Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Tuesday, November 15, 2005

Regulators’ focus on management commentary deepens.

Of all the tasks in the lead up to “results day”, writing the management commentary is one of the most challenging and demanding for IRO’s. It is also one of the areas that is attracting interest from regulators around the world.
The latest interest is a discussion piece produced by the International Accounting Standards Board, which in effect tries to pull together all the work that has been done in this area. The basic idea from the IASB would be to create a set of requirements that would sit alongside nationally-based rules. These include the UK’s OFR, the Management Discussion and Analysis (MD&A) in the US and Canada, Management Reporting in Germany, and the overarching IOSCO recommendations on management reporting.
Rather than specifying disclosure requirements, the IASB have developed a
Management Commentary disclosure framework. This framework identifies the areas that management should consider when preparing and presenting MC.

The IASB has taken on a hugely ambitious task. Marrying all the different targets of regulators around the world, with a parallel set of requirements would be highly demanding. And the complexities of agreeing those common standards between the likes of the SEC, the FRC and BAFIN will be challenging, at a time when those regulators are already reviewing their national requirements. OFR is yet to win complete compliance (see post October 19th), and the SEC is saying the US issuers that they want to see MD&A’s more productive.

2 more areas play a role in this:

First, the fast developing use of key performance indicators, (KPIs). In its discussion paper the IASB quotes from a Deloitte survey last year that showed that "99 per cent of respondents agreed that financial indicators alone cannot adequately capture their companies' strengths and weaknesses". The Committee of European Securities Regulators (CESR) has picked up on this (see post on August 11th) and highlighted concerns that companies are using non standard performance measures, making it hard for investors to compare on a like for like basis. CESR has now issued “recommendations” – with no force in law – on the presentation of alternative performance measures. It defines these as non GAAP measures.

Second, the management commentary also fits with other global trends of providing different types of reporting. Non financial measures are top of agenda for many, with initiatives such as the Enhanced Business Reporting Consortium leading the way in creating a taxonomy to allow non financial measures to be delivered to investors in structured way that allows automatic analysis .

So IROs have indeed got their work cut out to represent the business fairly and accurately in the management commentary, as well as to stay compliant with all these new regulations.

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