Financial Reporting Bulletin - UK.COM

Issue 5/2007FinancialReporting BulletinASB identifies good practice and areas forimprovementBackgroundThe Accounting Standards Board (ASB) has recently published its firstreview of narrative reporting by UK listed companies. The purpose of thereview is to highlight strengths and weaknesses of current narrativereporting, in the interests of widespread adoption of best practice. Thereport is based on a review of 23 annual reports and 5 independent reportson narrative reporting. It assesses:• Compliance – how UK companies are performing in the light of therequirement under the EU Accounts Modernisation Directive and theCompanies Act 1985 requirement for companies to provide a businessreview in the Directors’ report in their 2006 Annual report; and• Best practice – the degree to which companies have adopted therecommendations in the ASB’s Reporting Statement on the OperatingFinancial Review (OFR), given that it is the most complete andauthoritative source of best practice guidance.Summary of conclusionsBelow is a summary of the conclusions and recommendations in the report.Note that “companies” refers to the 23 companies that were included in thereview.ComplianceAreas of good reporting• Companies are in general complying with the legal requirements for theBusiness Review. However in meeting their legal requirements, companiesshould ensure there is appropriate cross-referencing in the directors’ reportto the other sections of the report and accounts, to ensure compliance withthe law. The DTI’s “Guidance on the changes in Directors’ Reportrequirements in the Companies Act 1985 (April and December 2005)” givesguidance on cross referencing.• Companies are providing a ‘fair review’ of their business.• There is a legal requirement for a ‘balanced’ analysis and in considering‘balance’ companies need to assess what prominence should be given toreporting ‘bad’ news. The achievement of the legal requirement of balancewill require the exercise of judgement by companies.

Financial Reporting BulletinIssue 5/2007Areas for improvement• The legal requirement is for companies to describe their principalrisks and uncertainties. Companies need to assess carefully whattheir principal risks and uncertainties are, rather than simplyproviding a long list of all possible risks and uncertainties.• Many companies are finding the disclosure of KPIs, both financialand non-financial, challenging. While the requirement to discloseKPIs is a matter of judgement for the directors, the lack of inclusion ofany KPIs in a Business Review in the future will provide the FinancialReporting Review Panel (FRRP) with a possible indicator that theBusiness Review may not be compliant with the law.• The disclosure of forward-looking information is proving to be achallenge. All the companies surveyed met the current legal test ofgiving an ‘indication’ of likely future developments, but the legalrequirement will increase in the future and companies will need todisclose more forward-looking information.Best practiceAreas of good reporting• Companies are generally good at proving descriptions of theirbusiness and markets, together with their strategies and objectives,although some improvements can be made in providing informationon their external environment:• Companies are providing satisfactory or better descriptions of thecurrent development and performance of the business;• There has been an increase in companies reporting environmental,employee and social issues, although very few companies havediscussed their contractual arrangements and relationships in anydepth.Areas for improvement• As noted above, the greatest area of difficulty for companies is thedisclosure of forward-looking information. Companies should reviewparagraphs 8-12 and 48-49 of the Reporting Statement, which outlinethe principle that the OFR should have a forward looking orientation,and set out potential areas which may affect the future developmentand performance of the business.• Companies need to provide a description of the resources availableto them, in particular intangible items not reflected in the balancesheet. Companies can refer to paragraph 51 of the ReportingStatement, which sets out examples of resources not included in thebalance sheet that may be disclosed eg brand strength, employees,research and development, etc.1

Financial Reporting BulletinIssue 5/2007• As noted above, companies need to assess carefully what theirprincipal risks and uncertainties are, and report on those, together withtheir approach to managing and mitigating those risks, rather thansimply providing a list of all their risks and uncertainties. Companiesshould review paragraphs 53-56 of the Reporting Statement which setout the disclosure recommendations for principal risks anduncertainties.• Although many companies are providing information on measure andindicators, improvements could be made in identifying their KPIs, bothfinancial and non-financial. Companies should review theimplementation guidance accompanying the Reporting Statement,which sets out 23 illustrative KPI’s which may assist them in meetingthis recommendation.Action requiredThe observations of, and issues noted by, the ASB should be consideredcarefully when preparing financial statements. The fact that the FRRPhas the authority to review and investigate directors’ reports in accountsfor periods commencing on/after 1 April 2006 should also be noted andthe points highlighted in the review should be given particular attention.www.bdo.co.ukBDO Stoy Hayward LLP operates across the UK with some 3,000 partners and staff. BDO Stoy Hayward LLP is a UK limited liabilitypartnership and the UK Member Firm of BDO International. BDO International is a world-wide network of public accounting firms, calledBDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The Belfastoffice is operated by a separate Partnership.BDO Stoy Hayward LLP and BDO Stoy Hayward - Belfast are both authorised and regulated by the Financial Services Authority toconduct investment business.BDO Stoy Hayward LLP is the Data Controller for any personal data that it holds about you. We may disclose your information, under aconfidentiality agreement, to a Data Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us toprovide you with information that we believe may be of interest to you, please contact Steve Fleming on 020 7893 3564 or emailsteve.fleming@bdo.co.uk.Copyright © July 07 BDO Stoy Hayward LLP. All rights reserved.‘Global Firm of the Year’ 2006‘Employer of the Year’ 20052