The conceptual and governance backbone of management commentary, explaining why it exists, how it connects strategy, risk, KPIs, ESG and IFRS numbers, and what boards and preparers systematically get wrong. IFRS Practice Statement 1 Management Commentary.
1 – Why Management Commentary matters (again)
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For years, management commentary has lived an uncomfortable double life. On paper, it is positioned as an integral part of financial reporting; in practice, it has often been treated as a peripheral narrative—something written after the numbers are final, carefully worded, legally cautious, and strategically vague. The revised emphasis on IFRS Practice Statement 1 makes clear that this view is no longer tenable.
The reason is simple: financial statements alone no longer explain how value is created, sustained, or eroded. Balance sheets and income statements describe outcomes, not intent. Cash flow statements show consequences, not choices. In an environment shaped by volatile markets, geopolitical risk, technological disruption and sustainability pressures, users of financial reports are not just asking what happened—they are asking why, how, and what next.
This is precisely the space that management commentary is designed to occupy. IFRS Practice Statement 1 explicitly frames management commentary as part of financial reporting because it provides the context necessary to interpret financial position, performance and cash flows. That positioning is not cosmetic. By anchoring management commentary within the Conceptual Framework for Financial Reporting, the IASB signals that narrative reporting is not a marketing exercise, but a matter of faithful representation, relevance and accountability.
What has changed in recent years is not the text of the Practice Statement itself, but its strategic relevance. IFRS 18 reshapes the profit and loss statement and elevates management performance measures. CSRD and ESRS dramatically expand narrative disclosures on strategy, risks and value creation. Investors increasingly scrutinise inconsistencies between strategy language and capital allocation. Against that backdrop, management commentary becomes the only formally recognised place where strategy, risks, performance measures and financial outcomes are allowed to meet coherently.
Seen through this lens, management commentary is not “extra” information. It is the interpretive layer that prevents financial reporting from becoming a set of disconnected metrics. Without it, users are left to reverse-engineer management intent from accounting artefacts—a process that inevitably leads to speculation, mistrust and discounting of credibility.
The renewed relevance of IFRS Practice Statement 1 is therefore not about compliance. It is about restoring coherence to corporate reporting at a time when the reporting landscape is fragmenting into ever more specialised disclosures.
2 – What IFRS Practice Statement 1 actually is (and is not)
One of the reasons management commentary has struggled to mature is persistent confusion about its nature. IFRS Practice Statement 1 is often described incorrectly—as a soft standard, a best-practice guide, or a voluntary MD&A framework. Each of those labels is incomplete.
Formally, the Practice Statement is non-binding. It is not an IFRS, and entities do not need to apply it to claim compliance with IFRS Standards. But substantively, it is far more demanding than many mandatory disclosures. It articulates a principle-based framework for how management should explain the business, grounded in the same qualitative characteristics that govern the financial statements themselves.
Equally important is what the Practice Statement is not. It is not sustainability reporting, even though it explicitly recognises non-financial factors. It is not a forward-looking forecast document, even though it requires discussion of prospects. And it is not a generic MD&A template—on the contrary, it explicitly discourages boilerplate disclosures and generic risk lists.
At its core, IFRS Practice Statement 1 rests on three foundational ideas.
First, management’s view matters. Management commentary should reflect how management actually understands and runs the business. It should be derived from the information used internally to manage performance, allocate resources and assess risks. This immediately disqualifies narratives that are written solely for external consumption, detached from internal decision-making.
Second, management commentary must supplement and complement the financial statements. The Practice Statement is explicit: repeating note disclosures or restating numbers without analysis adds little value. The role of the commentary is to explain the conditions, events and decisions that shaped the reported outcomes—and to highlight resources, risks and relationships that are not fully captured by IFRS recognition and measurement.
Third, management commentary must be forward-looking in a disciplined way. The objective is not to predict the future, but to articulate objectives, strategies and known trends, and to explain how current performance relates to those ambitions. In other words, management commentary should reveal management’s mental model of the future, not its numerical forecasts.
Taken together, these principles position IFRS Practice Statement 1 as a conceptual spine for narrative reporting. It does not prescribe structure or length. It does not mandate specific KPIs. Instead, it demands internal consistency: between strategy and metrics, between risks and disclosures, between words and numbers.
This is why management commentary cannot be outsourced to communications teams alone, nor treated as an editorial exercise. It is an extension of financial reporting judgment—requiring the same discipline, evidence and governance.
Here is the link to the IFRS Practice Statement 1: Management Commentary on IFRS.org.
3 – Users, accountability and board ownership
IFRS Practice Statement 1 is explicit about its primary audience: existing and potential investors, lenders and other creditors. These users rely on management commentary to assess prospects, resilience and stewardship. But focusing only on users risks missing a more fundamental implication of the Practice Statement: management commentary creates accountability.
The Practice Statement deliberately defines “management” broadly. It includes not only executive management, but also those responsible for oversight and decision-making—implicitly encompassing boards and supervisory bodies. This is not accidental. Management commentary is where strategic intent becomes visible, where trade-offs are articulated, and where explanations are offered for deviations from plan. That makes it, by definition, a board-level document.
In practice, however, ownership of management commentary is often fragmented. Finance teams focus on numerical consistency. Legal teams focus on liability. Strategy teams focus on messaging. The result is a document that is technically careful but strategically evasive—precisely the outcome the Practice Statement warns against.
From a governance perspective, this fragmentation is increasingly untenable. Audit committees are expected to oversee not only the integrity of the financial statements, but also the credibility of performance measures, the coherence of risk disclosures, and the consistency of narrative reporting. Regulators and investors alike are scrutinising discrepancies between stated strategy and observable actions, such as capital expenditure, acquisitions, restructuring or dividend policy.
Management commentary sits at the centre of these expectations. It is the place where boards can demonstrate that strategy is not aspirational rhetoric, but a framework against which performance is assessed and explained. Conversely, it is also the place where weak governance becomes visible—through vague objectives, shifting KPIs, or unexplained changes in narrative emphasis.
Importantly, IFRS Practice Statement 1 does not impose assurance requirements. But absence of mandatory assurance does not mean absence of responsibility. In many jurisdictions, management commentary is already within the scope of directors’ responsibility statements. Even where it is not, reputational and litigation risks increasingly attach to narrative disclosures, particularly where forward-looking statements and performance measures are concerned.
Seen this way, management commentary is not merely a communication tool. It is a governance artefact. It records how management interprets reality, how it explains outcomes, and how it frames the future. Boards that engage seriously with management commentary—challenging assumptions, demanding coherence and insisting on clarity—use it as an early warning system. Boards that do not, outsource one of their most powerful oversight instruments.
Read more in our blog: Primary users of general purpose financial reports, The Objective of General Purpose Financial Reporting or The best of 10 Accounting conventions.
4 – The five elements of management commentary as one connected system
IFRS Practice Statement 1 identifies five elements that should be present in management commentary: the nature of the business; objectives and strategies; resources, risks and relationships; results and prospects; and performance measures and indicators. These elements are often treated as discrete sections, arranged in a familiar annual report order and written by different contributors. That approach misses the point.
The Practice Statement is explicit that these elements should not be presented in isolation. They are interdependent and must be understood as parts of a single explanatory system. Management commentary is not a collection of topics; it is a narrative model that explains how management creates, preserves and measures value over time.
A useful way to understand this system is to view it as the organisation’s internal logic made visible to external users. Strategy provides direction, resources and relationships provide capability, risks constrain and shape choices, performance measures translate strategy into metrics, and results show the consequences of decisions already taken. When one of these elements is weak or disconnected, the credibility of the entire commentary deteriorates.
The nature of the business: defining the value engine
The description of the nature of the business is not a corporate biography, nor a marketing overview of products and markets. Its purpose is more fundamental: it establishes the economic logic of the entity.
Users need to understand how the entity creates value, in which markets, under which regulatory and competitive conditions, and with which structural features. This includes industry dynamics, the entity’s competitive position, its operating model, and the way it is organised to deliver value. Importantly, this section also defines the boundaries of management judgment. Capital-intensive utilities, platform-based technology companies and project-driven engineering firms operate under fundamentally different constraints, and management commentary must make those differences explicit.
From a governance perspective, this element sets the reference frame for everything that follows. If the nature of the business is described in generic terms, strategy and risk disclosures will inevitably drift into abstraction. Conversely, a precise articulation of the business model allows users to assess whether stated objectives and chosen performance measures actually fit the underlying economics.
Objectives and strategies: making priorities explicit
Objectives and strategies translate the nature of the business into directional intent. IFRS Practice Statement 1 expects management to disclose not only what it is trying to achieve, but also how success will be measured and over what time horizon.
This requirement introduces discipline. Strategy statements that rely on broad aspirations—growth, innovation, sustainability, resilience—are insufficient unless they are connected to concrete priorities and trade-offs. Management commentary should make clear where management is placing emphasis, which opportunities it is pursuing, and which risks it is deliberately accepting.
Crucially, this section is also where change becomes visible. The Practice Statement explicitly encourages discussion of significant changes in objectives and strategies over time. For users, consistency can signal stability, but unexplained consistency in a changing environment can be equally concerning. Boards should therefore view this section as a test of strategic honesty: does management explain why priorities evolve, or does it quietly rewrite the narrative each year?
The link between objectives, strategy and executive remuneration is particularly telling. Where incentives are aligned with stated priorities, management commentary gains credibility. Where they are not, users will infer that the narrative is performative rather than operational.
Resources, risks and relationships: capability and constraint
Resources, risks and relationships form the operating reality within which strategy must be executed. IFRS Practice Statement 1 deliberately brings these concepts together, because separating them often obscures their interaction.
Resources include not only financial capital and liquidity, but also human capital, intellectual property, systems and organisational capabilities. Many of these resources are not recognised on the balance sheet, yet they are central to value creation. Management commentary is expected to explain how such resources are deployed and whether they are sufficient for stated objectives.
Risks are not presented as an exhaustive catalogue, but as principal uncertainties that could materially affect value creation. The Practice Statement explicitly discourages long, generic risk lists. Instead, management should identify the risks that genuinely constrain strategy, distinguish between threats and opportunities, and explain how risk management effectiveness is assessed.
Relationships—whether with customers, suppliers, employees, regulators or strategic partners—are often where resources and risks converge. Dependence on a small number of key customers, exposure to critical suppliers, or reliance on regulatory licences can shape outcomes as profoundly as financial leverage. By requiring disclosure of significant relationships, the Practice Statement acknowledges that value creation is rarely a solo activity.
Together, these disclosures reveal whether management understands its own operating dependencies. From a governance standpoint, this is often where early warning signals appear: overstretched resources, emerging skill gaps, deteriorating stakeholder relationships, or risk mitigation strategies that exist on paper but not in practice.
Results and prospects: explaining outcomes without rewriting history
Results and prospects connect past performance to future expectations. Management commentary should explain what happened during the period, why it happened, and to what extent it informs management’s view of the future.
This is not a restatement of the income statement or balance sheet. It is an analysis of causality. Why did margins change? Which strategic choices influenced cash flows? How did risk events translate into financial outcomes? Equally important is the discussion of prospects: management’s assessment of how current performance, market conditions and strategic initiatives shape future potential.
The Practice Statement requires management to explain significant variances from prior expectations or targets. This requirement is central to credibility. Without it, forward-looking statements become costless promises. With it, management commentary becomes a learning loop, showing how management adapts its understanding in response to outcomes.
For boards, this section is particularly sensitive. It reveals whether management is willing to confront underperformance openly, or whether it relies on external explanations while leaving internal assumptions unexamined.
Performance measures and indicators: translating strategy into evidence
Performance measures and indicators are the measurement interface between narrative and numbers. IFRS Practice Statement 1 is clear: the most important measures are those management actually uses to manage the business.
This has two immediate implications. First, management commentary must explain why specific measures are relevant and how they relate to objectives and strategy. Second, consistency over time matters, but so does adaptability. When measures change, the change itself must be explained.
The Practice Statement also addresses a long-standing tension: the use of performance measures not defined by IFRS. Such measures are permitted, but only if they are clearly defined, explained, and reconciled to IFRS figures where derived from them. This requirement anticipates many of the governance concerns now formalised under IFRS 18 regarding management performance measures.
Performance measures are not neutral. They influence behaviour, shape incentives and frame external perception. Poorly chosen or poorly explained metrics can undermine trust even when financial results are strong. Well-chosen metrics, transparently explained, allow users to understand not just what management achieved, but how management judges success.
One system, not five sections
When these five elements are treated as a connected system, management commentary becomes more than descriptive reporting. It becomes a coherent explanation of management judgment.
Nature of the business explains the economic context. Objectives and strategies set direction. Resources, risks and relationships define capability and constraint. Performance measures translate intent into metrics. Results and prospects close the loop by linking outcomes back to strategy.
IFRS Practice Statement 1 does not prescribe how to write this story. But it makes clear that without these connections, management commentary fails its purpose. For boards and audit committees, understanding and enforcing these linkages is not a compliance exercise—it is a core governance responsibility.
Read more on the New Zealand External Reporting Board, XRB.nz: IFRS Practice Statement 1 – Management Commentary (MPS1).
5 – Forward-looking information without fantasy
Few aspects of management commentary create as much discomfort as forward-looking information. Investors demand insight into future prospects, regulators expect transparency about known trends and uncertainties, and boards worry about legal exposure if expectations are not met. The result, in many annual reports, is a carefully neutralised narrative that speaks about the future without actually saying anything.
IFRS Practice Statement 1 takes a different position. It does not treat forward-looking information as optional embellishment, nor does it require management to issue forecasts or projections. Instead, it frames forward-looking information as an essential component of faithful explanation. Management commentary is expected to reveal how management thinks about the future—not by predicting outcomes, but by articulating objectives, strategies, assumptions and known uncertainties.
This distinction is crucial. The Practice Statement explicitly states that forward-looking information “does not predict the future”, but sets out management’s direction, priorities and assessment of prospects. In doing so, it establishes a governance standard: management must show that it has a structured view of the future, grounded in current performance and observable trends.
Objectives, not promises
Forward-looking information under IFRS Practice Statement 1 starts with objectives. Objectives define what management is trying to achieve and provide a benchmark against which performance can be assessed over time. Crucially, objectives are not promises. They are expressions of intent, framed within known constraints.
This framing matters because it shifts the focus from outcome to decision logic. When management explains why it is prioritising certain markets, investments or efficiency initiatives, users gain insight into management’s strategic reasoning—even if external conditions later disrupt execution. Conversely, when management avoids stating objectives altogether, users are left to infer intent from capital expenditure patterns or restructuring decisions, often with less charitable interpretations.
From a board perspective, clearly articulated objectives create internal discipline. They force alignment between strategy discussions, capital allocation decisions and performance evaluation. Forward-looking information becomes a governance tool rather than a communications risk.
Known trends and uncertainties: what management already knows
The Practice Statement goes further by requiring disclosure of known trends, uncertainties and factors that could affect liquidity, capital resources, revenues and results. This requirement is often misunderstood as a call for speculative scenario analysis. It is not.
The emphasis is on what management is already aware of at the reporting date. This includes market developments, regulatory changes, technological shifts, cost pressures, supply-chain dependencies or talent constraints—provided they are sufficiently developed to influence management judgment.
This approach draws a clear line between responsible disclosure and hindsight risk. Management is not expected to anticipate every possible shock. But where management is actively monitoring developments, adjusting strategy or allocating resources in response, silence in management commentary undermines credibility. Users reasonably ask: if this mattered enough to influence decisions internally, why was it absent from the external narrative?
Assumptions: making the mental model visible
Forward-looking information is only meaningful if users understand the assumptions underlying management’s assessment of prospects. IFRS Practice Statement 1 therefore requires management to disclose the assumptions used in providing forward-looking information, particularly when quantified targets or measures are presented.
Assumptions need not be exhaustive or technical. Their purpose is to make management’s mental model explicit. What demand conditions are assumed? What cost inflation is considered manageable? Which regulatory outcomes are viewed as likely? These assumptions frame how management interprets current performance and evaluates future risk.
From a governance standpoint, disclosed assumptions also create accountability. They allow boards, investors and auditors to track not only whether outcomes were achieved, but whether deviations arose from execution failure, flawed assumptions or external shocks. Without this transparency, performance discussions become retrospective narratives rather than structured evaluations.
Explaining variance: the discipline most often avoided
Perhaps the most demanding requirement in IFRS Practice Statement 1 is the obligation to explain how and why actual performance differs from prior forward-looking disclosures. This requirement transforms forward-looking information from aspiration into commitment.
In practice, many management commentaries introduce new targets or priorities each year while quietly retiring old ones. The Practice Statement explicitly discourages this behaviour. Where management previously communicated targets, expectations or directional statements, it should report on actual outcomes, analyse significant variances and explain the implications for future expectations.
This is where governance quality becomes visible. Will management acknowledge that assumptions proved optimistic? Will it explain why strategic initiatives underperformed? Will it adjust expectations transparently? Or will it simply reset the narrative and move on?
Boards that insist on variance analysis in management commentary signal maturity and confidence. They demonstrate that learning, not perfection, underpins strategy execution.
Quantification without illusion of precision
IFRS Practice Statement 1 permits quantified forward-looking information, including targets, but does not require forecasts or projections. Where management chooses to quantify, it must explain risks and assumptions so users can assess the likelihood of achievement.
This strikes a careful balance. Quantification can enhance clarity, but it also creates an illusion of precision if divorced from uncertainty. Management commentary should therefore resist the temptation to present numbers that appear exact but rest on fragile assumptions. Directional targets, ranges or milestones often communicate intent more honestly than point estimates.
The governance challenge is not whether to quantify, but how to do so responsibly. Boards should ask whether quantified disclosures genuinely aid understanding, or whether they merely satisfy external expectations at the expense of long-term credibility.
Forward-looking information as a governance mirror
Ultimately, forward-looking information in management commentary reflects how management and the board confront uncertainty. Avoidance signals defensiveness. Overconfidence signals misjudgment. Balanced, assumption-based disclosure signals control.
IFRS Practice Statement 1 does not eliminate legal risk. But it reframes the conversation. The greater risk, in today’s reporting environment, is not that management commentary reveals too much about the future, but that it reveals too little about how management thinks about it.
When forward-looking information is treated as a structured explanation rather than a speculative forecast, management commentary becomes what the Practice Statement intended: a disciplined account of direction, not a catalogue of hopes.
6 – Performance measures, KPIs and the discipline behind the numbers (the IFRS 18 connection)
If strategy is the narrative heart of management commentary, performance measures are its nervous system. They translate intent into evidence. They signal what management monitors, rewards and ultimately values. IFRS Practice Statement 1 treats performance measures and indicators not as decorative analytics, but as the decisive test of credibility.
The underlying logic is straightforward: users do not judge management by its words alone, but by the metrics it chooses to emphasise. What management measures—and how consistently it measures it—reveals priorities more clearly than any strategy statement.
What makes a performance measure “critical”
IFRS Practice Statement 1 is explicit that the most important performance measures are those actually used by management to manage the business. This deceptively simple requirement has far-reaching implications.
First, it eliminates purely cosmetic KPIs. Measures invented solely for external reporting, disconnected from internal dashboards or incentive systems, undermine the integrity of management commentary. When users detect that metrics are presented externally but ignored internally, trust erodes rapidly.
Second, it forces alignment between narrative and operations. If management claims to prioritise capital discipline, but avoids discussing return-based measures, the inconsistency is immediately apparent. If sustainability is framed as strategic, but performance measures remain entirely short-term and financial, the narrative collapses under scrutiny.
From a governance perspective, performance measures act as a reality check. They expose whether strategy is operationalised or merely articulated.
Financial and non-financial measures: one system, not two worlds
The Practice Statement deliberately treats financial and non-financial performance measures as part of the same explanatory framework. This is increasingly important in an environment where business performance is shaped by factors that do not sit neatly in the financial statements: human capital, technology, customer trust, regulatory relationships and sustainability constraints.
Management commentary is expected to explain not only what these measures are, but why they matter. Why does management track this indicator? How does it influence decision-making? How does it connect to objectives and risk management?
This requirement guards against metric overload. Long lists of indicators, presented without explanation, obscure rather than illuminate performance. What users need is insight into causality—how non-financial drivers translate into financial outcomes over time.
Consistency, change and the governance of metrics
Consistency over time enhances comparability, and IFRS Practice Statement 1 recognises this explicitly. But it also acknowledges a reality often ignored in practice: as strategies evolve, some metrics lose relevance.
The governance challenge lies in managing this tension transparently. Changing performance measures is not inherently problematic. Failing to explain why they changed is.
Management commentary should therefore disclose when performance measures are replaced, modified or deprioritised, and explain the strategic rationale for doing so. Was the prior metric no longer aligned with value creation? Did the business model change? Did external conditions alter the relevance of certain indicators?
Boards that allow silent metric substitution risk undermining long-term credibility. Users quickly recognise when underperforming measures disappear without explanation.
Non-IFRS measures and the reconciliation imperative
One of the most sensitive areas addressed by IFRS Practice Statement 1 concerns financial performance measures that are not defined by IFRS. Such measures are permitted, but only under strict conditions.
Management must define these measures clearly, explain their relevance, and—where they are derived from IFRS figures—reconcile them to the financial statements. This is not a technical footnote requirement. It is a governance safeguard.
Non-IFRS measures often reflect management’s internal view of performance. They can provide valuable insight, particularly where IFRS measurement obscures underlying operating dynamics. But without transparency and reconciliation, they also create fertile ground for bias, selective emphasis and earnings management.
This is where the connection to IFRS 18 becomes unavoidable.
Read more on our blog: EBITDA – Earnings before interest taxes depreciation and amortisation.
IFRS 18 and the formalisation of management performance measures
IFRS 18 introduces a more structured framework for the presentation of performance in the income statement and places explicit emphasis on management performance measures (MPMs). While IFRS Practice Statement 1 predates IFRS 18, the conceptual alignment is striking.
Both frameworks recognise that management inevitably uses adjusted or alternative measures to assess performance. Both seek to bring those measures into the open—not to prohibit them, but to discipline them.
Under IFRS 18, MPMs must be explained, defined and reconciled. Under IFRS Practice Statement 1, performance measures must be relevant, consistent and linked to strategy. Together, they create a reporting environment in which management cannot easily tell one story in the narrative and another in the numbers.
For audit committees, this convergence is critical. It expands oversight from technical accounting compliance to performance communication integrity. Questions that previously sat uncomfortably between finance and strategy now have a formal reporting anchor.
Read more in our blog regarding IFRS 18: IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance.
Performance measures as behavioural signals
Performance measures do more than inform users; they shape behaviour. They influence investment decisions, cost control, risk appetite and executive remuneration. IFRS Practice Statement 1 implicitly acknowledges this by linking performance measures to objectives and strategies.
This behavioural dimension elevates KPIs to a governance issue. Poorly designed metrics incentivise short-termism, risk avoidance or value destruction. Well-designed metrics reinforce strategic discipline and long-term orientation.
Management commentary should therefore help users understand not just what is measured, but why those measurements matter. What behaviours do they encourage? What trade-offs do they imply? Which dimensions of performance do they deliberately leave out?
The audit committee’s expanding role
As performance measures move to the centre of narrative and numerical reporting, audit committees face an expanded mandate. Oversight now includes:
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consistency between KPIs, MPMs and IFRS figures;
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clarity of definitions and reconciliations;
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alignment between metrics, strategy and remuneration;
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transparency around changes in measurement over time.
IFRS Practice Statement 1 does not prescribe how committees should fulfil this role, but it makes clear that unmanaged performance narratives pose a risk—not only to reporting quality, but to governance credibility.
Metrics as proof of seriousness
Ultimately, performance measures are where management commentary either earns trust or loses it. Sophisticated narratives cannot compensate for opaque or inconsistent metrics. Conversely, clearly explained, well-aligned measures can sustain credibility even in periods of underperformance.
IFRS Practice Statement 1 treats performance measures as the discipline mechanism of narrative reporting. When combined with IFRS 18, that discipline becomes unavoidable. Management commentary is no longer a place to describe ambition alone; it is a place where ambition must be measured, explained and defended.
Read more on Management commentary practice statement- IASB standard setting on EFRAG.org.
7 – Why management commentary still fails: recurring patterns and governance blind spots
Despite the clarity of IFRS Practice Statement 1, genuinely insightful management commentary remains the exception rather than the norm. This is not primarily a technical failure. In most cases, the rules are understood, the frameworks are known and the disclosures are formally complete. The failure is structural and behavioural.
Management commentary often breaks down not because management lacks information, but because too many interests converge on the narrative at once. Legal caution, investor relations messaging, internal politics and time pressure all leave their mark. The result is a document that satisfies minimum expectations but avoids uncomfortable clarity.
Several recurring failure patterns can be observed across industries and jurisdictions. Each of them weakens the explanatory power of management commentary—and each reveals a governance blind spot.
Boilerplate narratives: compliance without insight
The most visible failure mode is the persistence of boilerplate language. Businesses describe competitive markets, uncertain macroeconomic conditions and the importance of people and sustainability in terms that could apply to almost any organisation.
IFRS Practice Statement 1 explicitly warns against generic disclosures that do not relate to the entity’s specific circumstances. Yet boilerplate survives because it feels safe. It reduces legal exposure, avoids internal disagreement and requires minimal judgment.
From a governance perspective, boilerplate is not neutral. It signals either an unwillingness or an inability to articulate what truly differentiates the business. Boards should recognise boilerplate as a red flag: if management cannot describe the business with specificity, it may not fully understand the sources of its own success or vulnerability.
Strategy without trade-offs
Another common failure is the presentation of strategy as a collection of ambitions rather than choices. Growth, efficiency, innovation and sustainability are all declared priorities, but rarely are the tensions between them acknowledged.
IFRS Practice Statement 1 expects management to disclose objectives and strategies in a way that reveals priorities for action. That necessarily implies trade-offs. Resources are finite. Risks cannot be eliminated without cost. Time horizons conflict.
When management commentary avoids trade-offs, it creates an illusion of coherence while concealing decision risk. Users are left with slogans rather than strategy. Boards, in turn, lose an opportunity to demonstrate that strategic choices are deliberate rather than reactive.
Risks as inventories, not constraints
Risk disclosures frequently take the form of long inventories: market risk, operational risk, regulatory risk, cyber risk, climate risk. While comprehensive in appearance, such lists often fail to explain which risks actually constrain strategic choices.
IFRS Practice Statement 1 requires management to distinguish principal risks and uncertainties and to explain how they are managed and monitored. The emphasis is on materiality and interaction, not completeness.
Risk lists that lack hierarchy or linkage to strategy suggest a defensive mindset. They protect against omission, but they do not inform decision-making. For audit committees, this is a critical governance issue. If risks are not framed as strategic constraints, risk management becomes a reporting exercise rather than a management discipline.
KPIs that decorate rather than explain
Performance measures are another frequent point of failure. Many management commentaries include pages of KPIs—financial, operational and ESG-related—without explaining why these measures matter or how they are used internally.
This approach undermines the very purpose of performance measures. IFRS Practice Statement 1 is clear that metrics should reflect the way management assesses progress against objectives. Metrics that lack narrative context or strategic linkage become decorative rather than explanatory.
A particularly damaging variant of this failure is selective continuity: measures are highlighted when they perform well and quietly dropped when performance deteriorates. Users notice. Boards should treat unexplained changes in metrics as governance events, not editorial decisions.
Forward-looking statements without accountability
Forward-looking information often appears in management commentary in the form of carefully worded optimism. Markets are expected to recover. Strategic initiatives are underway. The outlook remains positive. What is missing is accountability.
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The Practice Statement requires management to explain variances between prior expectations and actual outcomes. In practice, many commentaries reset expectations each year without reference to earlier statements. This erodes trust and turns forward-looking disclosures into low-cost promises.
Boards that tolerate this pattern weaken the credibility of the entire report. Forward-looking information only adds value when it is anchored in learning—when management demonstrates that it reflects on past assumptions and adapts accordingly.
Narrative–numbers disconnect
Perhaps the most damaging failure mode is the disconnect between narrative and numbers. Strategy sections describe focus and discipline, while capital expenditure and cash flow patterns suggest something else entirely. Risk discussions emphasise resilience, while balance sheets reveal increasing leverage or concentration.
This disconnect often arises from siloed processes: strategy is written by one group, financials by another, and management commentary becomes a stitched-together compromise. IFRS Practice Statement 1 explicitly seeks to prevent this by positioning management commentary as an integrated explanation.
For users, inconsistency between words and numbers is a credibility killer. For boards, it is an early warning signal that internal alignment may be weaker than assumed.
Governance silence: when no one owns the story
Underlying many of these failures is a simple governance issue: unclear ownership. When no one feels accountable for the coherence of management commentary, it becomes a negotiated text rather than a truthful one.
IFRS Practice Statement 1 implicitly assumes active involvement by management and oversight bodies. Where boards engage critically with management commentary—challenging assumptions, demanding specificity and insisting on linkage—the quality improves markedly. Where they do not, the document drifts toward safe irrelevance.
Failure as a signal, not an accident
The recurring failures of management commentary are not random. They reflect organisational incentives, governance culture and risk appetite. IFRS Practice Statement 1 provides a framework, but it cannot enforce courage or clarity.
For boards and audit committees, poor management commentary should be read as a signal, not just a reporting deficiency. It may indicate strategic ambiguity, weak internal alignment or an aversion to accountability. Conversely, strong management commentary often correlates with disciplined governance and mature leadership.
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The challenge is not to produce perfect narratives, but to produce honest ones—narratives that explain how management thinks, decides and learns. In that sense, management commentary is less about polishing the story and more about revealing the quality of governance behind it.
8 – Management commentary as a governance instrument, not a reporting appendix
When IFRS Practice Statement 1 is read narrowly, it appears to describe how management should write a better narrative. Read properly, it describes how boards and management should govern the interface between strategy, performance and accountability.
Management commentary is the only formally recognised reporting space where management explains not just what the numbers are, but how they came to be and why they matter. That makes it uniquely powerful—and uniquely sensitive. Used well, it strengthens trust. Used poorly, it exposes governance weakness.
Where management commentary sits in the governance architecture
Traditional governance frameworks distinguish clearly between strategy, risk management, internal control and financial reporting. Management commentary cuts across all of them.
It translates strategy into articulated objectives.
It frames risks as constraints on decision-making.
It links performance measures to incentives and oversight.
It contextualises financial outcomes within management judgment.
In doing so, management commentary becomes a control surface for governance. It reveals whether the organisation’s internal logic is coherent. Boards that understand this do not treat management commentary as a communications product, but as a governance artefact that deserves the same scrutiny as budgets, investment proposals or impairment assumptions.
Board and audit committee ownership
IFRS Practice Statement 1 never explicitly assigns responsibility to boards or audit committees. Yet its logic assumes their involvement. Without board-level challenge, management commentary quickly degrades into safe language and selective emphasis.
In practice, ownership should be shared but explicit:
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Management owns the content and judgment.
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The board owns the coherence and credibility.
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The audit committee owns the consistency between narrative, metrics and financial statements.
This does not require boards to rewrite text. It requires them to ask the right questions. Are objectives clear enough to be assessed later? Are risks described in a way that explains strategic constraints? Do performance measures reflect how the business is actually managed? Does the narrative match the capital allocation decisions we approved?
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Where these questions are asked consistently, management commentary evolves into a forward-looking governance dialogue, not a retrospective explanation.
Management commentary as an early warning system
One of the least appreciated strengths of management commentary is its ability to function as an early warning mechanism. Because it requires management to articulate assumptions, priorities and expectations, shifts in narrative often precede shifts in financial outcomes.
Overly optimistic language combined with deteriorating cash flows, repeated emphasis on “external factors” without internal reflection, or frequent metric changes without explanation all signal emerging governance risk. Conversely, clear articulation of uncertainty, trade-offs and learning signals resilience.
Boards that monitor management commentary over time—not just annually, but comparatively—gain insight into how management’s thinking evolves under pressure.
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The convergence of reporting regimes
The strategic importance of IFRS Practice Statement 1 is amplified by convergence with other reporting developments. IFRS 18 formalises management performance measures. CSRD and ESRS expand narrative requirements around strategy, risks and value creation. Investors increasingly expect integrated explanations rather than siloed disclosures.
In this environment, management commentary can either become the anchor that ties these regimes together, or the weakest link where inconsistencies accumulate. Treating it as a governance instrument allows boards to manage this convergence proactively rather than reactively.
From explanation to stewardship
At its best, management commentary demonstrates stewardship. It shows that management understands the business, acknowledges uncertainty, measures what matters and learns from outcomes. It allows users to assess not just performance, but the quality of decision-making.
IFRS Practice Statement 1 does not demand perfection. It demands honesty, coherence and relevance. Those qualities are as much about governance culture as they are about reporting see.
When boards embrace management commentary as part of their oversight toolkit, it ceases to be an annual reporting obligation and becomes a continuous accountability mechanism. It documents how management interprets reality—and how it adapts when reality disagrees.
Closing reflection
Financial statements tell us where an organisation has been. Management commentary tells us whether those numbers are the product of control or coincidence.
IFRS Practice Statement 1 provides the framework. Governance determines whether it is used as intended.
FAQ’s – IFRS management commentary
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FAQ 1 – What is IFRS Practice Statement 1 and why is it not “soft guidance”?
IFRS Practice Statement 1 is formally not an IFRS Standard and therefore not mandatory. This has led to the misconception that it is merely optional or soft guidance. In substance, however, it is a normative framework that anchors management commentary firmly within the boundaries of financial reporting.
The Practice Statement explicitly links management commentary to the Conceptual Framework for Financial Reporting. This means that fundamental qualitative characteristics such as relevance, faithful representation and materiality also apply to narrative reporting. Management commentary is therefore not a communications exercise, but an extension of professional judgment.
Paradoxically, the non-binding nature of the Practice Statement increases governance responsibility. Because it is principle-based rather than rule-driven, management and boards must explain their choices rather than comply mechanically. In practice, regulators, auditors and investors increasingly treat IFRS Practice Statement 1 as the reference point for credible narrative reporting. Deviations are acceptable—but only if they are well reasoned and transparent.
FAQ 2 – How does management commentary relate to the financial statements?
Management commentary is neither a summary nor a repetition of the financial statements. Its purpose is to provide context: to explain why the reported numbers are what they are and what they imply for future performance and position.
Financial statements present outcomes; management commentary explains causality. It connects margins, cash flows, investments and balance sheet movements to strategic decisions, market conditions and risk management. Simply restating figures or reproducing note disclosures without analysis adds little value and is explicitly discouraged by IFRS Practice Statement 1.
From a governance perspective, consistency between narrative and numbers is critical. Discrepancies often signal deeper issues such as weak internal alignment or selective storytelling. Audit committees that read management commentary alongside the financial statements use it as a coherence test: does the narrative genuinely explain the financial reality the board has approved?
FAQ 3 – What does “forward-looking information” mean under IFRS Practice Statement 1?
Forward-looking information under IFRS Practice Statement 1 does not mean forecasts or earnings guidance. It refers to management’s articulation of objectives, strategic direction, known trends and uncertainties that could affect future performance, liquidity or capital resources.
The focus is on what management already knows at the reporting date and how that knowledge shapes decision-making. Management is expected to disclose assumptions and explain how current results inform its view of prospects. This creates transparency around management’s mental model of the future, rather than an illusion of predictive accuracy.
Importantly, the Practice Statement requires management to explain significant variances between prior expectations and actual outcomes. Forward-looking information therefore carries accountability. It is not about optimism, but about learning and adaptation. For boards, this transforms forward-looking disclosure into a governance tool rather than a legal risk to be avoided.
FAQ 4 – How should KPIs and non-IFRS measures be used in management commentary?
IFRS Practice Statement 1 makes one principle clear: the most important performance measures are those actually used by management to run the business. KPIs are therefore not decorative analytics, but evidence of how management assesses success.
Both financial and non-financial measures may be used, provided their relevance is explained and their link to strategy is clear. When non-IFRS financial measures are presented, they must be defined transparently and, where derived from IFRS figures, reconciled to the financial statements.
This requirement has strong governance implications. Performance measures influence behaviour, incentives and capital allocation. Poorly explained or frequently changing metrics undermine trust. The introduction of IFRS 18 reinforces this discipline by formalising management performance measures in the income statement. Together, IFRS Practice Statement 1 and IFRS 18 make it increasingly difficult to tell one story in the narrative and another in the numbers.
FAQ 5 – What are the most common governance failures in management commentary?
The most common failures are behavioural rather than technical. They include generic, boilerplate narratives; strategy descriptions without explicit trade-offs; long risk lists without prioritisation; KPIs presented without strategic linkage; and forward-looking statements that are quietly reset each year.
Another recurring issue is inconsistency between narrative and financial outcomes. When strategy language suggests discipline while cash flows or capital allocation suggest otherwise, users quickly lose confidence.
These patterns often reflect unclear ownership. When management commentary is treated as a negotiated document between legal, finance and investor relations, rather than as a board-level governance artefact, its explanatory power erodes. For boards and audit committees, weak management commentary should be read as an early warning signal of deeper governance misalignment.
FAQ 6 – Why is management commentary a governance instrument rather than a reporting appendix?
Management commentary records how management interprets the business, its risks, its priorities and its measures of success. As such, it is a snapshot of management judgment at a specific point in time. That makes it highly valuable for oversight.
When reviewed over multiple periods, management commentary reveals how assumptions evolve, how strategies adapt and whether learning occurs after underperformance. IFRS Practice Statement 1 facilitates this by requiring consistency, explanation of change and linkage between narrative and metrics.
Boards that engage seriously with management commentary use it as a governance instrument—an early warning system and a test of strategic coherence. Those that treat it as a reporting appendix miss an opportunity to strengthen accountability and trust. In modern reporting, management commentary is not about polishing the story, but about demonstrating control over the business narrative.
