Following a Government announcement on 25 November, the Accounting Standards Board (ASB) has today issued an Exposure Draft of a Reporting Standard (RED 1) on the Operating and Financial Review (OFR). 

Under the Government proposals, quoted companies will be required to prepare a statutory OFR for the first time for financial years beginning on or after 1 April 2005. The Government has also announced that it intends to specify the ASB in legislation as the body to make the standards for the OFR.  Regulations giving legal effect to the proposals will be laid before Parliament in the next two months.

The proposals in the RED build on the requirements of the forthcoming Regulations and the ASB’s existing 2003 statement of best practice on the OFR, which is already used by many companies.

The proposals involve a principles-based standard which, in particular, makes clear that the OFR shall reflect the directors’ view of the business.  The objective is to assist investors to assess the strategies adopted and the potential for those strategies to succeed.  The information in the OFR will be useful to both investors and other users.

They also provide a basic framework for directors to apply in order to meet the requirements of the Regulations.  It is for the directors to consider how best to use this framework to structure the OFR, given the particular circumstances of the entity.

Although following a framework approach, the ASB is conscious that some guidance would be useful to directors and it has accordingly prepared some draft Implementation Guidance to accompany the draft Reporting Standard. The Guidance sets out some illustrations and suggestions of specific content and related key performance indicators that might be included in an OFR, especially on the particular matters referred to in the Regulations.

Commenting on the publication of the RED, Ian Mackintosh, ASB Chairman, said:

“Today’s capital markets demand greater transparency and more open communication between companies and investors. While for many companies, the OFR is already an important element of that communication, by making the OFR mandatory for quoted companies, the Government has made it clear that the time is right to extend the benefits of good OFR reporting.  The ASB is happy to support this initiative and we believe that the reporting standard provides a great opportunity for making improvements to company reporting.”

“The proposals issued today set out what we believe is an open and flexible structure for the OFR within which the directors can present their analysis of the business and its particular circumstances.  We look forward to receiving the views of all interested parties on this important issue.”

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Press enquiries:

Ian Mackintosh (Chairman) on 020 7611 9702 or David Loweth (Board Secretary) on 020 7611 9706.

1. On 25 November, the Government announced that, for financial years beginning on or after 1 April 2005, quoted companies in Great Britain will be required to prepare an OFR. Regulations giving legal effect to this requirement will shortly be laid before Parliament. The Government has also announced that the ASB will be specified under powers conferred by Section 13 of the Companies (Audit, Investigations and Community Enterprises) Act 2004 to make the standards for the mandatory OFR.
   
   
2. Schedule 7ZA of the forthcoming Regulations specifies the objective and content of the OFR. In developing the proposals in the RED published today, the Board has sought to reflect the requirements of the legislation and to build on its existing statement of best practice on the OFR, the latest version of which was issued in January 2003.
   
   
3. The disclosure framework in the RED reflects the provisions in the Regulations that set out the details of the general requirements that should always be included in an OFR, as well as the details of the particular matters which must be reported on “to the extent necessary” to meet those general requirements. These particular matters include employees, environmental matters, social and community issues, with analysis using key performance indicators. The Board has not specified any mandatory disclosures in these areas, recognising that it has to be for directors to judge what is required for an understanding of their business.
   
   
4. The deadline for comments on the RED is 28 February 2005. Copies of the ED can be downloaded, free of charge, from the ASB’s website at www.frc.org.uk/asb. Hard copies can be ordered, price £6.00 post-free, from ASB Publications, 145 London Road, Kingston upon Thames, Surrey, KT2 6SR (020 8247 1264). Web: www.asbpublications.com.
   
   
5. The ASB aims to finalise the Reporting Standard as soon as possible after the end of the consultation period, but given the need to give due consideration to the views of respondents it may not be possible to do so before 1 April 2005.
   
   
6. The ASB is an operating board of the Financial Reporting Council (FRC). The FRC is a unified, independent regulator. Its mission is to promote confidence in corporate reporting and governance. The FRC incorporates five operating boards: the ASB, the Auditing Practices Board, the Financial Reporting Review Panel, the Accountancy Discipline and Investigation Board and the Professional Oversight Board for Accountancy.
   
   
7. The role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
   
   
8. The ASB has up to ten Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who represent a variety of interests, are part-time.

1. The objective of the proposals in RED 1 is to specify the requirements for an OFR, which shall be a balanced and comprehensive analysis of:
   
   
   1. the development and performance of the business of the entity during the financial year;
   2. the position of the entity at the end of the year;
   3. the main trends and factors underlying the development, performance and position of the business of the entity during the financial year; and
   4. the main trends and factors which are likely to affect their future development, performance and position,
      
      
   prepared so as to assist investors to assess the strategies adopted by the entity and the potential for those strategies to succeed.
   
   
2. The proposals involve:
   
   
   • the setting out of a number of principles for directors to apply when preparing an OFR; and
   • the provision of a disclosure framework for directors to apply in order to meet the requirements of the Regulations.
     
     
3. The principles require that the OFR shall:
   
   
   • reflect the directors’ view of the business;
   • focus on matters that are relevant to investors;
   • have a forward-looking orientation;
   • complement as well as supplement the financial statements;
   • be comprehensive and understandable;
   • be balanced and neutral; and
   • be comparable over time.
     
     
4. The key elements of the disclosure framework in RED 1 cover:
   
   
   1. the nature, objectives and strategies of the business;
   2. the development and performance of the business, both in the period under review and in the future;
   3. the resources, risks and uncertainties and relationships that may affect the entity’s long-term value; and
   4. position of the business including a description of the capital structure, treasury policies and objectives and liquidity of the entity, both in the period under review and the future.
      
      
5. The proposals also cover the provisions in the Regulations that “to the extent necessary to meet the requirements of the key elements set out above, the OFR shall include information about a range of particular matters, in particular:
   
   
   • persons with whom the entity has relations, such as customers and suppliers;
   • employees;
   • environmental matters;
   • social and community issues; and
   • receipts from, and returns to, shareholders.
     
     
6. The list in the Regulations is non-exhaustive and RED 1 gives examples of further areas that might be covered.
   
   
7. On Key Performance Indicators (KPIs), the approach in the draft Reporting Standard emphasises that it is for directors to consider which KPIs, and how many, best reflect their judgement of what is required for an understanding of the business. The draft Reporting Standard sets out what disclosures should be made for each KPI included in the OFR, in order that investors can understand and evaluate each one.
   
   
8. The draft Implementation Guidance which accompanies, but is not part of, the draft Reporting Standard, is designed to assist directors by outlining some suggestions and illustrations of the content required to be covered in the OFR, with some example KPIs and further “signposting” guidance as to the areas directors will need to consider with regard to the particular matters referred to above.