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The Accounting Standards Board (ASB) has today issued Reporting Standard (RS) 1 ‘The Operating and Financial Review’.
RS1 is the first Reporting Standard issued by the ASB under its new legal powers. 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.
The standard applies to quoted companies in Great Britain and to any other entities that purport to prepare “Operating and Financial Reviews”. It is 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 shareholders to assess the strategies adopted and the potential for those strategies to succeed. The information in the OFR will also be useful to a wide range of other users.
RS 1 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. Similarly, RS 1 does not specify any specific Key Performance Indicators (KPIs) that entities should disclose, nor how many, on the grounds that this is a matter for directors to decide.
The standard is accompanied by Implementation Guidance, which the ASB believes will be useful to directors in considering what to include in their OFR. The Guidance sets out some illustrations and suggestions of specific content and related KPIs that might be included in an OFR. Announcing the publication of the standard, Ian Mackintosh, Chairman of the ASB, said:
“This reporting standard represents an important step forward in encouraging greater transparency and more open communication between companies and their shareholders. The requirement to prepare an OFR should be seen as an opportunity for directors to present a clear and balanced analysis of the strategic position and direction of their business. This should be of great benefit to many parties.”
“The ASB believes it important that the OFR shall have a forward-looking orientation, identifying those trends and factors relevant to the investors’ assessment of the current and future performance of the business and the progress towards the achievement of long-term business objectives.”
“Respondents to the Exposure Draft supported the open and flexible structure we proposed, within which the directors can present their analysis of the business in a way which best reflects its particular circumstances. We look forward to seeing the benefits of good OFR reporting being extended across a broader range of companies and other entities.”
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.
The role of the ASB is to issue accounting standards and reporting 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.
The ASB has been given legal powers to make standards for the OFR in 'The Reporting Standards (Specified Body) Order 2005' (Statutory Instrument, SI, 2005 No. 692). The legal requirements for the OFR are set out in 'The Companies Act 1985 (Operating and Financial Review and Directors' Report etc.) Regulations 2005' (SI 2005 No. 1011). The OFR Regulations require quoted companies in Great Britain to prepare an OFR for financial years beginning on or after 1 April 2005.
RS 1 builds on the requirements of the OFR Regulations and the ASB's 2003 statement of best practice on the OFR, which RS 1 now supercedes. It also reflects the responses received to Reporting Exposure Draft (RED) 1, which the ASB issued on 30 November 2004 (PN 258). The major change from RED 1 has been to clarify that the OFR should be for "members" (shareholders), rather than investors more widely. This is both consistent with the legislation and addresses concerns expressed by respondents that a focus on investors would extend directors' liability.
RS 1 involves:
the specification of a number of principles for directors to apply when preparing an OFR; and the provision of key elements of a disclosure framework to apply in order to meet the requirements of the Regulations.
Principles
The principles in particular make clear that the OFR shall reflect the directors' view of the business. The objective is to assist members to assess the strategies adopted by the entity and the potential for those strategies to succeed. While the OFR shall focus on matters that are relevant to members, the information in the review will also be useful to other users.
Further principles require that the OFR shall:
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.
Disclosure framework
The key elements of the disclosure framework cover:
the nature, objectives and strategies of the business; the development and performance of the business, both in the period under review and in the future; the resources, risks and uncertainties and relationships that may affect the entity's long-term value; and the 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.
It is for directors to consider how best to use this framework to structure the OFR, given the particular circumstances of the entity.
RS 1 also reflects 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 matters, including employees, environmental matters, and social and community issues, with analysis using key performance indicators (KPIs). The ASB 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. RS 1 sets out what disclosures should be made for each KPI included in the OFR, in order that investors can understand and evaluate each one.
Although following a framework approach, the ASB is conscious that some guidance would be useful to directors and it has accordingly prepared some Implementation Guidance to accompany the Reporting Standard. The Guidance sets out some illustrations and suggestions of specific content and related KPIs that might be included in an OFR.
The ASB will keep RS 1 under review to reflect developments. For example, the ASB will continue to monitor the work of the Review of the Turnbull Guidance on Internal Control, in order to determine what should be the appropriate linkages between the OFR and the statement of internal control. The Board will examine the final output of the review to consider whether any amendment to the Reporting Standard might be necessary.
All Press enquiries should be directed to: Ian Mackintosh (Chairman) on 020 7492 2434 or David Loweth (Board Secretary) on 020 7492 2420.
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