Improving MD&A: a national necessity.

• Author: Tarca, Ann
• Position: READ FOR CPE CREDIT - Management Discussion and Analysis - Legislation

The International Accounting Standards Board announced in September that an International Financial Reporting Standards Practice Statement Management Commentary would be released to provide guidance to companies when preparing narrative reports to accompany financial statements.

Given that many national regulators already have guidance or rules for management commentary, this begs the question of whether regulation in this area is best left to national security market regulators such as the U.S. Securities and Exchange Commission, which has, in the past, been very active in directing MD&A reporting in the United States.

IFRS Practice Statement Background

In 2009, IASB released an Exposure Draft of a framework for the preparation and presentation of management commentary. The board considered that such a framework would be useful to financial statements users. The board supported a guidance document, not an IFRS, to allow the framework to be adapted to the legal and economic circumstances of individual jurisdictions.

The proposed framework was intentionally general, reflecting the view that a flexible approach elicits more meaningful disclosure by encouraging entities that prepare management commentary to discuss those matters most relevant to their individual circumstances. The framework set out the principles, qualitative characteristics and content elements necessary to provide existing and potential capital providers with decision-useful information.

[ILLUSTRATION OMITTED]

Management Commentary Regulation: Current Approaches

Today there is general agreement about the importance of MD&A in providing analysis and insights about a company's financial position and performance. Disagreement is prevalent, however, regarding the preferred framework for achieving high-quality reports (those deemed useful for investors).

Many countries have requirements related to narrative reporting arising from securities or company law and stock exchange listing rules. Mandatory requirements and monitoring (by the SEC and Canadian Securities Regulators) play a key role in the U.S. and Canada. In contrast, a voluntary code of best practice guidelines is influential in the United Kingdom and Australia.

A mandatory approach may promote more disclosure, but some question the quantity and boilerplate nature of disclosures currently provided in the U.S. According to Lorraine Chilvers, chief executive officer of Delaney Consulting LLC, in Jackson, Miss., reporting requirements have become "huge," leading to information the reader "doesn't need to see, doesn't want to see or doesn't understand."

Nevertheless, a mandatory approach may encourage more balanced disclosure and consistency between companies and years. Chilvers adds, "in the U.S. system, if the financial results differ from expectations, a key benefit is that you don't have a lot of leeway not to measure an item--you are required to focus on these items." Some argue for freedom to present material in a way suitable for their companies.

In their view, regulators should avoid a "one size fits all" approach. Too much regulation interferes with a company's ability to provide a good review, one that reflects management's views about the business.

[ILLUSTRATION OMITTED]

Role of IASB Commentary Framework

Since many countries presently have a framework for management commentary...