Saturday, February 24, 2007

UK Abandons MD&A in Favor of Business Review Narrative

In a bow to deregulation, the UK has abandoned the operating and financial review, the UK’s version of the SEC mandated MD&A, and replaced it with the EU-driven business review. In a speech to the Confederation of British Industry, Chancellor of the Exchequer Gordon Brown said that the operating and financial review requirement was being dropped because it is an example of the goldplating of European regulation, which occurs when additional and unnecessary burdens are imposed in the process of translating EU Directives into UK law.

The business review, which arises out of the EU Accounts Modernization Directive, requires companies to provide narrative information on the following areas: a balanced and comprehensive analysis of the development and performance of the company during and at the end of the financial year, a description of the principal risks and uncertainties facing the company, financial and non-financial key performance indicators, and views on the trends and factors affecting company performance.

At the same time, the International Accounting Standards Board has floated a discussion paper on what the Board calls management commentary, which is known as MD&A in the US and Canada and operating and financial review in the UK. The paper assesses the role the IASB could play in improving the quality of the management commentary that accompanies financial statements and also how international convergence may be achieved in this area.

MD&A is widely regarded as an important part of companies’ annual reports and many jurisdictions have developed requirements or principles on management commentary. The discussion paper reviews those requirements and offers recommendations on how the IASB might promote the wider adoption of best practice in the interests of investors and other users of financial reports.