|
Public Companies Update January 2005
5 OFR UPDATE
In the last quarter, the Government has published its final
draft regulations regarding operating and financial reviews
and for the Accounting Standards Board ("ASB") has
issued a consultation paper on the ASB's draft guidance.
5.1 Amendments to the Companies Act 1985 (Operating and
Financial Review ("OFR") and Directors' Report etc)
Regulations 2005
The Government published its final draft regulations in relation
to operating and financial reviews on 20 January 2005.
The key changes to the OFR are as follows:
| 5.1.1 |
Enforcement
The bulk of the regulations come into force on 1 April
2005.
The majority of the enforcement provisions will only come
into effect for OFRs prepared for financial years starting
on or after 1 April 2006. In relation to reports produced
for periods starting before this date, then only the voluntary
revision and review provisions will come into effect as
regards enforcement.
As opposed to directors being liable if they fail to take
reasonable steps to prevent the report from being approved,
they will be liable if they knew the relevant report did
not comply with the provisions or were reckless as to
whether or not it complied and failed to take reasonable
steps to secure proper compliance. |
| 5.1.2 |
Content
The objectives and content of the OFR provide that the
review must be consistent with the size and complexity
of the business and to the extent that certain information
is not included, the OFR must state this.
Where the directors are of the opinion that the disclosure
of information may be seriously prejudicial to the interests
of the company then it may be permitted to exclude it
e.g. if the information relates to impending developments
or matters in the course of negotiation. |
| 5.1.3 |
Circulation of reports
If shareholders only receive summary financial statements,
the full OFR should be available on the company's website
and shareholders should be notified of this. In this case,
the full OFR need not be sent to them.
If directors of a company prepare group accounts, the
OFR should be a consolidated review relating to the company
and its subsidiaries. |
| 5.1.4 |
Review
The auditors will not now need to give an opinion
as to whether or not the directors have used due and careful
enquiry in preparing the OFR. |
OFRs will be mandatory for quoted companies (including those
on the Official List).
Although AIM listed companies will not be required to comply
with the OFR as a matter of law, AIM companies and their nominated
advisers should nevertheless consider whether AIM companies
should comply with the OFR as a matter of best practice.
A copy of Charles Russell's earlier OFR briefing note can
be found at http://www.cr-law.co.uk/articles/viewarticle.asp?articleid=476
5.2 Operating and Financial Review - ASB Draft Guidance
Issued for Consultation
The ASB has recently published for consultation a draft reporting
standard (referred to as Reporting Exposure Draft 1 or "RED1"
for short) on the preparation of an OFR. The DTI has confirmed
that all quoted companies (i.e. those on the Official List
but not AIM or OFEX) will need to prepare an OFR for financial
periods ending on or after 1 April 2005 and follows the completion
of the DTI's recent consultation process on the proposed contents
of an OFR. RED1 sets out the key matters to be disclosed in
the proposed OFR, which include the following:
| • |
The nature, objectives and strategies of
the business; |
| • |
The development and performance of the
business, both in the period under review and in the future; |
| • |
The resources, risks, uncertainties and
relationships that may affect the entity's long-term value; |
| • |
The position of the business, including
a description of the capital structure, treasury policies
and objectives and liquidity of the entity, both in the
period under review and in the future. |
RED1 also sets out the key principles for directors to apply
in drawing up an OFR. The principles proposed by the ASB require
that the OFR should:
| • |
Reflect the directors' view of the business; |
| • |
Focus on matters that are relevant to investors; |
| • |
Have a forward-looking orientation, identifying
those trends and factors relevant to the investors' assessment
of the current and future performance of the business
and the progress towards the achievement of long-term
business objectives; |
| • |
Complement as well as supplement financial
statements; |
| • |
Be comprehensive and understandable; |
| • |
Be balanced and neutral, dealing even-handedly
with both good and bad aspects; and |
| • |
Be comparable with previous OFRs over time. |
The ASB has set a deadline of 28 February 2005 by which feed-back
on RED1 should be received. However, it has also indicated
that it thinks it unlikely that completion of the consultation
process will have taken place before the introduction of the
new regulations.
A copy of RED1 which was laid before Parliament on 12 January
2005 can be found at: http://www.frc.org.uk/images/uploaded/documents/OFREDweb.pdf
If you require further information on any matter covered
in this note, please contact your principal contact at Charles
Russell or Simon
Gilbert, Katy
Knight, Clive
Hopewell or Alexander
Keepin (London), Francis
Rundall or Richard
Norton (Cheltenham) or Catherine
Drew or Geoff
Sparks (Guildford) on 0207 203 5000.
To download these articles in pdf format, please click
here
Please note that the summaries above are
a general indicative guide only. They are not exhaustive.
This information has been prepared by the firm as a service
to our clients. As it is a general guide, we recommend that
you seek professional advice before taking action. No liability
can be accepted by the firm for any action taken or not taken
as a result of this information. The firm is not authorised
under the Financial Services and Markets Act 2000 but we are
able in certain circumstances to offer a limited range of
investment services to clients because we are members of the
Law Society. We can provide these investment services if they
are an incidental part of the professional services we have
been engaged to provide.
|
