The imposition of a statutory Operating and Financial Review (OFR) on listed companies will represent a significant task for all and a considerable challenge and burden for many.
APPENDIX 2 – DISCLOSURE CHECKLIST
The Operating and Financial Review (OFR)
Disclosure Checklist
1. The OFR
This disclosure checklist is based on the UK Accounting Standards Board’s (ASB) Reporting Standard on the OFR (RS1) which supports the final statutory requirements in SI 2005/1011.
The Regulations state that quoted companies will be required to prepare statutory OFRs for the first time for financial years beginning on or after 1 April 2005. The Reporting Standard will apply to all entities that prepare an OFR.
Paragraphs in bold state the main principles and elements of the disclosure framework, as set out in RS 1. 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 1 reference | SI reference | Yes/No |
| 1.1 | Purpose | |||
| The OFR shall set out an analysis of the business through the eyes of the board of directors. | 5 | |||
| The appropriate elements of information used in managing the entity, including its subsidiary undertakings are disclosed. | 6 | |||
| 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. | 6 | S234AA (4) | ||
| 1.2 | Audience | |||
| The OFR shall focus on matters that are relevant to the interests of members. | 7 | |||
| 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) because if those issues influence on the performance of the business and its value, they are also of significance to members. | 8 | |||
| 1.3 | Time-frame | |||
| The OFR shall have a forward-looking orientation, identifying those trends and factors relevant to the members’ assessment of the current and future (1)(d) performance of the business and the progress towards the achievement of long-term business objectives. | 9 | Sch 7ZA (1)(d) | ||
| The factors discussed are those that have affected development, performance, and position during the financial year and those which are likely to affect the and (1)(d) entity’s future development, performance and position. | 10 | Sch 7ZA(1)(c) and (1)(d) | ||
| 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. | 11 | |||
| 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. | ||||
| Disclosure of information about impending developments or about matters in the course of negotiation is not required if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company. | 81 | |||
| The OFR comments on the impact on future performance of significant events after the balance sheet date. | 12 | |||
| The OFR discusses predictive comments, both positive and negative, made in previous reviews and whether or not these have been borne out by events. | 13 | |||
| 1.4 | Content | |||
| The OFR shall complement as well as supplement the financial statements, in order to enhance the overall corporate disclosure. | 14 | |||
| 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. | 15 | |||
| Where relevant the OFR provides additional explanations of amounts recorded in the financial statements. | 16 | Sch 7ZA(7) | ||
| Where relevant the OFR explains the conditions and events that shaped the information contained in the financial statements. | 16 | |||
| Where amounts from the financial statements have been adjusted for inclusion in the OFR, that fact is highlighted and a reconciliation has been provided. | 16 | |||
| 1.5 | Comprehension | |||
| The OFR shall be comprehensive and understandable, and consistent with the size and complexity of the business. | 17 | Sch 7ZA(1) | ||
| The directors have considered whether the omission of information might reasonably be expected to influence significantly the assessment made by members. | 18 | |||
| When preparing the OFR, the directors have focussed on the objective of quality, not quantity. | 19 | |||
| 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. | 20 | |||
| 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. | 21 | |||
| The OFR shall be written in a clear and readily understandable style. | 22 | |||
| 1.6 | Balance | |||
| The OFR shall be balanced and neutral, dealing even-handedly with both good and bad aspects. | 23 | Sch 7ZA(1) | ||
| The directors shall ensure that the OFR retains balance and that members are not misled as a result of the omission of any information on unfavourable aspects. | 24 | |||
| 1.7 | Comparability | |||
| The OFR shall be comparable over time. | 25 | |||
| Disclosure is sufficient for the members to be able to compare the information presented with similar information about the entity for previous financial years. | 26 | |||
| Directors have considered the extent to which the OFR is comparable with reviews prepared by other entities in the same industry or sector. | 26 |
| 2. | DISCLOSURE FRAMEWORK | RS 1 reference | SI reference | Yes/No |
| The directors have considered how best to use the framework and key content elements in the Reporting Standard 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: | 27 | |||
| (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 shall 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 necessary to achieve this are: | 28 | Sch 7ZA | |
| (a) the nature, objectives and strategies of the business, including a description of the market, competitive and regulatory environment in which the entity operates; | 2(a) | |||
| (b) the development and performance of the business, both in the financial year under review and in the future; | 1(a) | |||
| (c) the resources, principal risks and uncertainties and relationships that may affect the entity’s long-term value; and | 2(b) and (c) | |||
| (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(d) | |||
| 2.2 | To the extent necessary to meet the requirements set out in 2.1 above the OFR shall include information about: | 29 | Sch 7ZA | |
| (a) environmental matters (including the impact of the business of the entity on the environment); | 4(1)(a) | |||
| (b) the entity’s employees; | 4(1)(b) | |||
| (c) social and community issues; | 4(1)(c) | |||
| (d) persons with whom the entity has contractual or other arrangements which are essential to the business of the entity; | 5(a) | |||
| (e) receipts from, and returns to, members of the entity in respect of shares held by them; and | 5(b) | |||
| (f) all other matters that directors consider to be relevant. | ||||
| 2.3 | For items (a) to (c) in 2.2 above, the OFR, in particular, includes: | 30 | Sch 7ZA (4) | |
| (a) the policies of the entity in each area mentioned; and | 2(a) | |||
| (b) the extent to which those policies have been successfully implemented. | 2(b) | |||
| 2.4 | If the OFR does not contain information and analysis of each kind mentioned in 2.2 items (a) to (e) and 2.3, it shall state which of those kinds of information and analysis it does not contain. | 31 | Sch 7ZA (2) | |
| 3. | THE NATURE, OBJECTIVES AND STRATEGIES OF THE BUSINESS | |||
| 3.1 | The OFR shall 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 at the end of the year. | 32 | Sch 7ZA 1(b) | |
| 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). | 33 | |||
| 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. | 34 | |||
| 3.2 | The OFR shall discuss the objectives of the business to generate or preserve value over the longer-term | 35 | ||
| Where appropriate, objectives in non-financial areas are discussed in addition to financial objectives. | 36 | |||
| The directors have determined an appropriate time perspective for reporting in the OFR based on the nature of the industry within which they work. | 37 | |||
| 3.3 | The OFR shall set out the directors’ strategies for achieving the objectives of the business. | 38 | ||
| Directors’ strategies have been disclosed so that members can assess the current and past action undertaken by directors in respect of the stated objectives. | 39 | |||
| 3.4 | To the extent necessary to meet the requirements set out in 2.1 above, the OFR shall 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. | 40 | Sch 7ZA 6(1) | |
| The KPIs disclosed are those that the directors judge are effective in measuring the delivery of their strategies and managing their business. | 41 | |||
| Where available, the directors have used KPIs accepted and widely used either within the industry sector or more generally. | 42 | |||
| 3.5 | Directors shall also consider the extent to which other measures and evidence shall be included in the OFR. | 43 | ||
| 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. | 44 | |||
| 4. | CURRENT AND FUTURE DEVELOPMENT AND PERFORMANCE | |||
| 4.1 | The OFR shall 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. | 45 | Sch 7ZA 1(a) | |
| 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. | 46 | Sch 7ZA 1(c) | ||
| The OFR covers significant aspects of the statements of financial performance and where appropriate is linked to other aspects of performance. | 47 | |||
| 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. | 48 | |||
| 4.2 | The OFR shall analyse the main trends and factors that directors consider likely to impact future prospects. | 49 | Sch 7ZA 1(d) | |
| 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. | 50 | |||
| Any assumptions underlying the main trends and factors above have been disclosed. | 50 | |||
| Directors have considered the potential future significance of issues in deciding whether or not to include an analysis of them in the OFR. | 51 | |||
| 5. | RESOURCES | |||
| 5.1 | The OFR shall include a description of the resources available to the entity and how they are managed. | 52 | Sch 7ZA 2(b) | |
| 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. | 53 | |||
| 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 shall include a description of the principal risks and uncertainties facing the entity, together with a commentary on the directors’ approach to them. | 54 | Sch 7ZA 2(c) | |
| 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. | 55 | |||
| 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. | 57 | |||
| 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. | 58 | |||
| Directors have considered the full range of business risks. | 58 | |||
| 7. | RELATIONSHIPS | |||
| 7.1 | To the extent necessary to meet the requirements set out in 2.1 above, the OFR shall 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. | 59 | ||
| 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. | 60 | |||
| Where necessary for an understanding of the business, the OFR shall describe receipts from, and returns to, shareholders in relation to shares held by them. This shall include a description of any distributions, capital raising and share repurchases. | 61 | |||
| 8. | FINANCIAL POSITION | |||
| 8.1 | The OFR shall contain an analysis of the financial position of the entity at the end of the year. | 62 | Sch 7ZA 1(b) | |
| 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. | 63 | |||
| 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. | 64 | |||
| The OFR draws attention to accounting policies changed during the financial year under review. | 64 | |||
| 8.2 | The OFR shall contain a discussion of the capital structure of the entity. | 65 | Sch 7ZA 2(d) | |
| The discussion includes comments on short and longer-term funding plans to support the directors’ strategies to achieve the entity’s objectives. | 66 | |||
| The discussion includes comment on why the entity has adopted its particular capital structure. | 66 | |||
| 8.3 | The OFR shall set out the entity’s treasury policies and objectives. | 67 | ||
| The OFR discusses the implementation of these treasury policies in the financial year under review. | 68 | |||
| The purpose and effect of major financing transactions undertaken up to the date of approval of the financial statements is explained. | 69 | |||
| The effect of interest costs on profits and the potential impact of interest rate changes is also discussed. | 69 | |||
| 9. | CASH FLOWS | |||
| 9.1 | The OFR shall 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. | 70 | ||
| The discussion of cash flows supplements the information in the financial statements. Comments might include: | 71 | |||
| (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. | 71 | |||
| Where segmental cash flows are significantly out of line with segmental revenues or profits, it is indicated and explained. | 72 | |||
| 10. | LIQUIDITY | |||
| 10.1 | The OFR shall discuss the entity’s current and prospective liquidity. Where relevant, this shall 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. | 73 | ||
| The ability of the entity to fund its current and future operations and stated strategies is discussed. | 74 | |||
| 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 | 75 | |||
| 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. | 76 | |||
| 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. | 76 | |||
| 11. | KEY PERFORMANCE INDICATORS (KPIs) | |||
| 11.1 | An entity shall provide information that enables members to understand each KPI disclosed in the OFR. | 77 | ||
| The following information is provided for each KPI disclosed in the OFR: | 78 | |||
| (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, corresponding amounts 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 identification and explanations of significant changes in the underlying accounting policies adopted in the financial statements, are identified and explained. | ||||
| 12. | OTHER PERFORMANCE INDICATORS | |||
| The following information for any quantified measure, other than a KPI, used in the OFR is provided: | 80 | |||
| (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 Standard and particulars of, and reasons for, any departure is included. | 83 | Sch 7ZA 8 | ||
| 14. | DEFINITIONS | |||
| Directors | 4 | |||
| Reference to either “directors” or “board of directors” within the Reporting Standard is taken to be the entity’s governing body where the entity is not a company. | ||||
| Key Performance Indicators (KPIs) | 4 | Sch 7ZA 6(2) | ||
| 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) | 4 | |||
| 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. |
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