On 10 May, the ASB 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 to make the standards for the mandatory OFR. The legal 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 supersedes. It also reflects the responses received to Reporting Exposure Draft (RED) 1, which the ASB issued in November 2004. The main 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 sets out:
- 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, principal 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 members 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.
Copies of RS1 'The Operating and Financial Review' can be downloaded, free of charge, from the ASB's website.
