance on management commentary purports to set up best practices, some board members think it's superfluous.
David McCannJune 23, 2009

The promulgator of International Financial Reporting Standards today weighed in with its first proposal for what companies that use IFRS should include in the management commentary that accompanies their financials. But some members of the International Accounting Standards Board don’t think there’s a clear need for the guidance.

Even if the proposal is approved after a comment period that runs through March 1, 2010, following the guidance would not be required. That’s because the IASB’s mandate authority over financial statements and related disclosures does not extend to management’s narrative commentary. That was one reason why 3 of the 14 IASB board members voted against issuing the proposal, saying that they did not believe financial reporting would be improved by guidance that companies would be free to ignore.

Also, because the proposal will not result in a financial reporting standard, issuing it is not an effective use of IASB resources or those of constituents who may feel an obligation to comment, say the three board members, Robert Garnett, Prabhakar Kalavacherla, and James Leisenring.

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Beyond the objections of the objecting board members, another factor calling into question the need for the proposal is that guidance or requirements for management commentary already exists in many of the countries that have adopted IFRS. In the United States, where a switch from Generally Accepted Accounting Principles to the international standards is scheduled to unfold during the next decade, public companies are subject to Securities and Exchange Commission mandates covering the Management’s Discussion & Analysis section of financial reports.

But the large majority of IASB members who voted for the proposal believe there are several good reasons for it. For one, some countries offer little or no guidance on management commentary. More importantly, the standard setter wants to raise awareness of the importance of informative, useful management discussion by offering a set of best practices as a complement to existing guidance.

“Other than at blue-chip companies, there is a big need to improve the quality of management commentary,” board member Philippe Danjou told “In many cases what you see from smaller companies are boilerplate statements that are not useful to stockholders. If they follow this guidance, they will have to really think twice about what they say, and why and how they say it.”

Danjou acknowledged that any company already listed in the United States will probably find little that’s useful in the proposal, since tts provisions generally are in line with, or at least compatible with, the SEC’s rules. But the board also reviewed guidance from the International Organization of Securities Organizations as well as individual countries and synthesized everything into its proposed best practices.

Those best practices, though, are described in very general terms. IASB intentionally did not offer any illustrative examples or otherwise provide specific instructions on how to apply its guidance. “The board is concerned that such detailed guidance could be interpreted as either a floor (minimum requirements for content) or a ceiling (the only disclosures for inclusion in management commentary),” it wrote in the introduction to its exposure draft of the proposal. It added that development of application guidance and examples “is best left to other organizations.”