IFRS Practice Statement 1: management commentary

Financial statements tell you what happened in numbers. They do not tell you why it happened, what the business depends on, or where it is going. A narrative report written by management fills that gap. It is called management commentary. International Financial Reporting Standards (IFRS) do not make it compulsory, but the International Accounting Standards Board (IASB) publishes a practice statement to show how to do it well.

This topic covers the scope of IFRS Practice Statement 1, what management commentary is, who reads it, its principles, qualitative characteristics, materiality, presentation, the five elements that ICAN teaches, performance measures, and the revised statement issued in 2025. The previous topics covered subsidiaries without public accountability and other standards. The next topic covers materiality judgements. The latest Pathfinder diets have no question on management commentary, but narrative reporting is examinable.

Key terms in plain English

Syllabus check

Narrative reporting is examinable under syllabus area C. This topic covers:

• the scope, principles, elements and presentation of management commentary;
• performance measures, forward-looking information and the revised statement.

CAMA 2020 and management commentary

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view.

Scope and definition

• The practice statement applies only to management commentary, not to other information in the statements or the report.
• It is used by entities that present management commentary on statements prepared under IFRS.
• It does not say which entities must publish it, how often or how far it must be audited. Each country or regulator decides.
• Management commentary is other financial reporting and sits within the Conceptual Framework. It is based on principles, so the form and content vary by entity.
• “Management” means those responsible for decisions and oversight: executives, key management personnel and members of a governing body.
• If the commentary relates to statements, the entity either makes them available with it or says which statements it relates to. The commentary must be clearly identified and distinguished from other information, and management states how far the practice statement was followed. A claim to comply is made only if the statement is followed in its entirety.

Principles

• Management’s view: it comes from the information management uses to run the business.
• Supplement and complement: it explains the amounts in the statements and the conditions and events behind them, and gives important information that is not in the statements (including resources that are not recognised).
• Forward-looking: it sets out management’s objectives and strategies, trends and uncertainties that could affect liquidity, capital, revenue and results, with assumptions disclosed. It may include targets or forecasts but need not. Management explains how and why performance is short of, meets or exceeds targets stated in the previous commentary, and what the variance means.
• Quality: fundamental characteristics are relevance and faithful representation; enhancing ones are comparability, verifiability, timeliness and understandability.
• Materiality: an entity-specific aspect of relevance.
• Presentation: clear, focused on the most important matters, consistent with the statements (for example segments), and free of duplication, generic boilerplate and immaterial detail. Reciting numbers without analysis is not useful.

The five elements (as ICAN teaches)

The elements are related. Present them together, with management’s view of how they interact.

1. Nature of the business: industries, main markets and competitive position, the legal, regulatory and economic environment, main products, services and distribution, and the structure and how value is created.
2. Objectives and strategies: priorities for action, how success is measured and over what period, significant changes from earlier periods, and the link with executive pay.
3. Resources, risks and relationships: the critical financial and non-financial resources and how they are used (capital structure, financing arrangements, liquidity, people, intellectual capital, plans for surpluses or shortfalls); the principal risks (strategic, commercial, operational and financial), how they are managed and how effective that is, covering opportunities as well as threats; and the significant relationships with stakeholders and how they are managed.
4. Results and prospects: an explanation of performance, position and progress, how results link to objectives and strategies, a comparison with earlier periods, and prospects, with the risks and assumptions behind any quantified targets.
5. Performance measures and indicators: those management uses to measure progress against its objectives, with reasons for changes. Use the measures that are widely accepted in the industry where possible, keep them consistent over time, and explain any changes.

Non-IFRS measures

If financial information is adjusted for the commentary, say so. A financial measure that is not defined by IFRS must be defined and explained, and its relevance stated. If it comes from the statements, it must be reconciled to a measure in the IFRS statements.

The revised practice statement (June 2025)

The IASB issued a revised IFRS Practice Statement 1 on 23 June 2025. It replaces the 2010 version for annual periods beginning on or after 23 June 2025, and earlier application is allowed. It is still not mandatory, and an entity may claim IFRS compliance without it. It follows an objectives-based approach: an overall objective (to enhance users’ understanding of the financial performance and position) and disclosure objectives for six interrelated areas of content:

1. Business model: how the entity creates value and generates cash flows.
2. Strategy: management’s strategy for sustaining and developing the business model.
3. Resources and relationships: those that the business model and strategy depend on, including resources not recognised as assets.
4. Risks: events or circumstances that could disrupt the business model, strategy, resources or relationships.
5. External environment: how it has affected or could affect the first four areas.
6. Financial performance and financial position: management’s view of the results and condition reported in the statements.

The headings are not prescribed, and management gives the material information needed to meet the objectives. It can be used with IFRS Sustainability Disclosure Standards so that financial and sustainability information are connected.

The rules in more depth

Why management’s view

The directors know the business best. Their explanation of what mattered gives users a guide that numbers alone cannot.

Why a forward-looking section needs assumptions

A target without its assumptions cannot be judged. Users need to see what would have to be true.

Why variances against earlier targets matter

It tests management’s credibility. A company that sets targets and never reports on them tells users little.

Why non-IFRS measures are reconciled

Management can choose what to leave out of an “underlying” profit. A reconciliation lets users see what was removed.

Effect on analysis

Commentary is where analysts find strategy, risk and the measures that management itself uses. They compare the words with the numbers.

Worked examples

1. Purpose: to give integrated information that explains what happened, why, and the implications. It complements the statements and looks at the past, present and future.
2. Principles: management’s view; supplement and complement (for example how currency changes and supply disruptions affected the results); relevance and faithful representation; forward-looking direction; and the needs of investors, lenders and creditors.
3. Five elements: nature of the business (markets, products, distribution, competitors); objectives and strategies (priorities, how success is measured, changes); resources, risks and relationships (liquidity, plants, intellectual property; technology change, supply chain, currency; suppliers and distributors); results and prospects; and performance measures (for example market share and margin).

1. Revenue was ₦8bn (16%) below target, and one approval was missed.
2. The commentary must say how and why results fell short: for example regulatory delays, more competition and supply chain disruption.
3. It must explain what the variance means for management’s expectations (for example later approval dates and lower revenue growth), and any change in strategy.
4. New forward-looking statements, such as the pipeline and expected approvals, state their assumptions and the risks. They set out management’s direction and do not promise outcomes.

1. The measure must be defined: for example, “underlying profit is profit for the year before restructuring costs and gains on disposals of land”.
2. Reconciliation.
   900 + 100 − 40 = ₦960m underlying profit.
3. The entity explains why it is useful to users and shows that the figures are adjusted. It is shown with the IFRS profit and not in place of it.

1. Resources: financing and liquidity, the reserves and facilities, the skilled people, technology and intellectual capital, and plans for any shortfalls.
2. Risks: only the principal ones (price, regulatory, environmental, operational and financial), how each is managed (for example hedging, compliance programmes, spill response) and how effective that is.
3. Relationships: for each, what it is, how it affects performance, and how it is managed: joint venture partners (shared costs and decisions), the government (licences and compliance), host communities (consent and development obligations), service providers (access to technology), customers (concentration), and lenders (covenants).
4. Show how they interact, for example that community relations affect production and so the lenders’ covenants.

How to score full marks

• Name the user and tie each point to what they need.
• Use the elements as headings (five, or the six areas of the revised statement).
• Apply them to the company’s facts and use its name.
• Link the commentary to the financial statements and say what is not in them.
• For forward-looking items, give the assumptions and the variance against earlier targets.
• For performance measures, define, explain and reconcile non-IFRS ones.
• State that the statement is non-mandatory and that compliance means following all of it.

Common mistakes in the exam

• Saying that management commentary is compulsory under IFRS.
• Listing the elements without applying them to the company.
• Repeating the figures in the statements without explanation.
• Listing every risk and not the principal ones.
• Giving a target without assumptions or ignoring a missed target.
• Using a non-IFRS measure without defining and reconciling it.
• Claiming compliance after following only part of the statement.

Quick revision

• Narrative report that gives context and management’s view. Non-mandatory.
• Users: investors, lenders and other creditors.
• Principles: management’s view, supplement and complement, forward-looking, quality, materiality, clarity.
• Five elements (ICAN): business, objectives and strategies, resources risks and relationships, results and prospects, performance measures.
• Revised 2025 statement: six areas of content, objectives-based, replaces the 2010 version.
• CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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