This page was last reviewed in January 2008.
On 28 November 2005, the Chancellor of the Exchequer announced the Government's intention to remove the statutory requirement for quoted companies to publish an OFR for financial years beginning on or after 1 April 2005. Regulations to repeal the requirement (Statutory Instrument, SI, No. 2005/3442) were laid in Parliament on 15 December and came into effect on 12 January 2006. This had implications for the ASB's Reporting Standard (RS) 1 'The Operating and Financial Review', which has now been formally withdrawn. As a result, the Board has converted RS 1 into a Reporting Statement of best practice on the OFR, which will have persuasive rather than mandatory force. The statement was published on 26 January.
In January 2008 the ASB issued a press notice reminding UK quoted companies of the need to follow the enhanced business review reporting requirements in the Companies Act 2006. The ASB believes its Reporting Statement on the OFR includes all of the new Companies Act 2006 requirements and that this statement continues to provide applicable best practice guidance for UK companies. In order to further assist UK companies, the press notice also includes a table which illustrates the link between best practice guidance and legislative requirement.
Reporting Statement
The Reporting Statement involves:
the specification of a number of principles for directors to apply when preparing an OFR; and the provision of recommended key elements of a disclosure framework to apply in an OFR.
The principles in particular make clear that the OFR should reflect the directors' view of the business. The objective is to assist members of the company (the current shareholders) to assess the strategies adopted by the entity and the potential for those strategies to succeed. While the OFR should focus on matters that are relevant to members, the information in the review will also be useful to other users.
The Reporting Statement sets out a framework of the main elements that should be disclosed in an OFR, leaving it to directors to consider how best to structure their review, in the light of the particular circumstances of the entity. It contains recommendations on the disclosures that should be made in respect of any Key Performance Indicators (KPIs) included in an OFR, but it does not specify any particular KPIs that entities should disclose, nor how many, on the grounds that this is a matter for directors to decide.
The Reporting Statement is accompanied by the Implementation Guidance that the ASB prepared to accompany RS 1. The Guidance sets out some illustrations and suggestions of specific content and related KPIs that directors might consider including in an OFR.
RS 1
The ASB issued RS 1 on 10 May 2005. RS1 was the first Reporting Standard issued by the ASB under its then legal powers to make standards for the OFR ('The Reporting Standards (Specified Body) Order 2005' (SI 2005 No. 692)). The legal requirements for the OFR were set out in 'The Companies Act 1985 (Operating and Financial Review and Directors' Report etc.) Regulations 2005' (SI 2005 No. 1011), now repealed by 'The Companies Act 1985 (Operating and Financial Review) (Repeal) Regulations 2005 (SI 2005 No. 3442).
The process of developing the standard was started in May 2004, when the Government announced its proposals for a statutory OFR and indicated that it intended to specify the ASB as the body to make reporting standards for the OFR. An Exposure Draft of the Standard (RED 1) was issued on 30 November 2004 and attracted some 60 responses.
RS 1 built on the requirements of the OFR Regulations and the ASB's 2003 statement of best practice on the OFR, which RS 1 superseded. The standard applied to quoted companies in Great Britain and to any other entities that purported to prepare "Operating and Financial Reviews". It was a principles-based standard, which in particular made clear that the OFR had to reflect the directors' view of the business.
Review of Narrative Reporting
In January 2007 the ASB published a Review of narrative reporting by UK listed companies in 2006. The Report examines the depth to which companies have adopted the recommendations in the Reporting Statement, as well as compliance with the legal requirements on The Business Review. The Report can be accessed here.
Contact: Melanie Kerr
