Resources, risks and relationships: the most misunderstood section of management commentary

IFRS Practice Statement 1 resources and risks – Among all elements of management commentary, none is more frequently misunderstood—and more routinely downgraded—than the section on resources, risks and relationships. In many annual reports, it appears as a descriptive inventory: people, systems, suppliers, customers, regulators, risks. Informative, perhaps, but rarely decisive.

That treatment fundamentally misreads the intent of IFRS Practice Statement 1.

Resources, risks and relationships are not contextual background. They are the operating reality that determines whether strategy is executable, resilient and sustainable. When this section is reduced to a catalogue, management commentary loses its explanatory power. When it is taken seriously, it becomes one of the most governance-relevant parts of the report.

The problem is not lack of disclosure. It is lack of integration.

The structural mistake: separating strategy from capability

A recurring flaw in management commentary is the implicit separation between strategy and capability. Strategy is presented as ambition and direction. Resources, risks and relationships are described elsewhere as conditions or constraints.

IFRS Practice Statement 1 rejects this separation.

The standard is explicit: management commentary should explain how an entity’s resources and relationships support the achievement of objectives, and how risks arise from and affect that system. In other words, strategy cannot be understood independently of the resources that enable it, the relationships that sustain it, and the risks that threaten it.

When organisations fail to make this connection, resources become static assets, risks become abstract lists, and relationships become stakeholder paragraphs. None of these explains why outcomes occur.

From a governance perspective, this is not a stylistic weakness. It is a structural one.

Why boards often underestimate this section

Boards and audit committees often focus their attention on:

strategy articulation,
financial performance,
risk management frameworks,
and compliance disclosures.

Resources and relationships tend to fall between these domains. They are discussed, but rarely interrogated as determinants of performance.

This is partly historical. Financial reporting traditionally focused on assets recognised on the balance sheet. Human capital, customer trust, supplier dependency or regulatory goodwill were treated as “soft” factors—important, but hard to measure.

IFRS Practice Statement 1 deliberately moves beyond that mindset. It recognises that value creation increasingly depends on resources and relationships that are not recognised in the financial statements, but are decisive for future performance.

When boards treat this section as descriptive, they miss a critical governance signal: whether management truly understands the dependencies and vulnerabilities of its business model.

Here is the link to the IFRS Practice Statement 1: Management Commentary on IFRS.org.

Resources: not what you own, but what you rely on

One of the most common misunderstandings is to equate “resources” with owned assets. In practice, resources under IFRS Practice Statement 1 are much broader. They include:

people and skills,
systems and processes,
intellectual property and data,
organisational culture,
and access to external capabilities.

Crucially, resources are defined not by ownership, but by reliance. If the business model depends on something to function or grow, it is a resource—regardless of whether it appears on the balance sheet.

Management commentary that merely lists resources without explaining how they enable strategy adds little value. The governance question is not “what resources exist?”, but:

which resources are critical,
how scarce or substitutable they are,
and how resilient they remain under stress.

Boards should read the resources section as an implicit statement about execution risk.

Read more on the New Zealand External Reporting Board, XRB.nz: IFRS Practice Statement 1 – Management Commentary (MPS1).

Relationships: the invisible infrastructure of performance

Relationships are often treated as a stakeholder exercise: customers, suppliers, employees, regulators, communities. IFRS Practice Statement 1 intends something much sharper.

Relationships are operational dependencies. They shape access, continuity, pricing power, regulatory latitude and reputational resilience. Poorly managed relationships rarely show up immediately in the numbers, but they almost always precede strategic failure.

Examples are familiar:

reliance on a small number of key suppliers,
dependence on a limited group of customers,
informal regulatory understandings,
or concentration of critical knowledge in a few individuals.

In management commentary, these dependencies are often softened into neutral descriptions. From a governance perspective, they are points of fragility.

A credible management commentary does not merely state that relationships exist. It explains:

which relationships are critical,
what the entity gives and receives,
and how changes in those relationships would affect performance.

Risks: consequences, not abstractions

Risk disclosures are usually extensive. Yet they are often disconnected from both strategy and resources.

IFRS Practice Statement 1 is clear that risks should not be presented as generic threats. They should be explained as consequences of how the entity operates, given its resources and relationships.

When risks are described independently of resources and relationships, they become abstract. Cyber risk without reference to systems and skills. Regulatory risk without reference to regulatory relationships. Supply chain risk without reference to supplier concentration.

The result is a risk section that satisfies form but fails substance.

For boards, this is where oversight should sharpen. The relevant question is not whether risks are listed, but whether they are logically derived from the way the business actually functions.

Why this section is governance-critical

Resources, risks and relationships together form the stress-test of strategy. They answer questions strategy alone cannot:

Is the strategy executable with the resources available?
Are critical relationships resilient or fragile?
Do identified risks genuinely reflect how value is created and threatened?

When management commentary integrates these elements, it becomes forward-looking without forecasting. It explains why certain outcomes are plausible and others are not.

When it does not, strategy floats above reality—and boards lose an early-warning signal.

Read more in our blog regarding IFRS 18: IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance.

The core governance failure

The most common governance failure in this area is not omission, but compartmentalisation. Resources, risks and relationships are disclosed, but not connected to:

objectives,
performance measures,
or strategic trade-offs.

IFRS Practice Statement 1 expects these connections to be made explicit. Not with exhaustive detail, but with explanatory discipline.

That expectation is routinely underestimated.

How resources, risks and relationships actually drive performance

If Part I established that resources, risks and relationships are not background information, Part II addresses the practical consequence of misunderstanding them: performance is explained without explaining its real drivers.

Many management commentaries describe results convincingly but cannot explain why those results occurred—or why they might not recur. That gap almost always traces back to weak integration between strategy, performance and the underlying operating reality of resources, risks and relationships.

IFRS Practice Statement 1 is explicit on this point. Management commentary should explain how the entity’s performance and position are shaped by the interaction of these elements. Not individually, but as a system.

Performance is an outcome of capability, not intention

A recurring flaw in management commentary is the assumption that performance follows strategy. In reality, performance follows capability.

Strategy expresses intent. Resources and relationships determine whether that intent can be executed. Risks arise where intent and capability are misaligned.

IFRS Practice Statement 1 therefore expects management to explain performance not only in terms of market conditions or strategic choices, but in terms of:

whether the right skills were available,
whether systems scaled as expected,
whether key relationships held,
and whether risks materialised because dependencies were underestimated.

When this explanation is absent, performance commentary becomes superficial. Results are attributed to “market dynamics” or “execution”, without clarifying what execution depended on.

For boards, this is a critical distinction. Strategy reviews that are not anchored in resources and relationships tend to overestimate controllability and underestimate fragility.

Resources as performance constraints

Resources are often discussed as strengths: talented people, robust systems, strong brands. IFRS Practice Statement 1 demands a more balanced view.

Resources are also constraints.

People resources constrain how fast an organisation can grow, transform or integrate acquisitions. System resources constrain how reliably data flows, controls operate and scaling occurs. Cultural resources constrain how change is absorbed or resisted.

Management commentary that presents resources only as assets misses their explanatory role. The governance-relevant question is not “what resources do we have?”, but:

which resources limit performance,
where bottlenecks exist,
and how sensitive outcomes are to resource strain.

Weak resource explanation often precedes performance volatility. Growth outpaces staffing. Digital ambitions exceed system maturity. Compliance expectations exceed control capacity.

These are not surprises. They are predictable outcomes of resource dependency—if explained honestly.

Relationships as multipliers of performance and risk

Relationships amplify both upside and downside. They are force multipliers.

A strong customer relationship can stabilise revenue in volatile markets. A fragile supplier relationship can disrupt operations despite strong demand. Regulatory trust can enable flexibility; its loss can constrain strategic options overnight.

IFRS Practice Statement 1 expects management to explain how relationships influence performance, not merely that they exist.

Yet many commentaries default to stakeholder mapping without substance. Customers are “important”. Suppliers are “strategic”. Regulators are “engaged”. None of this explains performance.

A governance-level explanation addresses:

dependency (how concentrated is reliance?),
reciprocity (what does the entity give as well as receive?),
and resilience (how quickly can relationships adapt under stress?).

When these aspects are ignored, performance explanations become detached from reality.

Boards should read the relationships section as an implicit risk map. Where dependency is high and alternatives are limited, risk is latent—even if not labelled as such.

Risks as expressions of dependency

IFRS Practice Statement 1 deliberately reframes risk. Risks are not abstract threats. They are the downside expression of how the business model relies on resources and relationships.

This is where many risk disclosures fail. They list risks generically—cyber risk, supply chain risk, regulatory risk—without rooting them in actual dependencies.

Cyber risk without reference to system architecture, skills or data concentration explains little. Supply chain risk without supplier concentration metrics explains less. Regulatory risk without discussion of regulatory relationships is hollow.

A credible management commentary links risks directly to:

specific resources (systems, people, data),
specific relationships (suppliers, regulators, partners),
and specific strategic choices (outsourcing, centralisation, leverage).

Only then does risk disclosure become explanatory rather than precautionary.

Why integration matters for performance credibility

Performance measures, KPIs and MPMs—discussed in Blog 2—only gain credibility when anchored in resources and relationships.

A margin target is meaningless without explanation of cost structure dependency. A growth KPI lacks credibility without explanation of capacity and talent availability. A cash flow measure is incomplete without discussion of customer and supplier payment dynamics.

IFRS Practice Statement 1 expects these connections to be made. It does not prescribe how detailed they must be, but it expects management to show causal reasoning.

When commentary fails to connect performance metrics to underlying capability, users are left to infer. That inference is rarely favourable.

The hidden governance signal: stress without disclosure

One of the most important governance signals is stress that appears in outcomes but not in explanation.

Examples include:

declining margins without discussion of cost rigidity,
delivery delays without discussion of capacity constraints,
compliance issues without discussion of control resourcing,
or customer churn without discussion of relationship fragility.

In each case, performance deteriorates before resources or relationships are acknowledged as drivers.

IFRS Practice Statement 1 is designed to surface this earlier. When management commentary explains performance through resources and relationships, stress becomes visible before it escalates.

Boards that insist on this integration gain time. Boards that accept compartmentalised explanations lose it.

Why this section exposes governance maturity

Resources, risks and relationships are uncomfortable because they expose limits of control.

They force management to acknowledge dependency, scarcity and vulnerability. They limit the ability to attribute outcomes solely to strategy or market conditions.

That is precisely why this section is governance-critical.

Strong governance does not eliminate dependency. It recognises it, explains it and manages it consciously.

Weak governance hides dependency behind abstraction.

IFRS Practice Statement 1 draws that distinction more sharply than many boards realise.

The cost of weak integration

When resources, risks and relationships are treated as separate disclosure silos, management commentary loses explanatory depth. Performance becomes harder to interpret. Forecast credibility declines. Risk oversight becomes reactive.

The cost is not immediate non-compliance. It is erosion of trust—internally and externally.

That erosion is difficult to reverse.

Oversight, early-warning signals and why this section is the board’s most underused tool

If Part I explained why resources, risks and relationships are not background information, and Part II showed how they actually drive performance, Part III addresses the decisive question: how boards and audit committees should use this section as an oversight instrument.

This is where IFRS Practice Statement 1 quietly but fundamentally elevates management commentary. Properly applied, the resources–risks–relationships section becomes one of the earliest and most reliable governance warning systems available to boards—often earlier than financial ratios, KPIs or risk dashboards.

Yet in practice, this potential is rarely realised.

From disclosure to oversight: the missing step

Most boards read management commentary as a reporting output. IFRS Practice Statement 1 implicitly expects boards to treat it as an oversight input.

The difference is crucial.

As disclosure, the section on resources, risks and relationships is assessed for completeness and tone. As oversight input, it is assessed for coherence, consistency and plausibility.

Boards should not ask:

“Is this section included?”
“Is it balanced?”

They should ask:

“Does this explanation actually make the reported performance plausible?”
“Do the stated resources support the strategy being pursued?”
“Are the identified risks a logical consequence of the dependencies described?”
“What would have to fail here for this strategy to unravel?”

These are governance questions, not disclosure questions.

Early-warning signals hidden in plain sight

One of the most powerful aspects of this section is its leading-indicator value.

Before financial performance deteriorates, stress usually appears elsewhere:

in people capacity,
in systems reliability,
in supplier or customer behaviour,
in regulatory friction,
or in concentration of dependency.

These signals almost always show up in resources, risks and relationships before they are visible in KPIs or financial statements.

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Examples are familiar:

rapid growth without corresponding talent depth,
digital transformation without system resilience,
increased outsourcing without supplier redundancy,
regulatory ambition without regulatory trust,
cost pressure without cost flexibility.

When management commentary describes these elements honestly, boards gain time. When it abstracts or softens them, boards lose it.

IFRS Practice Statement 1 is designed to surface these signals—but only if boards insist on integration rather than description.

Audit committees traditionally focus on:

financial reporting quality,
internal control effectiveness,
risk management frameworks,
and compliance.

Resources and relationships often fall outside this remit, assumed to belong to “operations” or “strategy”.

That assumption is increasingly dangerous.

Under IFRS Practice Statement 1, resources and relationships are foundational to explaining financial position and performance. Weak system capability is not an operational detail—it is a reporting risk. Fragile supplier dependency is not a procurement issue—it is a continuity risk. Talent scarcity is not an HR issue—it is an execution risk.

Audit committees that ignore this section miss a critical part of the assurance chain: whether reported performance rests on sustainable capability.

Why management often downplays this section

There is a reason this section is frequently vague: it exposes limits.

Resources, risks and relationships force management to acknowledge:

dependence rather than control,
constraint rather than ambition,
vulnerability rather than optionality.

That is uncomfortable—especially in externally facing reporting.

But governance maturity is precisely about owning dependency, not denying it. Boards that tolerate vague or generic language here inadvertently encourage overconfidence elsewhere in the report.

IFRS Practice Statement 1 does not require exhaustive detail. It requires honest linkage.

Connecting this section to KPIs and MPMs

There is a direct link between Blog 2 and Blog 3.

KPIs and MPMs explain how performance is measured.
Resources, risks and relationships explain whether that performance is repeatable.

A credible management commentary connects these layers:

performance measures are grounded in available capability,
targets reflect resource constraints,
risks explain volatility in metrics,
and relationships explain stability or fragility.

When these links are absent, performance reporting becomes brittle. It works when conditions are favourable and collapses under stress.

Boards should explicitly test these connections.

A practical board-level reading guide

Boards and audit committees can turn this section into a governance tool by asking five disciplined questions:

Dependency clarity
What does the strategy critically depend on—and is that dependency explicit?
Constraint realism
Where are the real limits to execution, and are they acknowledged?
Risk logic
Do identified risks logically follow from described resources and relationships?
Change sensitivity
Which resources or relationships would most quickly undermine performance if they changed?
Narrative stability
How does this explanation evolve over time—and what changes before results change?

These questions rarely appear in reporting checklists. They belong in boardrooms.

Why this section matters more in times of change

The importance of resources, risks and relationships increases sharply during:IFRS Practice Statement 1 resources and risks

rapid growth,
digital transformation,
restructuring,
regulatory tightening,
geopolitical disruption,
or sustainability transitions.

In such periods, financial performance often lags reality. Capability and dependency change first.

IFRS Practice Statement 1 anticipates this by positioning management commentary as a bridge between past performance and future viability.

Boards that use this section well gain foresight. Boards that treat it as narrative lose it.

Integrative conclusion – The quiet centre of governance

Resources, risks and relationships are not the most visible part of management commentary. They are, however, its quiet centre of gravity.

They explain why strategy is feasible or not.
They explain why performance is sustainable or fragile.
They explain why risks materialise—or do not.

IFRS Practice Statement 1 elevates this section from context to causal explanation. It expects management to connect ambition with capability, performance with dependency, and risk with reality.

For boards and audit committees, this is an opportunity often missed.

The most sophisticated governance failures rarely stem from missing strategies or inadequate KPIs. They stem from unacknowledged dependency—resources stretched too far, relationships taken for granted, risks listed but not internalised.

This section is where those failures can be seen early—if governance is willing to look.

Strong boards do not read resources, risks and relationships to reassure themselves.
They read it to understand where control ends and vulnerability begins.

That is why this is the most misunderstood—and potentially the most powerful—section of management commentary.

FAQ’s

FAQ 1 – What are “resources, risks and relationships” under IFRS Practice Statement 1?

Under IFRS Practice Statement 1, resources, risks and relationships describe the operating reality that enables or constrains strategy. Resources include people, systems, culture and capabilities the business relies on. Relationships include customers, suppliers, regulators and partners that create dependency. Risks are the downside expression of how these resources and relationships are configured. Together, they explain why performance occurs, not just what occurred.

FAQ 2 – Why is this section often misunderstood in management commentary?

Many organisations treat resources, risks and relationships as background or descriptive information rather than causal drivers of performance. As a result, they are listed rather than integrated with strategy and results. IFRS Practice Statement 1 intends this section to explain execution capability and vulnerability, not to serve as a static inventory.

FAQ 3 – How do resources and relationships explain performance better than strategy alone?

Strategy expresses intent, but performance follows capability. Resources determine what can realistically be executed, while relationships determine continuity, access and resilience. Without explaining these dependencies, performance commentary cannot explain why results were achieved—or why they may not be repeatable. This is why IFRS Practice Statement 1 requires performance to be explained through resources and relationships.

FAQ 4 – How should risks be connected to resources and relationships?

Risks should be explained as consequences of dependency. Cyber risk should be linked to systems and skills. Supply chain risk should be linked to supplier concentration. Regulatory risk should be linked to regulatory relationships. Generic risk lists without these connections fail to explain how the business model is actually exposed.

FAQ 5 – Why is this section important for boards and audit committees?

Resources, risks and relationships act as early-warning indicators. Stress often appears in capacity, systems or relationships before it appears in financial results. Boards and audit committees that read this section as an oversight input—rather than a disclosure output—can identify governance risk earlier than through KPIs or financial ratios alone.

FAQ 6 – How does this section link to KPIs and MPMs under IFRS 18?

KPIs and MPMs explain how performance is measured. Resources, risks and relationships explain whether that performance is sustainable. IFRS Practice Statement 1 expects these layers to be connected. Performance measures without explanation of underlying capability and dependency lack credibility, especially under stress.