Whatever name it goes by – and the various laws and standards that govern it use a variety of different terms for the same thing – the management report is the place where an entity is required to take stock of the year under review and cast a more or less accurate look into the future. A particular challenge for auditors is assessing the soft factors in a management report. The management report is a unique opportunity to build trust – one, unfortunately, that few organisations choose to exploit.

The Swiss Code of Obligations (CO), Swiss GAAP FER, the EU Accounting Directive and US GAAP all require a management report by one name or another. The precise requirements vary depending on the country and the rules. In this article you’ll find a broad overview of the status quo.

Management reports under the Swiss Code of Obligations

In Switzerland, an annual report produced in accordance with the CO comprises an entity’s financial statements, a management report and – if required by law – consolidated accounts. Under the terms of Art. 961 CO, entities that exceed two of the relevant
20-40-250 limits and are thus subject to an ordinary audit must produce a management report. Art. 961c CO stipulates that the management report must present the business performance and the economic position of the undertaking from points of view not covered in the financial statements. In concrete terms this means providing information on the average headcount over the year (in FTE terms), the conduct of a risk assessment, orders and assignments, research and development activities, extraordinary events and future prospects. The management report must not contradict the economic position presented in the financial statements. In most cases Art. 961 CO is redundant, as entities that exceed the 20/40/250 limits often produce consolidated financial statements in any case in accordance with a recognised financial reporting standard. Depending on the standard used, this will also require the production of a management report.

Annual reports under Swiss GAAP FER
The management report described in the Swiss GAAP FER Framework has to cover the following aspects:

• An outline of the economic environment in the year under review and expectations for the future
• Comments on the components of the financial statements based on the key business ratios presented in the balance sheet and income statement, and their development
• Comments on the further development of the organisation, mainly with regard to risks and opportunities for the subsequent financial year.

Swiss GAAP FER requires a more future-oriented view than the CO.

Performance reports as per Swiss GAAP FER 21

Swiss GAAP FER 21 governs financial reporting for charitable non-profit organisations (NPOs). The recommendation is designed to make NPO reporting more meaningful and comparable. To take account of the lack of profit motive and the way NPOs are funded, in addition to the annual accounts Swiss GAAP FER 21 requires a statement of changes in capital and a performance report. The performance report is supposed to cover matters such as the purpose and objectives of the NPO, the services it provides, details of its management, and ties to affiliated persons. To this extent the performance report corresponds to an extended management report.

Management reports under EU Directive 2013/34/EU

Directive 2013/34/EU of the European Parliament and of the Council entered into force on 26 June 2013, superseding the fourth and seventh EU Directives. The so-called Accounting Directive was adopted in country-specific legislation in member states. The requirements governing management reports vary from country to country. Under Art. 19 of the Accounting Directive, an undertaking or group must provide a fair review of the development and performance of its business. The review must constitute a balanced and comprehensive analysis of the development and performance of the undertaking’s business and of its position, consistent with the size and complexity of the business. The management report is also supposed to cover the following things:

• Developments of particular importance occurring after the end of the financial year
• The likely future development of the undertaking
• Research and development activities
• Information concerning the acquisition of the entity’s own shares

All this makes producing a management report in compliance with EU Directive 2013/34/EU an extremely wide-ranging and complex undertaking. In addition, Art. 29 of the Accounting Directive also requires groups to publish a consolidated management report.

Management commentaries under IFRS

The International Accounting Standards Board (IASB) has published a practice statement providing a framework for the presentation of a management commentary that relates to financial statements prepared in accordance with IFRS. The practice statement is not an IFRS, which means that entities are not required to comply with the practice statement unless specifically required by their jurisdiction or the local stock exchange. Management commentaries should provide:

• A presentation of the entity’s asset, financial and earnings situation
• A narrative report on the entity’s performance, position and progress from the management’s point of view
• Information supplementing and complementing information presented in the financial statements

Management commentaries should contain both forward-looking information and information with qualitative characteristics relevant to financial reporting. It should enable readers to assess the entity’s earning power, the strategies adopted by its management, and their plans for the business. This includes material risks, the strategy with regard to risks, the influence of resources not presented in the financial statements, and the significance of non-financial factors (see Non-financial reporting). The stock exchange in Switzerland does not require a management report. But entities that report in line with IFRS provide information on their financial position in their annual report in any case – if only because commentary of this sort is part and parcel of responsible reporting.

Notes in accordance with US GAAP and Form 20-F

The United States Generally Accepted Accounting Principles (US GAAP) were developed primarily with the aim of providing existing and potential investors with better information. Alongside a balance sheet, a profit and loss statement, a statement of cash flows and a statement of changes in equity, US GAAP requires notes to the financial statement including a comprehensive review of operations. The 20-F is a form filed to the US Securities and Exchange Commission (SEC) by foreign issuers that have shares traded on a US exchange. Companies subject to the requirement must use Form 20-F to file an annual report within six months of the end of the financial year. The form performs the function of a management report, placing the emphasis on detailed information relating to the history and development of the business and risk factors to which the entity is exposed.

Imposition rather than aspiration

Responsibility for a management report and signing it off for publication lies with the board of directors; executive management is responsible for producing the report. In many cases Swiss companies view the management report as an onerous obligation. Very few take a broad perspective, and even fewer produce a report with an integrated view (see Integrated reporting). This is a shame, because a management report is a good strategic opportunity to present yourself to investors as a well-positioned organisation that produces far-sighted reporting, building trust and enhancing your image. The clearer your management report, the easier it is to present and understand value creation within your organisation.

Challenge for auditors

Under the Swiss Code of Obligations and Swiss GAAP FER only the financial statements and, if applicable, the consolidated financial statements are audited – not the management report, which falls under the category of ‘other information’. While the auditors are not responsible for the correctness of this other information, they are responsible for ensuring that this other information does not contain discrepancies in relation to the audited financial statements. If the auditors discover discrepancies, the entity must decide whether to correct the audited financial statements or the other information. Under the EU Directive the auditor is supposed to check whether the management report tallies with the financial statements for the year in question and was produced in compliance with the applicable rules. Unlike the Swiss Code of Obligations and Swiss GAAP FER, this constitutes positive confirmation. In other words, the duties of an auditor auditing financial statements under EU law go further than in Switzerland.

Beware the pitfalls

Management reports are a major challenge, both for the people producing them and for the auditor. An EU management report, for example, is supposed to cover risks and uncertainties. This requires a detailed assessment of the company’s capabilities. Here sensitive business transactions in particular can lead to a certain conflict of interest in terms of whether information is worthy of publication or not. Providing a balanced and comprehensive analysis of the development and performance of the undertaking’s business consistent with its size and complexity entails soft factors, which are hard to define, present and verify. Here it is advisable to view the information from the same perspective and measure it by the same yardstick.

Scope for optimising effort

The EU Accounting Directive acknowledges the key role of small and medium-sized enterprises (SMEs) in the economy, and is aware of the effort involved in producing a management report. For this reason it has adopted the principle of ‘think small first’, allowing member states to exempt SMEs from the requirement to disclose non-financial information and keep the work involved in reporting within reasonable limits.

It’s also possible to optimise the effort involved in producing a proper management report from a technical point of view. Producing a management report involves bringing together data from different sources and systems, which makes the process more prone to error. These days there are various IT-based tools available to address this problem. For example the SmartNotes publishing platform can enable organisations to merge information from a variety of sources and produce and amend their financial or annual report quickly and error-free.