ARTICLE
17 March 2006

Corporate Governance Update Part 1 of 3

This publication provides an update on narrative reporting regulation in the UK. The volume of activity and press in this area has remained high over the past few months and, with the ongoing extended DTI consultation on the subject, we anticipate much more to come.
United Kingdom Corporate/Commercial Law

1. Preface

This publication provides an update on narrative reporting regulation in the UK. The volume of activity and press in this area has remained high over the past few months and, with the ongoing extended DTI consultation on the subject, we anticipate much more to come.

When the Government made the decision in November 2005 to scrap the statutory operating and financial review (OFR) and leave all companies, listed and unlisted, to produce an enhanced business review (EBR) in their directors’ report from 1 April 2005, it expected the response from most quarters to be positive. We were certainly somewhat relieved. However the decision, and in particular its timing given the long period of consultation that led to the introduction of a mandatory OFR in the first place, has seemed to prompt more criticism than appreciation.

Whilst our 2005 survey 'Hold the Front Pages’ leads us to expect voluntary OFRs to continue, concern has been voiced about the potential impact of a voluntary regime on the quality of narrative reporting that will be produced by UK listed companies. In particular, special interest groups are concerned about the loss of the clear requirements to report on issues such as the environment and employees. As a result, the DTI has widened its consultation to invite views on all aspects of narrative reporting and to consider at this late stage whether the statutory OFR provisions or, more likely, elements thereof should indeed have been removed. The Company Law Reform Bill provides a mechanism for their re-introduction or, if necessary, secondary legislation may be used.

And so the debate rages on. At its heart are the same contentious issues about which industry and Government have argued before. Any suggestion of new requirements to include forward-looking information prompts UK directors to lobby yet again for the introduction of a ‘safe harbour’ to provide them with the requisite protection if they give such disclosures honestly and in good faith. In the meantime, we are left with further uncertainty about what the law will ultimately require from UK boards and how informative and useful their resulting narrative reports will be.

This Update sets out the latest regulatory position to assist in particular those companies reporting before the final outcome is known. It includes a quick reference guide in the form of answers to frequently asked questions, an illustrative voluntary OFR and an illustrative EBR for a UK wholly owned subsidiary. In addition, we have updated our disclosure checklists for both the OFR and the EBR.

We hope you find it useful.

Ian Krieger 
Senior Client Service Partner

2. Narrative reporting – Regulatory update

2.1 Repeal of OFR legislation

On 15 December 2005 the Government laid regulations to repeal the mandatory OFR. On the same date, the Department of Trade and Industry launched a consultation, inviting comments by 15 February 2006 on:

(1) whether any particular requirements relating to EBRs need clarification to achieve more effectively the Government’s objectives regarding the Business Review; and

(2) any other considerations relevant to deciding how to amend the Company Law Reform Bill on matters relating to narrative reporting.

On 12 January 2006, the Companies Act 1985 (Operating and Financial Review) (Repeal) Regulations 2005 (SI 2005/3442) came into force removing the legal requirement for listed companies to prepare an OFR.

The situation is now that OFRs remain voluntary for all companies, as they had been for many years previously. In addition, a proposed distinction between quoted and unquoted companies no longer applies so that all companies, except those qualifying as small, are required by law to include an enhanced business review (EBR) in their directors’ report for periods commencing on or after 1 April 2005.

2.2 DTI widen consultation on narrative reporting

Boards of UK quoted companies were largely surprised but probably relieved by the removal of the statutory OFR, especially given the volume of new regulation they were already dealing with. However, the abandonment of a statutory OFR was less well received by other parties including institutional investors and environmental and employee organisations, in particular, Friends of the Earth who applied for judicial review of the Government’s decision.

This application for judicial review has now been withdrawn and on 2 February 2006 the DTI announced that it would widen its current consultation on company narrative reporting. It is seeking views and evidence to assist Ministers in deciding whether, and if so how, to amend provisions of the Company Law Reform Bill (currently going through Parliament) relating to narrative reporting by companies. The DTI has emphasised the need to ensure effective forward-looking narrative reporting by quoted companies (including, where appropriate, on social, community, employee and environmental matters). The revised consultation terms are therefore inviting views from all stakeholders on:

(1) the full range of options for narrative reporting, including matters previously contained within the now repealed Schedule 7ZA CA85 (detailed legal provisions on the proposed statutory OFR content) and within the EU Accounts Modernisation Directive (currently enacted as s234ZZB CA85); and

(2) any other matters relevant to narrative reporting.

The deadline for submitting comments has been extended to 24 March 2006. Comments already submitted will be taken into account as part of the wider consultation and those who submitted them are free to express further views. Whilst the Government may introduce regulations as an interim measure before the Bill comes into force, it has stated that these will not apply to financial reporting periods that had already commenced before the new regulations were passed.

2.3 ASB – Reporting Statement on OFR

On 26 January 2006 the Accounting Standards Board (ASB) issued a new best practice statement "Reporting Statement: Operating and Financial Review" (the ‘2006 Reporting Statement’). The content of this Statement is largely identical to that of the now obsolete Reporting Standard 1 (which was issued in relation to the proposed statutory OFR). The main points to note in respect of the conversion of the Standard to the Reporting Statement are:

  • the language now used reflects the fact that compliance with the Statement is voluntary and not mandatory (e.g. ‘shall’ changed to ‘should’, and ‘requires’ to ‘recommends’);
  • the Statement is still written with quoted companies in mind but applies to all companies purporting to prepare an OFR;
  • best practice still requires inclusion of a statement of compliance with the Statement; and
  • the 2006 Reporting Statement has no effective date and is therefore effectively immediately from 26 January 2006.

A copy of the Reporting Statement can be obtained from the ASB’s website1.

The ASB’s previous 2003 statement of best practice on OFRs had been superseded by Reporting Standard 1 when it was issued in May 2005. However, this earlier statement may still be relevant for a company preparing a voluntary OFR where the timing of its financial year end makes it impracticable for it to comply with the 2006 Statement (see further 3.1 below).

If a company voluntarily prepares and publishes a narrative report and calls it an ‘Operating and Financial Review’ or ‘OFR’, there is likely to be an expectation that its report complies with an ASB statement of best practice. There is a risk of misleading the market if it does not comply (albeit perhaps with some disclosed exceptions).

The two steps that a company should therefore take if producing a voluntary narrative report are:

(1) the narrative report should not be called an ‘Operating and Financial Review’ or ‘OFR’ unless the directors are seeking to comply with an ASB statement of best practice. Alternative names such as ‘Business and Financial Review’ are less likely to be misleading or to imply any best practice compliance; and

(2) if the directors have sought to comply with a best practice statement, the report should explain clearly which statement the directors have sought to comply with and should give details of any exceptions to that compliance. In addition, the directors might choose to give details of plans, in terms of compliance, for their future OFRs (see example wordings included in the illustrative OFR in Appendix 3).

For further advice on the application of the ASB’s statements, please see the Frequently Asked Questions set out in section 3.1 of this update.

2.4 Forward-looking information and ‘safe harbour’ provisions

The current legal requirements for a directors’ report include the need to give "an indication of likely future developments in the business of the company" (Schedule 7, paragraph 6 (1) (b)). Given the Government’s reported desire to "ensure effective forward-looking narrative reporting by quoted companies", Deloitte is concerned that further mandatory requirements to disclose forward-looking information may be re-introduced as a result of the DTI’s widened consultation. It would be another case of ‘gold-plating’ EU requirements in the UK if the Government were to require specific forward-looking disclosures, particularly if unlisted companies were caught by such provisions. In addition, our concern is heightened by the lack of any ‘safe harbour’ provision in the UK to protect directors who give such information honestly and in good faith. The absence of any protection could result in directors opting to give boiler-plate disclosures in place of meaningful discussion. Industry bodies are lobbying the Government to introduce a ‘safe harbour’, similar to the protection for directors issuing a Management Discussion and Analysis (MD&A) in the US.

In the meantime, Allen & Overy’s legal opinion, prepared for the Chartered Institute of Management Accountants (CIMA) in June 2005 in light of the introduction of a statutory OFR, remains very relevant. The advice given with the opinion includes steps that directors can take to minimise their exposure to liability when making forward-looking statements in OFRs and should be referred to by boards preparing an OFR on a voluntary basis. The opinion can be found on CIMA’s website2 but directors may also wish to seek their own legal advice in this area.

2.5 Defra guidelines issued

"Environmental Key Performance Indicators: Reporting Guidelines for UK Business" was issued by the Department for Environment, Food and Rural Affairs (Defra) in January 2006. Although adoption of these guidelines is not mandatory, Defra comments that companies using them will be well placed to respond to requirements for the business review introduced by the EU Accounts Modernisation Directive. The analysis of the development and performance of the business required within the directors’ report, under the Directive, should "include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters".

The aims of the Defra Guidelines are to:

  • give guidance to companies on reporting their environmental performance using key performance indicators (KPIs) to encourage an increase in the current low levels of quantified information relating both to the impact of companies’ activities on the environment and to how environmental constraints affect the way companies operate;
  • define which of the 22 listed environmental KPIs (grouped within four categories: emissions to air, water and land, and resource use) are most relevant to particular sectors;
  • encourage businesses to consider also reporting on how they influence the environmental performance of their supply chain and products; and
  • set out the business rationale for managing environmental performance using KPIs.

The "General Environmental Reporting Guidelines" together with the supplements on waste, water and greenhouse gases (released during 2000/01) are superseded by these new Guidelines.

2.6 IASB discussion paper on Management Commentary

In October 2005, the IASB published a discussion paper outlining its views on how it might regulate management commentary (i.e. narrative reporting) in the future. The Board had reviewed and assessed the narrative reporting requirements already in place in the UK, the US, Germany and Canada and had concluded that they would prefer to introduce any future regulation in this area in the form of a mandatory standard as opposed to voluntary guidance. The paper includes the Board's proposals for what it believes should be included in a Management Commentary standard. Comments on the paper should be submitted by 28 April 2006.

2.7 Financial Reporting Council (FRC) Review of Narrative Reporting

The FRC's proposed 2006/07 work plan, which it published in December 2005 for consultation, includes a proposal to conduct a review of the quality of narrative reporting in company reports in the UK. This proposal is part of its drive to promote high quality corporate reporting and the results of the review are likely to influence future regulation in this area.

3. OFR and EBR – Frequently asked questions

For periods commencing on or after 1 April 2005, all companies other than small companies are required to prepare an ‘enhanced business review’ (EBR) as part of their directors’ report. This includes companies who were expecting to prepare a statutory OFR prior to the Government’s decision to withdraw it.

This section provides a quick reference guide in the form of answers to frequently asked questions relating to the OFR (3.1 below) and the EBR (3.2 below).

Some questions are duplicated in more than one section if applicable to each. In addition, some of the answers repeat information already given in the Regulatory Update in section 2 above.

The answers to the questions are based on information available as at 28 February 2006. As at this date, the DTI is consulting on the full range of options for narrative reporting (see section 2.2 of this Update).

3.1 Operating and Financial Review (OFR)

Now that the mandatory OFR has been scrapped, do we have to do anything else?
Yes. For periods commencing on or after 1 April 2005, all companies, listed or unlisted (unless they qualify as small) must include an EBR in their directors’ report. This is a legal requirement (details set out in s234 and s234ZZB of the Companies Act 1985 (CA85)) introduced to meet the minimum standards of narrative reporting set out in the EU Accounts Modernisation Directive. The EBR is less extensive than the proposed OFR but still requires extra disclosure.

We are listed. Do we still need to produce an OFR?
As in prior years there is no legal or Listing Rules requirement to produce an OFR. However it is still considered best practice for listed companies to do so. Shareholders and analysts may expect that you will provide the information that would be included in an OFR but this may take other forms such as a separate Business Review and Financial Review.

If we publish an OFR, do we have to do the EBR as well?
For accounting periods beginning on or after 1 April 2005, the company must comply at a minimum with the legal requirements to include certain information in the EBR. However, this information may be provided in the OFR provided the directors include in their directors’ report a cross reference to the relevant section(s) of the OFR. Whilst such a cross-reference will need to scope in the minimum content for an EBR, it is not necessary, nor advisable, to cross-refer to sections of the OFR containing information not required by the EBR provisions or indeed to the whole OFR. Any disclosures included in the EBR (directly or by reference) will fall within the scope of the offences relating to directors’ reports.

If we still choose to publish an OFR, what information must it contain?
By law there are no longer any requirements as to what is included in an OFR. The only legal requirements are those for an EBR and if these are dealt with by precise cross-reference to material in the OFR, then that material must comply at a minimum with the provisions of s234ZZB CA85.

Best practice for voluntary OFRs is set out in the ASB’s ‘Reporting Statement: Operating and Financial Review’ (2006). This Statement sets out what content should ideally be included. The previous 2003 best practice statement was superseded by Reporting Standard 1 in May 2005 but may still be relevant for some financial years (see further question below on 31 December 2005 year ends).

A checklist for a voluntary OFR based on the 2006 Reporting Statement is included in Appendix 4. An illustrative OFR, also based on the 2006 Reporting Statement, is set out in Appendix 3.

Do we have to include forward-looking information in our voluntary OFR?
If the directors are seeking to comply with the 2006 Reporting Statement then they should include forward-looking information in their OFR. If such information is included, the directors may wish to consider taking their own legal advice regarding suitable wording to caveat such information and/or they should refer to the legal opinion provided by Allen & Overy to CIMA3 in respect of the statutory OFR which is still relevant. This is because there are currently no ‘safe harbour’ provisions to protect directors even if they present such information honestly and in good faith. If the OFR does not include forward-looking information, but the directors state that they are complying with the 2006 Reporting Statement, they should explain this omission as an exception to that compliance.

What is the ASB’s statement of best practice on OFRs? Do we have to comply with it in our OFR?
In the past, before the proposal to introduce a mandatory OFR, the ASB issued a number of best practice statements for OFRs with the latest version being the 2003 best practice statement. This 2003 statement was superseded by Reporting Standard 1 (RS 1) which was issued in May 2005 in respect of the mandatory OFR. Now that the mandatory OFR has been repealed, the ASB have converted RS 1 into a new statement of best practice called ‘Reporting Statement: Operating and Financial Review’ which was issued on 26 January 2006. Although that Reporting Statement is now a voluntary statement, not a mandatory standard, readers of a narrative report called an ‘Operating and Financial Review’ or ‘OFR’ are likely to expect that it complies with the recommendations contained in the Reporting Statement. It is therefore strongly advisable that if the company does not seek to comply with this Statement, it should give its narrative report a different name (e.g. Business and Financial Review). Alternatively, wording explaining the extent to which the OFR complies with the Reporting Statement should be given, as recommended in the Statement itself. Directors should avoid giving a misleading description of the extent of their compliance.

See Appendix 3 for an illustrative OFR which includes suggested wording for compliance statements.

An OFR checklist, based on the disclosures recommended by the 2006 Reporting Statement, is also included in Appendix 4.

We are preparing our OFR for the period ended 31 December 2005 and were planning to follow the ASB’s 2003 statement of best practice rather than early adopting the old Reporting Standard 1. Do we now have to comply with the latest ASB Reporting Statement?
No law or other regulation forces you to comply with any ASB statement although it is clearly best practice to do so. To avoid confusing readers of a narrative report labelled ‘OFR’ it is strongly advisable to indicate whether the directors have tried to comply with an ASB statement and, if so, which one and any exceptions to that compliance. The latest Reporting Statement, issued on 26 January 2006, does not include an effective date and therefore the ASB officially requires compliance with the Statement from its date of issue. However for December 2005 year ends it is reasonable, given the timing of the new Reporting Statement, to follow the previous 2003 ASB statement providing this is explained in the OFR. In such cases, directors might wish to consider stating that they intend to follow the 2006 Reporting Statement in the following year.

Sample compliance wording can be found in the illustrative OFR included in Appendix 3.

What are the implications of not complying with the ASB’s statements on OFRs?
There are no legal or official direct penalties for not complying with the ASB’s statements. However, if a narrative report is called ‘OFR’, shareholders will expect directors to have followed the ASB’s best practice guidance. In addition, if directors state that they comply with an ASB statement, they should explain any exceptions to that compliance to avoid misleading shareholders. Any material which is included by reference in a directors’ report to meet the requirements of an EBR must, however, meet the legal requirements for such a review if the report is within the effective date.

It should also be noted that if anything in the OFR is inconsistent with information contained elsewhere in the annual report, or is otherwise misleading, this may be picked up by the Financial Reporting Review Panel.

3.2 Enhanced Business Review (EBR)

What is an "enhanced business review" or "enhanced directors’ report"?
Both these terms refer to the new requirements for additional information to be included in the business review that forms part of the directors’ report for periods commencing on or after 1 April 2005. These new legal requirements have been introduced to implement the EU Accounts Modernisation Directive in the UK. For earlier periods, a ‘fair review of the development of the business’ (original s234CA85 as amended) was already a legal requirement but the disclosure provisions were much less onerous.

Who has to prepare an EBR?
All companies, other than those qualifying as small, must prepare and include an EBR in their directors’ report for periods commencing on or after 1 April 2005.

Do we have to prepare a Group EBR? Does it have to include all the subsidiary information too?
In the case of a parent company preparing group accounts, the directors’ report should be a group directors’ report which includes an EBR for the group, taking into account the company and its subsidiaries included in the consolidation, and focussing on matters that are material to the group as a whole. It will not necessarily cover all the matters included in each individual subsidiary's EBR. A parent company preparing group accounts need only prepare a group directors’ report and hence a group EBR. It is not necessary also to prepare an entity-only directors’ report containing an entity-only EBR.

Are subsidiary companies exempt from including an EBR in their directors’ report?
Subsidiary companies need to include their own EBR in their directors’ report (except where the company qualifies as small). If a subsidiary company is an intermediate holding company, its directors’ report will only cover the company itself unless it cannot take, or chooses not to take, the exemption from preparing group accounts (in which case it prepares a group directors’ report including a group EBR covering the sub-group it heads).

See Appendix 1 for an illustrative EBR for a wholly owned UK trading subsidiary of a UK listed parent.

Are there any exemptions from the EBR requirements for small or medium-sized companies?
Small companies are exempt from the EBR requirements (s246(4)(a) CA85). The exemption is also available for companies which meet the small company size criteria but which are not eligible to prepare small company accounts on the grounds of being a member of an ineligible group (see further s247A CA85).

Medium-sized companies do have to prepare an EBR but are exempt from the requirement to include an analysis using non-financial key performance indicators (s246A(2A) CA85). Medium-sized companies are not exempt from the requirement to include an analysis based on financial KPIs.

We are a limited liability partnership (LLP). Do we have to comply with the EBR requirements?
LLPs are not required to prepare a directors’ report (including an EBR) by virtue of Schedule 1 of the Limited Liability Partnership Regulations 2001 (as amended). The latest Statement of Recommended Practice (SORP) ‘Accounting by LLPs’ requires them to prepare a Members’ Report but the relevant provisions of the SORP do not include anything akin to the EBR disclosures for companies.

If we publish an OFR, do we have to do the EBR as well?
For accounting periods beginning on or after 1 April 2005, the company must comply at a minimum with the legal requirements to include certain information in the EBR. However, this information may be provided in the OFR provided the directors include in their report a cross reference to the relevant section(s) of the OFR. Whilst such a cross-reference will need to scope in the minimum content for an EBR, it is not necessary, nor advisable, to cross-refer to sections of the OFR containing information not required by the EBR provisions or indeed to the whole OFR. Any disclosures included in the EBR (directly or by reference) will fall within the scope of the offences relating to directors’ reports.

We have a 31 December period end. What are our legal obligations regarding the EBR for 2005 and for future years?
The law requires an EBR for periods commencing on or after 1 April 2005. Therefore for a year ended 31 December 2005, there is no new legal obligation i.e. the directors’ report should meet the same requirements as for 2004. However for a short period of account commencing on or after 1 April 2005 an EBR would be required. For the year ended 31 December 2006 and future years, the directors’ report must include an EBR.

We have a 31 March period end. What are our legal obligations for 2006 and for future years?
For the year 1 April 2005 to 31 March 2006 and subsequent years, the directors’ report must include an EBR.

We have a 31 March accounting reference date and have taken advantage of the Companies Act provisions to prepare accounts to a date up to seven days before. Does this make a difference to our obligations?
The law requires an EBR for periods commencing on or after 1 April 2005. Therefore, if the company's previous year end was before 31 March 2005 then you do not need an EBR for the 2006 financial year. For example, a company with a 31 March accounting reference date prepared accounts for the 52 weeks to 28 March 2005. Its next period started on 29 March 2005 and runs to 27 March 2006. As this financial year commenced before 1 April 2005, no EBR is required. The company will prepare and publish its first EBR for the 52 week period commencing 28 March 2006.

What must be included in an EBR?
The detailed disclosure requirements for an EBR are included in s234ZZB CA85. An EBR must include a fair review of the business of the company which should be a balanced and comprehensive analysis of the development and performance of the business of the company during the financial year, and the position of the company at the end of that year. The review should be consistent with the size and complexity of the business and, to the extent necessary for an understanding of the development, performance or position of the business of the company, should include analysis using financial key performance indicators (KPIs) and, where appropriate, analysis using other non-financial KPIs, including information relating to environmental matters and employee matters. Medium-sized companies do not need to include non-financial KPIs.

The EBR must also include a description of the principal risks and uncertainties facing the company.

An EBR checklist for the additional requirements of s234ZZB CA85 is included in Appendix 2.

Do we have to include forward-looking information in our EBR?
Schedule 7, paragraph 6(b) requires the directors to include in their report "an indication of likely future developments in the business of the company". This is not a new requirement.

In addition, the law now requires a description of the principal risks and uncertainties facing the company. Disclosures given to meet this requirement may include comments on the possible future impact on the business of those risks and uncertainties.

There is no explicit legal requirement to include predictive information about targets for KPIs.

Due to the lack of a statutory ‘safe harbour’ provision in the UK to protect directors giving forward-looking disclosures honestly and in good faith, boards may wish to seek legal advice regarding suitable wording to caveat such disclosures.

Do we have to include key performance indicators (KPIs) in our EBR? If so, how many and which ones?
The law says that, to the extent necessary for an understanding of the development, performance or position of the business of the company, the business review must include an analysis using financial KPIs and, where appropriate, non-financial KPIs (including information relating to environmental and employee matters). It defines KPIs as ‘factors by reference to which the development, performance or position of the business of the company can be measured effectively’. In practice, these should be the KPIs used by management in assessing the success of the business against its stated strategies and objectives. The number will depend on the size of the business but it may not normally be necessary to give more than 4 to 6 KPIs. For a subsidiary, KPIs may not be considered relevant to an understanding of the development, performance or position of the business if, for example, the success of the company’s business is measured as part of a bigger division or business because that is the way the business is managed.

Do we have to include information on the environment or our employees in our EBR?
Information on the environment and on employees must be included to the extent necessary to give an understanding of the development, performance or position of the business. The law expressly includes these matters as examples of the non-financial analysis that should be included in an EBR ‘where appropriate’.

Can the Financial Reporting Review Panel scrutinise our EBR?
The Financial Reporting Review Panel will, in the course of its review of a company’s accounts, read the EBR for consistency with the rest of the accounts. For periods commencing on or after 1 April 2006 (i.e. a one year delay), the Panel will also have the power to review directors’ reports, including EBRs, for compliance with the law.

What are the implications of not complying with the legal provisions regarding the EBR?
If a director approves a wrong or incomplete directors’ report (or recklessly approves one not knowing if it is wrong or incomplete) without taking all reasonable steps to secure compliance, he or she is punishable by a fine which is potentially unlimited. In addition, directors could be disqualified for up to 15 years.

Appendix 1 – Illustrative EBR (UK wholly owned subsidiary)

Illustrative Business Review for inclusion in the Directors’ Report of a wholly owned UK trading subsidiary

For periods commencing on or after 1 April 2005, all companies (except those qualifying as small) will be required to include an enhanced business review in their directors’ report. This illustrative business review has been prepared to provide an example of the typical disclosures which a UK trading subsidiary of a group might give to meet this requirement.

The illustration is based on a hypothetical subsidiary company which is part of a hypothetical group, and assumes that the subsidiary is not itself preparing group accounts. The wording used is purely illustrative and in practice will need to be modified to reflect the circumstances, size and complexity of the company and its business. Similarly the structure of the example set out below will not necessarily be appropriate for all companies. The illustrated review may also contain internal inconsistencies.

The illustration includes some matters already required in the directors’ report, which fit in with certain new requirements of the enhanced business review. For example, inclusion of the existing disclosures on research and development may be more suitably located with the new disclosures discussing the development of the business. Thus, in the illustration below, these relocations of existing material have been illustrated by referring to the relevant legal provisions.

Business Review and Principal Activities

The company is a wholly owned subsidiary of Delto plc and operates as part of the group’s European division.

The company’s principal activities are the manufacture and sale of X products to the X industry in the UK and Ireland. There have not been any significant changes in the company’s principal activities in the year under review. The directors are not aware, at the date of this report, of any likely major changes in the company’s activities in the next year. [Exisiting requirement – Sch 7, para 6(1)(a)] [Consider legal position re any forward looking statement.]

The company continues to invest in research and development. This has resulted in a number of updates to existing products. The directors regard R&D investment as necessary for continuing success in the medium to long term future. [Existing requirement – Sch 7, para 6(1)(c)]

As shown in the company’s profit and loss account on page X, the company’s sales have increased by X% over the prior year and profit after tax has similarly improved.

The balance sheet on page X of the financial statements shows that the company’s financial position at the year end is, in both net assets and cash terms, consistent with the prior year. Details of amounts owed to its parent company are shown in note X on page X.

Details of significant events since the balance sheet date are contained in note X to the financial statements on page X. [Existing requirement Sch 7, para 6(1)(a)]

The Delto plc group manages its operations on a divisional basis. For this reason, the company’s directors believe that further key performance indicators for the company are not necessary or appropriate for an understanding of the development, performance or position of the business. The performance of the European division of Delto plc, which includes the company, is discussed in the group’s Annual Report which does not form part of this Report.

Principal risks and uncertainties
Competitive pressure in the UK is a continuing risk for the company, which could result in it losing sales to its key competitors. The company manages this risk by providing added value services to its customers, having fast response times not only in supplying products but in handling all customer queries, and by maintaining strong relationships with customers.

The company’s sales in Ireland are made in Euros and it is therefore exposed to the movement in the Euro to Pound exchange rate. The group’s treasury function takes out contracts to manage this risk at a group level. [Financial instruments disclosures – Sch 7, para 5A – effective from 1 Jan 2005]

The company is financed by a fixed rate loan from its parent and has no third party debt. It therefore has no interest rate exposure.

Group risks are discussed in the group’s Annual Report which does not form part of this Report.

Environment
The Delto plc group recognises the importance of its environmental responsibilities, monitors its impact on the environment, and designs and implements policies to reduce any damage that might be caused by the group’s activities. The company operates in accordance with group policies, which are described in the group’s Annual Report which does not form part of this Report. Initiatives designed to minimise the company’s impact on the environment include safe disposal of manufacturing waste, recycling and reducing energy consumption.

Employees
Details of the number of employees and related costs can be found in note X to the financial statements on page X.

Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the company continues and that appropriate training is arranged. It is the policy of the company that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. [Only required if the average number of employees of the company exceeded 250.] [Existing requirement – Sch 7, para 9]

The company participates in the group’s policies and practices to keep employees informed on matters relevant to them as employees through regular meetings and newsletters. Employee representatives are consulted regularly on a wide range of matters affecting their interests. The group employee share scheme has been running successfully since its inception in [date] and is open to all employees. [Only required if the average number of employees of the company exceeded 250.] [Existing requirement – Sch 7, para 11]

Appendix 2 – Enhanced Business Review disclosure checklist

Enhanced Business Review for Directors’ Reports

All companies are required to produce enhanced Directors’ Reports for periods commencing on or after 1 April 2005 unless they qualify as small companies as defined in law.

The key change is that the Directors’ Report must include an enhanced business review. A mini-checklist has been provided below for the additional requirements.

In the financial year, if a company is a parent company and the directors of the company prepare group accounts, companies should note that the Directors’ Report must be a consolidated report relating to the company and its subsidiary undertakings included in the consolidation.

Principles

Section 234ZZB

Yes/No

The business review must contain:

1(a) and 1(b)

 

(a) a fair review of the business of the company; and

   

(b) a description of the principal risks and uncertainties facing the company.

   

The business review is a balanced and comprehensive analysis of the development 2(a) and 2(b) and performance of the business of the company during the year and the position of the company at the end of that year.

   

This analysis is consistent with the size and complexity of the business. 

   

The review includes an analysis using financial KPIs, to the extent that they 3(a) are necessary for an understanding of the development, performance or position of the business of the company.

   

Where appropriate, a company has considered providing an analysis using other KPIs 3(b) (medium-sized companies do not have to comply with this requirement), including information relating to environmental factors and employee factors. 

   

The review, where appropriate, includes references to, and additional explanations of, 4 amounts included in the annual accounts of the company.

   

The auditors must state in their report whether in their opinion the information given in the Directors’ Report for the financial year for which the annual accounts are prepared is consistent with those accounts. Previously, the auditors had to state only if they believed that the information was inconsistent. 

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