OFR future hangs in balance as most firms say they are ready

CIMA looks for positive ways forward. By Tim Cooper, editor, email newsletters, CIMA.

71 per cent of listed companies feel at least fairly prepared to produce an operating financial review (OFR), according to a CIMA survey. 54 per cent see the OFR as beneficial for their investor communications. But 67 per cent are still deciding on some or all of the key performance indicators (KPIs) to report on and their definition.

The results of the survey came as the Department of Trade and Industry (DTI) started a consultation following on from Chancellor Gordon Brown’s controversial announcement to abolish the mandatory OFR. Many of the review’s supporters, including CIMA, were surprised and disappointed at Brown’s decision.

‘Ten weeks to destroy’

In views expressed to 'Accountancy Age' this week, CIMA’s chief executive, Charles Tilley, said: ‘Seven years to create through due process and extensive stakeholder consultation. Ten weeks to destroy through consultation by stealth. The mandatory requirement for an OFR is to be abolished. In contrast to the widely reported comments made by the Chancellor at the CBI Conference, the DTI’s consultation is well hidden on page seven of an 18-page document, named the Draft Simplification Plan, on the DTI’s website. [See below for details of how to contribute to CIMA's response.]

‘We still have the disclosure required by the European Union Accounts Modernisation Directive. So what will we lose if companies choose not to abide by the Accounting Standards Board’s (ASB) principles-based guidance on OFR? We will lose the emphasis on strategy; the forward-looking orientation of the review; and the transparent definitions of KPIs which facilitate sector comparisons.’

OFRs already in use

In an article in the Financial Times last week Tilley said that he supported the cutting of red tape, but ‘coming as it does after seven years of extensive consultation on the new corporate reporting rules, [Brown’s announcement] has the potential to discourage similar involvement in governmental consultation in the future. One has to question the thought process behind this decision. After all, the UK’s Accounting Standards Board has published guidance on OFR since 1993. Many companies already prepare one, so there would have been few additional costs.’

CIMA is looking for ways forward for the OFR which might include:

• We will try to establish who will provide guidance and clarity over the Modernisation Directive. For example, will it be the ASB or the government?
• The Financial Services Authority should consider making the OFR a requirement in the Listing Rules. We first suggested this in January 2003.
• Could the government create something akin to a safe harbour? We believe that safe harbour is the right approach and we will continue to look for ways in which this can be implemented.

Survey findings

The CIMA survey was conducted by MORI and based on telephone interviews with senior finance executives in 200 UK listed companies between 4 October and 10 November 2005. 54 per cent of them see the OFR as beneficial for their investor communications, giving them more information, understanding and clarity. Over 40 per cent of companies have previously produced an OFR and over 70 per cent feel at least fairly prepared to meet the OFR’s requirements.

The main results of the survey were: 

• over 80 per cent of those due to report on the mandatory OFR between next April and June said they are at least fairly prepared. Over two-thirds of all respondents said they are either very or fairly prepared (at the time of the survey)
• one-in-four either don’t know (9 per cent) when they will have the process in place for agreeing the content and preparation of the OFR, or think it will be after June 2006 (15 per cent) 
• the greatest challenges in preparing the OFR are due to the time and work needed, and defining and gathering the information
• 67 per cent are still deciding on some or all of the KPIs to report on and their definition. 31 per cent will still be finalising their KPIs after March 2006
• 54 per cent of companies see the OFR as beneficial for their investor communications, giving them more information, understanding and clarity. Criticism is due to perceived bureaucracy and the amount of time and work needed for no added value.

Tilley said: 'Interestingly, two-thirds were still deciding on which KPIs to report and their definition. So management information in a significant number of companies could have improved under the proposed regime. Preparing a high quality OFR can improve management’s resource allocation within a company as well as investors’ resource allocation between companies. The benefits are unquestionable, but difficult to estimate. Costs are easier and said by the DTI to be £33 million per annum. Set against a UK stock market value of £1.5 trillion it needs only an infinitesimal and very achievable reduction in the cost of capital to justify the statutory OFR.'

The benefits of good disclosure are discussed in paragraphs 34 and 74-86 of the Regulatory Impact Assessment for the OFR. This came into force on 22 March 2005. In paragraph 77 MORI quotes some US research which found that good disclosers outperformed an all-share index by 5-10 per cent over five years.

Blink and you’ll miss it

The undertaking to abolish the OFR was sensationally announced by the Chancellor at the CBI conference on Monday 28 November.  However, there is a due process to be observed and a period of consultation to gather the views of interested parties.

We encourage members to use the CIMA consultations database to access details of the consultation and to contribute their views to the CIMA response. This is being drafted with the assistance of a group of senior CIMA members.  We would be grateful for comments by 6 January, since the rather short consultation period ends on 31 January 2006.  The consultations database is located on the CIMA website within the members’ personal area My CIMA. Search for the consultation title or ‘OFR’.

Keep up to date with any announcements, responses and articles by checking Insight, and Industry Focus and News and Events on the home page of the CIMA website.

December 2005