On 10 June, the ASB published for comment an Exposure Draft of a revision to its Statement ‘Operating and Financial Review’. Commentators have until the end of October to respond with their views.

As companies and their transactions continue to increase in complexity, narrative reporting assumes an increasingly important role in the overall corporate reporting package. Although the existing OFR Statement was, in a number of respects, ahead of its time when it was first issued in 1993, best practice has moved on considerably since then.

The proposed Statement retains the existing approach, providing a framework to assist directors but avoiding detailed requirements. The Board believes that this approach is most appropriate for reporting of this type and that a more detailed Statement could impair the directors’ ability to describe their own business. The main revisions proposed in the draft are as follows:

• A series of principles to be applied by directors when preparing an OFR, with guidance in the remainder of the Statement to assist in the application of these principles. The principles cover areas such as the purpose and audience of the OFR, the reliability of information and the use of financial and non-financial measures.

• A new section covering ‘the business, its objectives and strategy’ intended to give context to the discussion of the performance and financial position of the business in the remainder of the Statement.

• A broader discussion of performance, based on the achievement of business objectives identified by management, as well as the items in the profit and loss account and the STRGL. The Board took the view that, if management sets objectives in a particular area (for example, total shareholder return, return on capital employed or in the area of corporate social responsibility), the OFR should discuss the performance of the business in that context.

  A consequence of this more inclusive approach is the recognition that reporting non-financial measures may be as important as financial measures in explaining strategy and performance. It is also recommended that boards of directors should identify and comment on the ‘key performance indicators’ used in managing the business.

• A greater emphasis in the ‘dynamics’ section on the importance of discussing the strengths and resources of the business whose value may not be fully reflected in the balance sheet (for example, brand equity, intellectual capital and proprietary business processes). This section also focuses on the identification and reporting of risk.

This consultation seeks to canvass UK views on the direction in which any future international guidance should develop. In particular, the ‘light-touch’, principled approach favoured by the ASB differs from that adopted in some other regimes. Commentators’ views on this point would be of considerable interest.

The recommendations of the independent Company Law Review steering group, published in 2001, include a proposal that large public (and very large private) companies should be required by law to prepare an OFR. The ASB’s Exposure Draft may facilitate discussion of the form that a future requirement might take; it does not, however, anticipate whatever decisions may be taken on the Company Law Review recommendations. For the foreseeable future, the revised Statement would remain voluntary.

Your comments and suggestions will assist the Board to assess what is regarded as appropriate disclosure and what level of guidance it should provide. A strong response both from preparers of company reports and investors will be essential in an area where views differ widely.