2021 volume 31 issue 3

Investor-focused Management Commentary


Terry Liu, KPMG
Rob Brouwer, KPMG

Management commentary, also known as Management Discussion and Analysis (MD&A) is a report that complements a company’s financial statements. Over the years, investors have expressed concern about perceived ‘reporting gaps’ in the information provided relative to what they need, and concerns about sometimes misleading or inconsistent disclosures in non-GAAP and other financial measures.

Common concerns from investors include too much generic information and failure to address company-specific matters – in particular, those that are important for the company’s long-term prospects. For example, some investors note there is often insufficient information on the key intangible resources and relationships that the company depends on for its future success. Concerns are similar regarding environmental, social and governance (ESG) matters and how they affect a company’s business model, strategy, resources, relationships or risks.

In response, both the International Accounting Standards Board (IASB) and the Canadian Securities Administrators (CSA) are making changes to address investors’ concerns on management commentary disclosures.

IASB’s proposed changes in management commentary

In May 2021, the IASB issued an exposure draft (ED) proposing a major overhaul to the existing IFRS Practice Statement 1, Management Commentary. The proposals build on innovations in narrative reporting and aim to bring together in one place the information that investors need to assess the company’s long-term prospects, including information about sustainability matters, intangible resources and key relationships.

The existing practice statement would be replaced by a new comprehensive framework intended to improve disclosures that provide insight into factors:

  • that have affected the company’s financial performance and position as reported in its financial statements; and
  • that could affect the company’s ability to create value and generate cash flows in the future.

The proposals would require information to be provided on matters that are fundamental to the company’s prospects including, for example, sustainability-related matters, covering six content areas:

  • business model;
  • strategy;
  • resources and relationships – including intangibles;
  • risks;
  • external environment; and
  • financial performance and position – including how this has been affected or could be affected by the matters identified.

The information about each content area would need to address management’s progress in managing key matters and the implications of these matters. It may need to include financial and non-financial KPIs used in managing the business. For example, a social media business might need to report on its subscriber numbers.

The proposed management commentary framework provides the basis for identifying what matters to report on and guidance on how to present the information. The ED proposes that companies would not have to apply the proposed practice statement to claim compliance with IFRS Standards, though national regulators may choose to mandate it.

The IASB is seeking feedback on the ED by November 23, 2021.

CSA’s new disclosure requirements on non-GAAP measures

The reporting of non-GAAP financial data has become routine for most reporting issuers as they work to provide their readers with what they consider relevant insights beyond the information included in the GAAP financial statements. Investors generally agree that non-GAAP and other measures are helpful for presenting a company’s financial results in a meaningful way, but continue to ask for better and more consistent disclosure.

After collecting feedback on its proposals over the past few years, the CSA published the final version of its National Instrument on Non-GAAP and Other Financial Measures Disclosure (NI 52-112) on May 27, 2021. NI 52-112 provides formal rules to ensure the quality and consistency of disclosure surrounding such measures.

Under NI 52-112, a “non-GAAP financial measure” is defined as a financial measure disclosed by an issuer that:

  • depicts the historical or expected future financial performance, financial position or cash flow of an entity;
  • with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity;
  • is not presented in the financial statements of the entity; and
  • is not a ratio, fraction, percentage or similar representation.

Common industry terms that may fall under this definition include “adjusted EBITDA”, “adjusted net income”, and “free cash flow”. NI 52-112 also addresses non-GAAP ratios, capital management measures and supplementary financial measures.

NI 52-112 will apply to most reporting issuers, and also to some non-reporting issuers relative to certain documents in connection with offerings or transactions. (Investment funds, designated foreign issuers and SEC foreign issuers are exempted.) Issuers that include non-GAAP and certain other financial measures in public disclosure will be required to provide additional information to help investors understand the context of such measures. This is effective as of August 25, 2021 but (for reporting issuers) will not apply to documents filed for a financial year ending before October 15, 2021. Consequently, for issuers with calendar year ends, NI 52-112 will only begin to apply with respect to their December 31, 2021 annual filings.

The application of this new guidance will affect the disclosures of most Canadian reporting issuers. Companies should allow themselves enough time to analyze the new requirements carefully and prepare for the additional disclosure, and changes to existing disclosures, that may be necessary. To read more on this matter, see the Securities Regulation & IR column in this issue of IR leader

Terry Liu, CPA, CA is a Senior Manager, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.

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