Where now for the OFR?

On 28 November, the Chancellor of the Exchequer announced in his speech to the CBI Annual Conference that the Government intends to remove the statutory requirement for quoted companies to publish an Operating and Financial Review (OFR) for financial years beginning on or after 1 April 2005. This has implications for the ASB's Reporting Standard 1 (RS1) 'The Operating and Financial Review', which was issued in May under new legal powers to make reporting standards for the statutory OFR and in response to the Government's proposals.

Does this mean that companies should no longer publish an OFR? In our view, the answer is a resounding 'no'. The ASB has long believed that the publication of a narrative explanation of a company's development, performance, position and prospects should be encouraged as an important element of best practice in corporate reporting. The ASB first produced a statement of best practice in 1993 and updated it as recently as 2003. Recent research published by Deloitte ('Hold the Front Pages') showed that 82 per cent of listed companies, in 2004-05, either produced a formal OFR or showed clear recognition of an OFR.

Regardless of whether or not an OFR is a statutory requirement, the ASB's view of best practice remains unchanged. RS1 is the most up-to-date and authoritative good source of best practice guidance for companies to follow.

In any event, companies (and not just quoted companies) and groups will still be required by law to publish an enhanced business review in the directors' report. This requires large and medium-sized (but not small) companies to provide a "balanced and comprehensive analysis of the development and performance of the company's business and of its position, consistent with the size and complexity of the business". The review must also include a description of the principal risks and uncertainties that a company faces.

A lot of the debate over the statutory OFR focused on the reporting of nonfinancial aspects. If companies feel that they no longer have to report anything on social and environmental matters, they may need to just pause and think again. The law requires that "to the extent necessary for an understanding of the company's development, performance or position, the analysis shall include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters". Medium-sized companies do not have to provide the non-financial information.

As the Government's detailed plans for removing the statutory requirement for the OFR become clearer, the ASB will consider the implications, consult as appropriate and make further announcements. But the OFR is here to stay.

UITF Abstract 40 on service contracts

UITF Abstract 40 'Revenue recognition and service contracts' was issued on 10 March and is mandatory for accounting periods ending on or after 22 June 2005. It says, in a nutshell, that revenue from performing services should be recognised as contract activity progresses, rather than on contract completion, when the substance of the contract is that the seller performs its contractual obligations gradually over time.

A number of constituents have been disappointed with the final Abstract and have asked the UITF to reconsider it. A principal concern is that many service providers will have to change previously accepted policies in accounting for short-term service contracts, reporting revenues and therefore profits earlier than before, and that tax will be payable earlier as a result.

The UITF's role, when unsatisfactory or conflicting interpretations of an accounting standard have developed or seem likely to develop, is to reach a consensus as to the accounting treatment that should be adopted. In this case, the UITF had been asked by the CCAB bodies and others that uncertainty and conflicting interpretations surrounded the accounting for service contracts under Application Note G 'Revenue Recognition' to FRS 5 'Reporting the substance of transactions'. The UITF was urged to provide guidance. In reaching a consensus as to the accounting treatment that should be adopted, the UITF does not take a position one way or the other if a particular accounting treatment may have adverse (or indeed favourable) tax consequences for the entities concerned.

The UITF takes the view that Application Note G requires service contracts of any duration to be accounted for in accordance with its general principles and is content that Abstract 40 properly reflects those principles and the interface between Application Note G and SSAP 9 'Stocks and long-term contracts'. The UITF's consensus was ratified by the ASB.

A further question has arisen concerning Abstract 40 and the FRSSE. The Abstract includes the standard exemption for entities that use the FRSSE and it has been suggested in some quarters that they can ignore the Abstract. The principles of Application Note G are, however, reflected in the standard section of the FRSSE 2005 and the ASB has included the consensus paragraphs of Abstract 40 as guidance in an appendix. Its inclusion can only serve to underline that entities using the FRSSE should have regard to that guidance to determine current practice.