UK: Business Reviews – An Improvement?

Originally published 10th February 2006

The Department of Trade and Industry ("DTI") is seeking comments on the content of the business review which is to be included in the directors’ report on the accounts of quoted companies. The requirement for a mandatory operating and financial review ("OFR") has been removed.

The OFR was one of the foundations of the new accounting requirements for companies recommended by the company law review. It was regarded as essential for greater transparency regarding business strategy and future prospects and for boosting investor confidence in capital markets. Legislation introducing the OFR was rushed through in the Companies (Audit, Investigations and Community Enterprise) Act 2004. The Chancellor of the Exchequer announced the removal of the mandatory requirement for the OFR at the end of last year citing over regulation as the reason for change.

The abolition of the OFR has caused a great deal of adverse comment in some quarters, particularly from the Association of British Insurers; companies who had spent a great deal of money preparing for the OFR and from Friends of the Earth who brought legal action claiming that the government had acted unlawfully in abolishing the rules without proper consultation.

The government has agreed to pay Friends of the Earth’s legal costs in an out-of-court settlement and has very recently announced that the consultation on the content of the business review will be widened to allow comments on issues enshrined in the OFR such as environmental and community matters.

The business review is intended to be less prescriptive than the OFR and will not have any requirement for audit. The DTI has indicated that the business review is to provide a balanced and comprehensive analysis of the development and performance of a business and the position of the company at the end of that year consistent with the size and complexity of the business concerned. The directors’ report must contain a description of the principal risks and uncertainties facing the company and be measurable against key performance indicators.

Comments are required by March 24, 2006. It is intended that the new rules will be incorporated into the new Companies Bill currently going through parliament.

More information on the DTI proposals can be found on the DTI website at www.dti.gov.uk/cld/N00009PH.pdf.

The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Readers should not act on the basis of the information in this article without taking appropriate professional advice upon their own particular circumstances.