Management Commentary and Interpretation of Financial Statements
1 Management commentary
The lecture video above was recorded on the 2010 Practice Statement. The IASB replaced it with a revised Practice Statement in June 2025. Where the video and these notes differ, follow these notes.
In June 2025 the International Accounting Standards Board (IASB) issued the revised IFRS Practice Statement 1 Management Commentary. It replaces the Practice Statement issued in December 2010. The revised Practice Statement is effective for annual reporting periods beginning on or after 23 June 2025, and earlier application is permitted.
Management commentary is a general purpose financial report that accompanies the financial statements. It might also accompany or include sustainability-related financial disclosures. It is prepared for the primary users of financial reports – existing and potential investors, lenders and other creditors – referred to below as ‘investors’. Depending on the jurisdiction, it may be called the strategic report, the operating and financial review, or management’s discussion and analysis (MD&A).
1.1 Status of the Practice Statement
The Practice Statement is not an IFRS Accounting Standard or an IFRS Sustainability Disclosure Standard. Consequently, financial statements can comply with IFRS Accounting Standards even if they are not accompanied by management commentary prepared in accordance with the Practice Statement.
The Practice Statement does not specify which entities must prepare management commentary, how often, who authorises it for issue or what level of assurance it needs. Those matters typically fall under local law or regulation. The IASB intends the Practice Statement to be a global benchmark for regulators and a comprehensive resource for companies. It is flexible: it can be applied alongside local law or regulation and alongside other reporting requirements, such as IFRS Sustainability Disclosure Standards.
An entity whose management commentary complies with all the requirements of the Practice Statement includes an explicit and unqualified statement of compliance. An entity that complies with some, but not all, of the requirements may give a qualified statement of compliance, identifying the departures and the reasons for them (for example, commercial sensitivity).
1.2 Objective of management commentary
Management commentary should provide information that:
enhances investors’ understanding of the entity’s financial performance and financial position reported in its financial statements; and
provides management’s insight into factors, including sustainability-related factors, that could affect the entity’s ability to create value and generate cash flows across all time horizons, including in the long term.
Management commentary gives management’s perspective in a fact-based narrative. Its information is derived from the information management uses to manage the business, and the key matters it focuses on are those identified by management. It includes more discussion, analysis and forward-looking information than the financial statements, and it covers a wider range of matters, including matters that have not been recognised or disclosed in the financial statements.
An entity’s activities create value if they enhance or preserve the net present value of its future cash flows. Creating value comes before generating cash flows: investing in know-how or production capacity may need cash now but can improve long-term prospects. An entity’s ability to create value for itself is closely related to the value its activities create, preserve or erode for other parties, the economy and the natural environment. Management commentary therefore includes material information about those impacts if they could affect the entity’s ability to create value.
1.3 The six areas of content
The revised Practice Statement is objectives-based. Instead of a detailed checklist, it sets the overall objective above and a disclosure objective for each of six interrelated areas of content:
Business model – how the entity creates value and generates cash flows.
Strategy – management’s strategy for sustaining and developing the business model, including the opportunities management has chosen to pursue.
Resources and relationships – the resources and relationships on which the business model and strategy depend, including resources not recognised as assets in the financial statements.
Risks – the risks of events or circumstances that could disrupt the business model, the strategy, or the entity’s resources or relationships.
External environment – factors and trends outside the entity, such as economic, political, regulatory, technological and social developments, that have affected or could affect the business model, strategy, resources, relationships or risks.
Financial performance and financial position – the performance and position reported in the financial statements: what has affected them in the period or could affect them in the future, how management allocated financial resources, and how results compare with any forecasts or targets the entity published earlier.
The areas are interrelated, so information given for one area often helps meet the objectives for another. An entity may use the six areas as headings in its commentary but is not required to. Governance is not a separate area of content, but management commentary includes material information about governance-related matters where this is needed to meet its objectives.
1.4 Key matters and material information
In the context of management commentary, information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that investors make on the basis of general purpose financial reports, which include the management commentary and the related financial statements. What is material for management commentary will typically differ from what is material for the financial statements, because the two reports have different objectives.
Management commentary must focus on key matters – matters fundamental to the entity’s ability to create value and generate cash flows, including in the long term. Identifying them requires judgement. Key matters are likely to be ones that management monitors and manages. They tend to be interrelated, so their effects are often pervasive and relate to more than one area of content. For example, if a competitive advantage is a key feature of the business model, management’s plan for sustaining it is likely to be a key aspect of its strategy.
Most material information will relate to key matters, but not all: an overview of the entity and its range of operations can be material without being a key matter. Information that is not material need not be given, even if a disclosure objective mentions it. Conversely, if the information given for the areas of content does not meet the overall objective, management identifies and adds the information needed.
1.5 Metrics
Material information is likely to include metrics – measures that management uses to monitor a quantitative or qualitative aspect of the entity’s financial or non-financial performance or position. Metrics are specific to the entity and its industry, and they are used to monitor key matters and to measure progress in managing them. Examples include:
Business model – production capacity or volumes; greenhouse gas emissions
Strategy – brand reputation scores; measures of product quality
Resources and relationships – store revenue per unit of floor area; customer-retention statistics
Risks – the extent of reliance on a raw material; the number of safety incidents
External environment – market-share statistics; the proportion of revenue exposed to a trend
Financial performance and financial position – line items, totals and subtotals from the financial statements, and measures derived from them
The Practice Statement does not require forecasts or targets. If management decides that a forecast or target needs to be included, specific requirements and guidance apply.
1.6 Attributes of useful information
The attributes are based on the qualitative characteristics of useful financial information in the Conceptual Framework, but they are explained in plain language because management commentary is often prepared by people who are not familiar with the Framework.
Required attributes | Desired attributes |
Completeness – all material information needed to understand the matter is provided. | Understandability – clear and concise: plain language, avoiding jargon, generic information and unnecessary duplication. |
Neutrality – balanced, not slanted, emphasised or de-emphasised to make it more likely that investors receive the information favourably or unfavourably. | Comparability – comparable with the entity’s own past information and with other entities, particularly those in the same industry. |
Freedom from error – free from error, although not necessarily perfectly precise; the precision needed depends on the information. | Verifiability – the information itself, or the inputs used to derive it, can be corroborated. |
1.7 Coherence
Information in management commentary should form a well-integrated, coherent whole, making clear the relationships between related matters and between related pieces of information. Coherence applies within the management commentary and across the entity’s other general purpose financial reports, including its financial statements and any sustainability-related financial disclosures. For example, analysis of operations should allow investors to relate it to the segment information in the financial statements.
Management commentary also explains apparent inconsistencies with the entity’s other reports and public communications, and how a metric it provides relates to a similar metric reported elsewhere – for example, in a press release or an investor presentation.
2 Interpretation of financial statements
2.1 Stakeholder analysis
Remember that different stakeholders are interested in different information:
Investors and potential investors may be primarily interested in PROFITABILITY.
Lenders and suppliers may be primarily interested in the survival of the company in the short term (LIQUIDITY) and the long term (SOLVENCY).
2.2 Traditional ratio analysis
When you studied Financial Reporting you learned the basic ratios:
Performance – ROCE, profit margin
Liquidity – Current and acid test ratio
Efficiency – Asset turnover, Inventory days, receivable days, payable days
Solvency – gearing ratio, interest cover
Investor – EPS, PE ratio, dividend cover
If you need to revise these ratios, please review the relevant chapters and lectures in the Open Tuition Financial Reporting materials.
2.3 Alternative performance measures (APMs)
For SBR, you also need to be familiar with EBITDA / EBITDAR.
EBITDA – Earnings before interest, tax, depreciation, tax and amortisation
EBITDAR – As EBITDA but also add back rental expense.
EBITDA is widely used to analyse businesses because it does not allow the underlying result to be distorted by ‘arbitrary / subjective’ decisions about depreciation and amortisation.
However, EBITDA is NOT cash flow, because it takes no account of the movements in working capital. For example, a business with a positive EBITDA can still find itself in trouble if it ties all its money in inventory which may prove difficult to sell.
2.4 Management Performance Measures (IFRS 18)
IFRS 18 introduced the concept of Management Performance Measures (MPMs). This refers to some but not all Alternative Performance Measures .
MPMs:
Are financial measures used in public communications (e.g. press releases).
Form a sub-total in the profit and loss, but which are not required to be disclosed.
Thus:
Average wage paid is NOT a MPM because it’s not a sub-total.
Operating profit is NOT a MPM because it has to be reported anyway.
But ‘operating profit before restructuring costs’ may be a MPM . In fact, may companies use this a sub-total in order to separate out their trading activities from ‘one-off’ items.
MPMs must be audited and a note to the financial statements must:
State that the MPM is not necessarily comparable to the MPMs of other companies.
Explain why the MPM is useful.
Reconcile the MPM to a sub-total that is required by IFRS (e.g. operating profit).
A measure only qualifies as a management performance measure if it is a subtotal of income and expenses used in public communications that IFRS 18 does not already require; a ratio such as gearing never qualifies. A question on one wants the definition test, the required note disclosures, and why investors find them useful.
The popularity of EBITDA was discussed earlier. IFRS 18 implies that companies should use term OPDAI (operating profit before depreciation, amortisation and impairment) rather than EBITDA.
2.5 ESMA Guidelines
There is concern that users may be misled by so-called ‘alternative performance measures’ in financial statements. In Europe the European Securities and Markets Authority have produced guidelines. If you learn these, they could be very useful in a discussion question. The principal guidelines are as follows:
APMs should be clearly defined in the financial statements.
A reconciliation should be published between the APM and the ‘traditional’ measure. For example, EBITDA should be reconciled to ‘earnings’, as used in Earnings per Share.
The relevance and reliability of any APMs used should be explained.
APMs should not be more prominent than traditional measures (e.g. EPS).
APMs should presented alongside comparatives for the prior year.
The method of calculation of the APM should be consistent from year to year.
Relevant examiner articles on the ACCA (students) website:
Additional performance measures
Giving investors what they need
Using the business model of a company to help analyse its performance