On 10 May 2005, 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 standards for the OFR (‘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.

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. An Exposure Draft of the Standard (RED 1) was issued on 30 November 2004 and attracted some 60 responses.

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. 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.

Contact: David Loweth