Messages On OFR

Clare Copeman sets the record straight on operating and financial disclosure and what, if anything, applies to professional practices.

There has been a good deal of confusion over the requirement for Operating and Financial Reviews (OFRs) on business performance. Firms can be forgiven for failing to understand exactly which disclosure requirements apply.

In November, the Chancellor made a surprise announcement that the OFR will in fact not be a mandatory requirement for fully listed companies. This apparent u-turn contradicted legislation (Statutory Instrument 1011 2005) which came into force in March last year, stating that quoted companies were obliged to publish an OFR providing a range of backward and forward looking analysis on factors underlying their business’ position and performance. This requirement was effective for accounts for financial periods beginning on or after 1 April 2005 (so, in most cases, for yearends on or after 31 March 2006).

In addition to the requirements for quoted companies, the legislation required all but the smallest non-quoted companies and LLPs to include in the directors’ or members’ report an ‘analysis using key performance indicators’ to provide the reader with ‘an understanding of the development, performance or position of the business’. The rules are more onerous for companies classified a ‘large’ than for those which are ‘medium’. The Chancellor’s announcement did not change this part of the legislation.

However, a further Statutory Instrument (SI 2005 1989), which came into force on 1 October 2005, removed the need for an OFR or enhanced members/directors’ report for LLPs.

So the current position is that whilst they do not need to prepare an OFR, all companies, whether quoted or unquoted (except those classified as ‘small’) will be required to make additional disclosures in their directors’ report. LLPs, on the other hand, will not be required to make equivalent disclosure by law.

Just to make things more complicated, the EU is proposing that accounting firms that audit listed companies should be required to provide additional disclosure concerning their corporate governance and professional standards. This will apply to LLPs as well as companies and the largest firms are already doing so voluntarily.

Regardless of the rules, however, market pressures may in any case give rise to increased levels of disclosure. The Chancellor’s November announcement caused consternation among many in the business world who support greater disclosure. Many commentators, including the Financial Reporting Council, are in favour of OFR-style reporting and many organisations have already produced OFRs or are a long way down the road towards them.

As a result, in spite of Gordon Brown’s apparent concession – which many saw as a sop to head off criticism over increased red tape – best practice may evolve such that LLPs make additional disclosure. Those LLPs that wish to be progressive should consider the extent to which they wish to make voluntary disclosure off an OFR nature in their forthcoming financial statements.

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.