Sir David Tweedie,
Chairman
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
Dear Sir David,
Re: Exposure draft: Management commentary (ED/2009/6)/DP
General
This letter is informed by the preliminary results of a project on the usefulness of
annual report risk disclosure that we are currently working on. The project is funded
by the Institute of Chartered Accountants of Scotland (ICAS) and runs until
September 2010. At this stage of our project we have completed interviews with 35
investment analysts (both on the buy and sell side) as well as 17 preparers of annual
reports (company directors and investor relations officers) in the UK. The research
seeks to examine whether annual report risk reporting reflects the information
requirements of a key user of corporate information- investment analysts. The
research also seeks to elicit responses from preparers of annual reports to understand
how risk reporting policy is determined. These issues will be examined in light of the
recent regulatory policy initiatives in relation to annual report risk reporting. We also
refer to our prior research results where relevant.
We welcome the publication of an exposure draft on the Management Commentary
by the IASB. Our comments in relation to the questions raised in the exposure draft
are listed below
1. 1. Do you agree with the Board’s decision to develop a guidance document
for the preparation and presentation of management commentary instead
of an IFRS? If not, why?
We do not agree with the Board’s decision to develop a guidance document for the
preparation and presentation of management commentary instead of an IFRS. While
it is important that companies are provided with the freedom to discuss issues that are
unique to their environment, regulation is important in providing companies with a
basic platform to report on. There is a risk that non compliance will be high if
disclosure is voluntary as documented in our previous research on risk disclosure.
(Abraham and Cox, 20071). The current guidelines provide enough flexibility for
companies to report on issues that are unique to their operations. There is a general
consensus in our interviews that disclosure regulation results in companies providing
some information from a state of no information. Analysts can then use this as the
basis for further questioning of company management.
1
Abraham, S., Cox, P., 2007. Analysing the determinants of narrative risk
information in UK FTSE 100 annual reports. British Accounting Review 39, 227-248.
2. Do you agree that the content elements described in paragraphs 24—39
are necessary for the preparation of a decision–useful management
commentary? If not, how should those content elements be changed to
provide decision–useful information to users of financial reports?
In general we would agree with the content elements described in paragraphs 2439 as useful guidelines necessary for the preparation of a decision-useful
management commentary. However there are a few specific issues we would like
to comment on
1. We would strongly support paragraph 30 that ‘’ It is important that management
distinguish the principal risks and uncertainties facing the entity, rather than listing all
possible risks and uncertainties”
.
This is a common view echoed by analysts and also evidenced by our own analysis of
company annual reports in the UK. Analysts noted that disclosure should be concise
and relevant and specific to the business rather than a box-ticking exercise.
2. Our findings support paragraph 30 that risk disclosure should be linked to the
entity’s overall strategy, as opposed to being a stand alone statement in the annual
report.
3. We suggest, based on our findings that the board add to paragraph 31 that
companies should highlight the changing nature of risk over time, clearly discussing
why new risk factors have been added and why certain risk factors have been dropped
from the list of key risk factors.
Professor Claire Marston
C.L.Marston@hw.ac.uk
0131 451 8007 (direct)/ 3873 (office)
Dr.Santhosh Abraham, CFA
S.Abraham@hw.ac.uk
0131 451 3841 (direct)/3873 (office)