While an entity’s financial report provides important information to members and other users about the entity’s financial position and performance, it will rarely contain all the information needed to readily assess the underlying reasons for the entity’s financial performance and to appreciate the reasons for the entity’s results. It will also provide little, if any, information about business strategies and prospects relevant to future financial performance.
Improvement opportunities
There are opportunities for many listed entities to improve their operating and financial reviews. While there is often better analysis in the investor presentations and analyst briefings, these are generally presented as slide shows without supporting narrative and are not a substitute for information that is accessible with the annual report. The OFRs of entities in other countries often contain more analysis of matters such as the underlying drivers of an entity’s performance.
The draft guide
ASIC’s proposed guidance is intended to assist directors of listed entities in giving investors useful and meaningful information and analysis through the OFR.
It is proposed that the OFR be tailored to the circumstances of each entity and the environment in which it operates and provide insightful information and analysis. It is envisaged that the level of disclosure would be less than that contained in a prospectus and would not normally include financial forecasts. The OFR is not intended to add unnecessary length to annual reports.
The proposed ASIC guidance concerns the requirements of current legislation. It does not cover integrated reporting, and ASIC seeks comments as to whether stakeholders agree with this approach.
Operations and position
It is proposed that the OFR presents information and analysis that provide a useful and meaningful description of the underlying drivers of, and reasons for, an entity’s financial performance and position.
In relation to operations, the OFR would include significant factors affecting:
- overall income and income for major operating segments, such as new businesses, major products, markets and competitors
- significant components of overall expenses and expenses for major operating segments, such as reasons for changes in impairment losses.
In relation to financial position, the OFR might include:
- significant changes in assets and liabilities from business acquisitions or disposals
- changes in the funding or dividend strategy
- any going concern issues or uncertainties
- the impact of off-balance sheet activities and exposures not reflected in the financial report.
It will often be necessary for the OFR to include particular elements of information disclosed in past continuous disclosure announcements, given the impact of a transaction or event on the financial performance for the period. The draft guide contains practical examples of inadequate disclosures and better disclosures.
Business strategies
The ASIC draft provides proposed guidance on presenting information on business strategies and prospects, including guidance on the use of an exemption from disclosing information that is likely to cause unreasonable prejudice to the listed entity. It is expected that information already publicly available would not be omitted.
In considering the usefulness of information to competitors, regard should be given to whether competitors are already likely to have access to the information, as well as the ability of competitors to act on the information to cause material disadvantage to the entity.
Good practice considerations
The draft guide proposes that, as a matter of good practice, the OFR be presented in a single section rather than spread throughout the annual report, be consistent with the financial report, be balanced and unambiguous and be presented in a clear, concise and effective manner.
Providing better information and analysis does not necessarily mean increasing the length or complexity of annual reporting information.
Directors may wish to consider whether key information for investors required by the Act is being lost in unnecessary detail and clutter, such as repetition or an overuse of photos.
Proposed timing
ASIC hopes to issue final guidance in time to assist listed entity directors for the 30 June 2013 reporting season. While directors may choose to consider the draft guidance for 31 December 2012 OFRs, ASIC does not expect entities to take the draft guidance into account in these documents.
