While the financial report itself is an invaluable source of information for company shareholder and scheme unit holders in providing historical financial performance and position, it contains limited analysis and information on the business strategy, risks, prospects and underlying drivers of the business.
Now, a new guide released by ASIC – Regulatory Guide 247, Effective disclosure in an operating and financial review (RG 247) – gives directors of listed entities the opportunity to make their OFRs more useful and meaningful to investors and improve the standard of disclosure. The guide is not intended to add unnecessary length to annual reports, but rather aims to promote better communication and assist in understanding the OFR requirements.
The purpose of the OFR
It is recommended that the OFR be presented in a clear, concise and effective manner in a single section of the annual report.
The OFR is not expected to contain prospectus-level disclosure and is not required to include financial forecasts. It should explain the information contained in the financial report, rather than simply repeating it, and should include the underlying drivers and reasons for the entity’s performance, which may include significant components of, and factors affecting, the overall income and income for major reporting segments.
The OFR performs a different role to market announcements and other periodic disclosures.
It supplements and complements the financial report, allowing investors to find relevant information in a single location rather than piecing together information from various past announcements.
It may contain a more or less detailed explanation and analysis than investor presentations and briefings, which may be in the form of a slide show without a supporting narrative.
RG 247 includes examples of disclosure that is likely to be inadequate, compared with disclosure that may be more appropriate.
Other disclosure guidelines
ASIC’s Regulatory Guide 230, Disclosure of non-IFRS financial information, should also be taken into account when disclosing financial information not prepared in accordance with International Financial Reporting Standards.
Information on the underlying drivers of the financial position might explain matters such as:
- significant changes in assets and liabilities as a result of major business acquisitions or disposals;
- changes in the funding or dividend strategy of the entity; and
- any doubt about the solvency of the entity or uncertainties about its ability to continue as a going concern.
Matters relevant to understanding the financial position might be the impact of any unrecognised or undervalued assets, or exposures not reflected in the financial report, as well as unusual contractual conditions.
Business strategies and prospects
Information on business strategies and prospects for future financial years should cover more than the next financial year. The time period depends on the individual circumstances of the entity. The OFR should bring together key disclosures that have been presented to the market on an ongoing basis.
Subject to an exemption, key business strategies should be presented, including significant plans that are a part of those strategies. Examples include the intention to develop or discontinue products or services, plans to enter new markets or to expand production capacity and market share in existing markets, or plans to raise funds for the acquisition of a new asset.
The level of information reasonably required for investors to make an informed assessment can normally be provided without causing unreasonable prejudice. For example, a strategy of discounted pricing might be sensibly disclosed without providing the exact amount of the discount.
Risks material to achieving the future financial performance and outcomes disclosed should also be provided. Disclosure of generic risks should be avoided. How controllable risks will be managed should be disclosed. Equally, it may be appropriate to disclose factors that may improve performance.
Specific business strategies and prospects are not required if disclosure is likely to result in ‘unreasonable prejudice’ to the entity; however, it would be rare to disclose no information about business strategies and prospects using this exemption. Whether there is unreasonable prejudice must take into account the information needs of investors.
Disclosure may be unreasonable if it is likely to give a commercial advantage to third parties and a material disadvantage to the entity. The word ‘likely’ means ‘more than a possibility’ or ‘more probable than not’. Entities should consider both ‘whether’ and ‘how’ information may be used by third parties when determining whether an unreasonable prejudice is likely to result.
The exemption is unlikely to apply where information has already been disclosed or can be inferred from public material. Entities should also consider specific information to be disclosed and whether it is exempt, rather than presuming that particular information must be omitted.
RG 247 provides practical considerations in determining whether the exemption is available.
For more information, see RG 247, which can be found at asic.gov.au
