Critics of traditional corporate financial reporting under Generally Acceptable Accounting Practice (GAAP) argue that financial statements alone are not considered sufficient without a narrative that provides a context within which to interpret the financial position, financial performance, and cash flows of an entity.
A financial expert within the board of Abcon Kombe Plc, aware of the above criticism, has proposed that Abcon Kombe Plc should include in its financial statements, management commentary to satisfy the numerous analysts that use its annual reports.
Required:
(a) Advise the Board on FIVE elements of information which IFRS Practice Statement expects to be included in management commentaries to meet its objectives. (5 Marks)
(b) Relate the FIVE elements of information above to the needs of the various primary users. (7 Marks)
(c) Justify why management commentaries should be made compulsory in Nigeria’s financial reporting environment. (3 Marks)
Answer
(a) Five elements of information which IASB practice statement expects to be included in management commentaries are:
(i) The nature of the business.
(ii) Management objectives and its strategies for meeting those objectives.
(iii) The entity’s most significant resources, risks, and relationships.
(iv) The results of operations and prospects.
(v) The critical performance measures and indicators that management uses to evaluate the entity’s performance against stated objectives.
(b) Relating the Five Elements to the Needs of Users:
(i) Nature of Business:
Understanding the business activities and external environment aids users in assessing how the company operates and sustains itself.
(ii) Objectives and Strategies:
Provides insights into the company’s plans and their feasibility in achieving long-term goals.
(iii) Resources, Risks, and Relationships:
Allows users to identify key resources, understand risks, and evaluate relationships essential for value creation.
(iv) Results and Prospects:
Gives an understanding of the company’s historical performance and future outlook, aiding decision-making.
(v) Performance Measures:
Offers metrics to gauge the company’s progress towards its objectives and ensures accountability.
(c) Justification for Mandatory Management Commentaries in Nigeria:
(i) Promotes investor confidence by providing transparency.
(ii) Helps stakeholders, including lenders, customers, and regulators, better understand the company’s strategic positioning.
(iii) Addresses information asymmetry by giving narratives that support quantitative data.
(iv) Improves decision-making for all stakeholders by ensuring reports are explanatory and context-driven.
CR – Nov 2014 – L3 – SC – Q5 – Introduction to Corporate Reporting
Evaluate IFRS management commentary requirements and their relevance in financial reporting.
Critics of traditional corporate financial reporting under Generally Acceptable Accounting Practice (GAAP) argue that financial statements alone are not considered sufficient without a narrative that provides a context within which to interpret the financial position, financial performance, and cash flows of an entity.
A financial expert within the board of Abcon Kombe Plc, aware of the above criticism, has proposed that Abcon Kombe Plc should include in its financial statements, management commentary to satisfy the numerous analysts that use its annual reports.
Required:
(a) Advise the Board on FIVE elements of information which IFRS Practice Statement expects to be included in management commentaries to meet its objectives. (5 Marks)
(b) Relate the FIVE elements of information above to the needs of the various primary users. (7 Marks)
(c) Justify why management commentaries should be made compulsory in Nigeria’s financial reporting environment. (3 Marks)
(a) Five elements of information which IASB practice statement expects to be included in management commentaries are:
(i) The nature of the business.
(ii) Management objectives and its strategies for meeting those objectives.
(iii) The entity’s most significant resources, risks, and relationships.
(iv) The results of operations and prospects.
(v) The critical performance measures and indicators that management uses to evaluate the entity’s performance against stated objectives.
(b) Relating the Five Elements to the Needs of Users:
(i) Nature of Business:
Understanding the business activities and external environment aids users in assessing how the company operates and sustains itself.
(ii) Objectives and Strategies:
Provides insights into the company’s plans and their feasibility in achieving long-term goals.
(iii) Resources, Risks, and Relationships:
Allows users to identify key resources, understand risks, and evaluate relationships essential for value creation.
(iv) Results and Prospects:
Gives an understanding of the company’s historical performance and future outlook, aiding decision-making.
(v) Performance Measures:
Offers metrics to gauge the company’s progress towards its objectives and ensures accountability.
(c) Justification for Mandatory Management Commentaries in Nigeria:
(i) Promotes investor confidence by providing transparency.
(ii) Helps stakeholders, including lenders, customers, and regulators, better understand the company’s strategic positioning.
(iii) Addresses information asymmetry by giving narratives that support quantitative data.
(iv) Improves decision-making for all stakeholders by ensuring reports are explanatory and context-driven.