In today’s capital constrained environment, this information is critical for investors and plays a vital role in capital allocation decisions.
However the survey also demonstrated that there was little consistency in approach or content. Opportunities for improvement in reporting have led KPMG to develop a practical guide to assist companies in writing Management Commentary to reflect better practice and give true insight to the capital markets.
"As access to finance tightens as a result of challenging economic conditions, many companies are re-evaluating the scope of their communications to the capital markets. Fierce competition for limited funds and increased scrutiny by regulators is pushing organisations to provide a more comprehensive overview and outlook for their business," said Peter Nash, National Managing Partner for KPMG's Audit practice.
"Providing historical and forward-looking information about the performance and condition of the company is a powerful way to tell stories to the capital markets. When done well, this commentary provides insights into a company's financial performance, position and prospects, equipping investors with critical information to evaluate a company and make more informed investment decisions," Peter said.
KPMG identified 10 areas companies should consider when seeking to improve their Management Commentaries. The top three differentiators were:
- ensuring that disclosures are comprehensive and easy to understand
- including a discussion about strategy and opportunities
- clearly articulating key performance indicators and their link to the strategy
This issue has not escaped the attention of the regulator. The Australian Securities and Investments Commission (ASIC) has recently added Management Commentary to its key areas of focus and has also highlighted significant opportunities for improvements in both the quality and depth of discussion included in the Management Commentary.
The report, Enhancing Management Commentary – review of practice is based on a survey of the most recent Annual Reports of companies in the ASX top 50 companies.
- Consider whether the information provided in other documents (for example, analyst presentations, Product Disclosure Statements) should be replicated in the Annual Report.
- Incorporate the key aspects of the Management Commentary in one location within the Annual Report.
- Consider whether the Management Commentary is clearly set out and well articulated so that a user with minimal industry and technical knowledge can understand and use the analysis provided.
- Provide a summarised discussion of capital structure, liquidity and funding profile and use linking and cross-referencing to refer to more detailed information contained in the financial statements, particularly in the areas of treasury policy, market risks, debt and liquidity management.
- Include an appropriate level of discussion around strategies and objectives including the company's achievements and performance against objectives to date and specific future initiatives.
- Clearly articulate KPIs and their link back to the objectives and strategies of the company with industry specific KPIs discussed where relevant.
- Ensure that the commentary is forward looking rather than focused solely on past performance
- Ensure there is a clear and balanced discussion of opportunities, risks and uncertainties facing the company’s operations, performance and condition.
- Articulate the key factors impacting financial performance, position and cash flows for the period rather than a high level discussion of increases and decreases compared to prior periods.
- Consider whether it is appropriate to rely on the S299(3) exemption and make a clear statement to this effect in the Management Commentary so users are aware of why certain information has been excluded.