What will replace OFR?

Before companies feel too relieved at the removal of the requirement to provide an OFR, it is worth looking at what will replace it. New requirements are being drafted, with the contentious forward looking information potentially disappearing.

The OFR came out of the European Union’s Accounts Modernisation Directive, and in part from the Company Law review. Since Gordon Brown’s announcement, the Department of Trade and Industry has published a Draft Simplification Plan, with a response date of 31st January 2006. It proposes what the ‘simpler Business review’ should contain, which will meet the requirements of the EU Directive, without the gold plating of the OFR.

It is clearly hard to predict accurately where this saga will end. Many of the elements of the original OFR were included in the Accounts Modernisation Directive, and will presumably therefore remain in any future requirements. These include a balanced and comprehensive analysis, current trends and factors, key performance indicators, and environmental factors.

However they do NOT include the contentious issue of forward looking information which was one of the elements of gold plating most concerning to issuers.

As suggested by the name of this blog, we support the wider transparency of issuers, and increased disclosure. Sufficient research – see earlier posts – shows that companies that are well understood by investors, offer a higher rate of total return, which is in turn reflected by a higher valuation. We also believe that this view is being more widely accepted, not only by regulators by by companies around the world.

In its immediate reaction to Gordon Brown’s speech, the FRC appears to support this view. "The FRC has long believed that the publication of a narrative explanation of a company's development, performance, position and prospects should be encouraged as an important element of best practice in corporate reporting. The ASB first produced a statement of best practice in 1993 (updated in 2003). A significant number of FTSE 100 companies already publish an OFR. Regardless of whether or not an OFR is a statutory requirement, the FRC's view of best practice remains unchanged."

Next steps. First, the OFR will NOT disappear completely; the EU Directive must be met somehow. Companies should therefore consider retaining the internal processes of the OFR, at least until the final, agreed details of the ‘simpler Business review’ emerge.