UK: Corporate Governance Update Part 3 of 3

A new chapter – updating directors’ reports and OFRs
Last Updated: 17 March 2006
Most Read Contributor in UK, August 2017
This article is part of a series: Click Corporate Governance Update Part 2 of 3 for the previous article.

Appendix 4 – Operating and Financial Review disclosure checklist

 

This disclosure checklist is based on the UK Accounting Standards Board’s (ASB) "Reporting Statement: Operating and Financial Review" (RS:OFR) which was published as a statement of best practice with respect to OFRs.

 

Paragraphs in shaded boxes state the main principles and elements of the disclosure framework, as set out in RS:OFR. These may be used to assist in drafting the OFR, with non-shaded sections used as a check on the completed OFR.

 

 

 

 

 

1.

Principles

RS:OFR reference

Yes/No

1.1

Purpose
The OFR should set out an analysis of the business through the eyes of the board of directors.

4

 
 

The appropriate elements of information used in managing the entity, including its subsidiary undertakings are disclosed.

5

 
 

Where appropriate, give greater emphasis to those matters which are significant to the entity and its subsidiary undertakings taken as a whole. Such matters may include issues specific to business segments where relevant to the understanding of the business as a whole.

5

 

1.2

Audience
The OFR should focus on matters that are relevant to the interests of members.

6

 
 

The directors have considered the extent to which they report on matters primarily of significance to other users (e.g. other investors, potential investors, creditors, customers, suppliers, employees and society more widely) where because of those issues influence on the performance of the business and its value, they are also of significance to members.

7

 

1.3

Time-frame
The OFR should have a forward-looking orientation, identifying those trends and factors relevant to the members’ assessment of the current and future performance of the business and the progress towards the achievement of long-term business objectives.

8

 
 

The factors discussed are those that have affected development, performance, and position during the financial year and those which are likely to affect the entity’s future development, performance and position.

9

 
 

Given the nature of some forward-looking information, in particular elements that cannot be objectively verified but have been made in good faith, directors may want to include a statement in the OFR to treat such elements with caution, explaining the uncertainties underpinning such information.

10

 
 

No statutory safe harbour provisions have been introduced. US registrants will be familiar with the disclaimer wording used in Management’s Discussion and Analysis (MDA) to highlight forward looking information. Similar wording may be appropriate in the OFR. This is an area in which it may be appropriate to consider taking legal advice.

   
 

No disclosure of information about impending developments or about matters in the course of negotiation should be made if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the entity.

79

 
 

The OFR comments on the impact on future performance of significant events after the balance sheet date.

11

 
 

The OFR discusses predictive comments, both positive and negative, made in previous reviews and whether or not these have been borne out by events.

12

 

1.4

Content
The OFR should complement as well as supplement the financial statements, in order to enhance the overall corporate disclosure.

13

 
 

The OFR provides useful financial and non-financial information about the business and its performance that is not reported in the financial statements but which, the directors judge, might be relevant to the members’ evaluation of past results and assessment of future prospects.

14

 
 

Where relevant the OFR provides additional explanations of amounts recorded in the financial statements.

15

 
 

Where relevant the OFR explains the conditions and events that shaped the information contained in the financial statements.

15

 
 

Where amounts from the financial statements have been adjusted for inclusion in the OFR, that fact is highlighted and a reconciliation has been provided.

15

 

1.5

Comprehension
The OFR should be comprehensive and understandable.

16

 
 

The directors have considered whether the omission of information might reasonably be expected to influence significantly the assessment made by members.

17

 
 

When preparing the OFR, the directors have focussed on the objective of quality, not quantity.

18

 
 

Where relevant, an explanation has been provided of the source of the information and the degree to which the information is objectively supportable to allow members to assess the reliability of the information presented.

19

 
 

Where additional information is discussed elsewhere in the annual report, or in other reports, this information has been cross-referenced to those sources to assist members. The directors have considered the key issues to include in the OFR that will provide members with focused and relevant information.

20

 
 

The OFR should be written in a clear and readily understandable style.

21

 

1.6

Balance
The OFR should be balanced and neutral, dealing even-handedly with both good and bad aspects.

22

 
 

The directors should ensure that the OFR retains balance and that members are not misled as a result of the omission of any information on unfavourable aspects.

23

 

1.7

Comparability
The OFR should be comparable over time.

24

 
 

Disclosure is sufficient for the members to be able to compare the information presented with similar information about the entity for previous financial years.

25

 
 

Directors have considered the extent to which the OFR is comparable with reviews prepared by other entities in the same industry or sector.

25

 

2.

Disclosure Framework

RS:OFR reference

Yes/No

 

The directors have considered how best to use the framework and key content elements in the Reporting Statement to structure the OFR as a whole and its precise content, including the level of detail to be disclosed, given the particular circumstances of the entity. These circumstances may include:

26

 
 

(a) the industry or industries in which it operates;

   
 

(b) the range of products, services or processes it offers;

   
 

(c) the number of markets it serves.

   

2.1

The OFR should provide information to assist members to assess the strategies adopted by the entity and the potential for those strategies to succeed. The key elements of the disclosure framework recommended to achieve this are:

27

 
 

(a) the nature, objectives and strategies of the business, including a description of the market, competitive and regulatory environment in which the entity operates;

   
 

(b) the development and performance of the business, both in the financial year under review and in the future;

   
 

(c) the resources, principal risks and uncertainties and relationships that may affect the entity’s long-term value; and

   
 

(d) the position of the business including a description of the capital structure, treasury policies and objectives and liquidity of the entity, both in the financial year under review and the future.

   

2.2

To the extent necessary to meet the recommendations set out in 2.1 above the OFR should include information about:

28

 
 

(a) environmental matters (including the impact of the business of the entity on the environment);

   
 

(b) the entity’s employees;

   
 

(c) social and community issues;

   
 

(d) persons with whom the entity has contractual or other arrangements which are essential to the business of the entity;

   
 

(e) receipts from, and returns to, members of the entity in respect of shares held by them; and

   
 

(f) all other matters that directors consider to be relevant.

   

2.3

For items (a) to (c) in 2.2 above, the OFR should, in particular, include:

29

 
 

(a) the policies of the entity in each area mentioned; and

   
 

(b) the extent to which those policies have been successfully implemented.

   

3.

The nature, objectives and strategies of the business

RS:OFR reference

Yes/No

3.1

The OFR should include a description of the business and the external environment in which it operates as context for the directors’ discussion and analysis of performance during the financial year and financial position.

30

 
 

The description of the business provides members with an understanding of the industry or industries in which the entity operates, its main products, customers, business processes and distribution methods, the structure of the business, and its economic model, including an overview of the main operating facilities and their location(s).

31

 
 

Where relevant, the OFR includes discussion of matters such as the entity’s major markets and competitive position within those markets and the significant features of the legal, regulatory, macro-economic and social environment that influence the business.

32

 

3.2

The OFR should discuss the objectives of the business to generate or preserve value over the longer-term

33

 
 

Where appropriate, objectives in non-financial areas are discussed in addition to financial objectives.

34

 
 

The directors have determined an appropriate time perspective for reporting in the OFR based on the nature of the industry within which they work.

35

 

3.3

The OFR should set out the directors’ strategies for achieving the objectives of the business.

36

 
 

Directors’ strategies have been disclosed so that members can assess the current and past action undertaken by directors in respect of the stated objectives.

37

 

3.4

To the extent necessary to meet the requirements set out in 2.1 above, the OFR should include the key performance indicators, both financial and, where appropriate, non-financial (including information relating to environmental and employee matters), used by the directors to assess progress against their stated objectives.

38

 
 

The KPIs disclosed are those that the directors judge are effective in measuring the delivery of their strategies and managing their business.

39

 
 

Where available, the directors have used KPIs accepted and widely used either within the industry sector or more generally.

40

 

3.5

Directors should also consider the extent to which other measures and evidence should be included in the OFR.

41

 
 

Where appropriate, the directors have included narrative evidence describing how they manage the business or quantified measures used to monitor the entity’s external environment and/or progress towards the achievement of its objectives.

42

 

4.

Current and future development and performance

RS:OFR reference

Yes/No

4.1

The OFR should describe the significant features of the development and performance of the business in the financial year covered by the financial statements, focusing on those business segments that are relevant to an understanding of the development and performance as a whole.

43

 
 

The trends and factors in development and performance as suggested by an analysis of the current and previous financial years have been highlighted. Development and performance are described in the context of the strategic objectives of the business.

44

 
 

The OFR covers significant aspects of the statements of financial performance and where appropriate is linked to other aspects of performance.

45

 
 

The OFR sets out the directors’ analysis of the effect on current development and performance of changes during the financial year in the industry or the external environment in which the business operates and of developments within the business itself.

46

 
 

4.2 The OFR should analyse the main trends and factors that directors consider likely to impact future prospects.

47

 
 

The OFR discusses the current level of investment expenditure together with the planned future expenditure and explains how that investment is directed to assist the achievement of business objectives.

48

 
 

Any assumptions underlying the main trends and factors above have been disclosed.

48

 
 

Directors have considered the potential future significance of issues in deciding whether or not to include an analysis of them in the OFR.

49

 

5.

Resources

   

5.1

The OFR should include a description of the resources available to the entity and how they are managed.

50

 
 

The OFR sets out the key strengths and resources, tangible and intangible, available to the business, which will assist it in the pursuit of its objectives and, in particular, includes those items that are not reflected in the balance sheet.

51

 
 

Depending on the nature of the business, these may include: corporate reputation and brand strength; natural resources; research and development; intellectual capital; licences, patents, copyright and trademarks; employees; and market position.

   

6.

Principal risks and uncertainties

   

6.1

The OFR should include a description of the principal risks and uncertainties facing the entity, together with a commentary on the directors’ approach to them.

52

 
 

The strategic, commercial, operational and financial risks are disclosed where these may significantly affect the entity’s strategies and development of the entity’s value.

53

 
 

The description of the principal risks and uncertainties covers both the exposure to negative consequences as well as potential opportunities. The directors’ policy for managing principal risks is disclosed.

55

 
 

The OFR covers the principal risks and uncertainties necessary for an understanding of the objectives and strategies of the business, both where they constitute a significant external risk to the entity, and where the entity’s impact on other parties through its activities, products or services, affects its performance.

56

 
 

Directors have considered the full range of business risks.

56

 

7.

Relationships

RS:OFR reference

Yes/No

7.1

To the extent necessary to meet the requirements set out in 2.1 above, the OFR should include information about significant relationships with stakeholders other than members, which are likely, directly or indirectly, to influence the performance of the business and its value.

57

 
 

The directors in deciding what to include, have considered the extent to which the actions of stakeholders other than members, can affect an entity’s performance and thus its value.

58

 
 

Where necessary for an understanding of the business, the OFR should describe receipts from, and returns to, shareholders in relation to shares held by them. This should include a description of any distributions, capital raising and share repurchases.

59

 

8.

Financial position

   

8.1

The OFR should contain an analysis of the financial position of the entity.

60

 
 

The analysis, whilst based upon the financial statements, comments on the events that have impacted the financial position of the entity during the financial year, and future factors that are likely to affect the financial position going forward. The analysis should supplement FRS25/IAS32 disclosures.

61

 
 

The OFR highlights accounting policies set out in the notes to the financial statements and discusses those accounting policies that are critical to an understanding of the performance and financial position of an entity, focusing on those which have required the particular exercise of judgement in their application and to which the results are most sensitive.

62

 
 

The OFR draws attention to accounting policies changed during the financial year under review.

62

 

8.2

The OFR should contain a discussion of the capital structure of the entity.

63

 
 

The discussion includes comments on short and longer-term funding plans to support the directors’ strategies to achieve the entity’s objectives.

64

 
 

The discussion includes comment on why the entity has adopted its particular capital structure.

   

8.3

The OFR should set out the entity’s treasury policies and objectives.

65

 
 

The OFR discusses the implementation of these treasury policies in the financial year under review.

66

 
 

The purpose and effect of major financing transactions undertaken up to the date of approval of the financial statements is explained.

67

 
 

The effect of interest costs on profits and the potential impact of interest rate changes is also discussed.

67

 

9.

Cash flows

RS:OFR reference

Yes/No

9.1

The OFR should discuss the cash inflows and outflows during the financial year under review, along with the entity’s ability to generate cash, to meet known or probable cash requirements and to fund growth.

68

 
 

The discussion of cash flows supplements the information in the financial statements. Comments might include:

69

 
 

(a) special factors influencing cash flows in the current financial year and those that may have significant effect on future cash flows; and

   
 

(b) the existence and timing of commitments for capital expenditures and other known or probable cash requirements.

   
 

Where entities have cash that is surplus to future operating requirements and current levels of distribution, the discussion includes future plans for making use of the excess cash.

69

 
 

Where segmental cash flows are significantly out of line with segmental revenues or profits, it is indicated and explained.

70

 

10.

Liquidity

   

10.1

The OFR should discuss the entity’s current and prospective liquidity. Where relevant, this should include commentary on the level of borrowings, the seasonality of borrowing requirements (indicated by the peak level of borrowings during that period) and the maturity profile of both borrowings and undrawn committed borrowing facilities.

71

 
 

The ability of the entity to fund its current and future operations and stated strategies is discussed.

71

 
 

Internal sources of liquidity are discussed and reference is made to any restrictions on the ability to transfer funds from one part of the group to meet the obligations of another part of the group, where these represent, or might foreseeably come to represent, a significant restraint on the group. Such constraints include exchange controls and taxation consequences of transfers.

73

 
 

Where the entity has entered into financing contracts with covenants with lenders which could have the effect of restricting the use of credit facilities, this is disclosed. Negotiation with the lenders on the operation of these covenants that are taking place or expected to take place is also discussed.

74

 
 

Where a breach of a covenant has occurred or is expected to occur, details are given of the measures taken or proposed to remedy the situation.

74

 

11.

Key Performance Indicators (KPIs)

RS:OFR reference

Yes/No

11.1

An entity should provide information that enables members to understand each KPI disclosed in the OFR.

75

 
 

The following information is provided for each KPI disclosed in the OFR:

76

 
 

(a) the definition and its calculation method is explained;

   
 

(b) its purpose is explained;

   
 

(c) the source of underlying data is disclosed and, where relevant, assumptions explained;

   
 

(d) quantification or commentary on future targets is provided;

   
 

(e) where information from the financial statements has been adjusted for inclusion in the OFR, that fact is highlighted and a reconciliation provided;

   
 

(f) where available, the corresponding amount for the financial year immediately preceding the current year is disclosed; and

   
 

(g) any changes to KPIs are disclosed and the calculation method used compared to previous financial years, including significant changes in the underlying accounting policies adopted in the financial statements, is identified and explained.

   

12.

Other performance indicators

   
 

The following information for any quantified measure, other than a KPI, used in the OFR is provided:

78

 
 

(a) the definition and its calculation method; and

   
 

(b) where available, corresponding amount for the financial year immediately preceding the current year.

   

13.

Statement of compliance

   
 

A statement as to whether the OFR has been prepared in accordance with the ASB Reporting Statement and particulars of, and reasons for, any departure is included as a matter of best practice.

80

 

14.

Definitions

   
 

Directors

3

 
 

Reference to either "directors" or "board of directors" within the Reporting Statement is taken to be the entity’s governing body where the entity is not a company.

   
 

Key Performance Indicators (KPIs)

3

 
 

KPIs are factors by reference to which the development, performance or position of the business of the entity can be measured effectively. They are quantified measurements that reflect the critical success factors of an entity and disclose progress towards achieving a particular objective or objectives.

   
 

Operating and Financial Review (OFR)

3

 
 

An OFR is a narrative explanation, provided in the annual report, of the main trends and factors underlying the development, performance and position of an entity during the financial year covered by the financial statements, and those which are likely to affect the entity’s future development, performance and position.

   

Footnotes

1 See http://www.frc.org.uk/asb/press/pub1029.html

2 The full opinion can be viewed on CIMA's website at http://www.cimaglobal.com/cps/rde/xbcr/SID-0AAAC564-50185432/live/OFR_Legal_Opinion_0705.pdf

3 The full opinion can be viewed on CIMA's website at http://www.cimaglobal.com/cps/rde/xbcr/SID-0AAAC564-50185432/live/OFR_Legal_Opinion_0705.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

This article is part of a series: Click Corporate Governance Update Part 2 of 3 for the previous article.
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.