THE PRINCIPLES OF MANAGEMENT COMMENTARY

The purpose of the Management Commentary (MC) is to present a balanced and comprehensive analysis of the position and performance of the entity in the year. In addition, it also deals with the main trends and factors behind the development, position and performance of the entity and those factors that are likely to affect the entity in the future.

The MC should enable users to assess the strategies adopted by the entity and the potential success of those strategies. The principles of the MC are as follows: 

• The MC should be seen through the eyes of the directors and focus on those matters relevant to the members of the company.
• The review should look forward, identifying trends and factors affecting the current and future performance of the entity.
• The review should be comprehensive, understandable, reliable, relevant and represent faithfully the underlying strategies and trends.
• Both good and bad aspects of the position of the entity should be discussed in a balanced and neutral way.
• The MC should be comparable over time, and the information should be supportable and consistent with the financial statements to which it relates.

A mandatory MC would make it easier for companies to judge the contents of the reports and the standard of reporting, making the reports more robust and comparable. If the MC is not mandatory, then this could lead to uncertainty, non-compliance and mis-information being shown in the review. Directors may adopt a policy of stating the minimum amount of disclosure which will limit the benefits of the review. Disclosures will only focus on short-term and risk management issues rather than the broader issues.

However, it can be argued that a mandatory MC could produced stereo-typed reports which are based on a checklist approach. Thus, innovation in corporate reporting would be stifled. Every company is different as to its challenges and risks and in a non-mandatory environment, companies could produce MCs to reflect those challenges and risks.