FSN: EU Performance Reporting in disarray

EU Performance Reporting in disarray

30th January 2006
The mandatory OFR (Operating and Financial Review) may have been quashed by Gordon Brown but many quoted companies will produce a voluntary OFR for the sake of best practice. Although, the situation surrounding environmental and employee disclosures for many private companies remains confused the Business Review in the Directors' Report (the UK's implementation of the EU Accounts Modernisation Directive) makes it mandatory where such disclosures are necessary for an understanding of “the development, performance or position” of the company. Gary Simon, FSN's managing editor, brings readers up to speed.

When the government abandoned the OFR at a moment's notice, few people realised that many companies are still required to report on environmental and employee issues. The OFR was simply the UK 's so called, “gold plated” version the EU Accounts Modernisation Directive. Quoted companies were not required to produce a narrative Business Review in the Directors' Report because compliance with Reporting Standard 1 (RS1) produced by the ASB (Accounting Standards Board) was deemed to be sufficient. However, without an OFR all quoted companies, as well as large and medium sized private companies are required to produce a Business Review. This became a requirement for all years commencing after the 1st January 2005 and can be found in Statutory Instrument No. 1011 of the Companies act 1985.

In practice, so many quoted companies had made preparations to comply with RS1 that many have decided to continue with their efforts and produce a voluntary OFR. Talking to FSN, Deloitte's technical partner, Isobel sharp, said, “Our research shows that 82% of listed companies intend to produce an OFR or provide OFR style information because there is a lot of institutional interest in a fuller narrative description.”

But the situation surrounding private companies is less clear cut. “We've had Business Reviews for many years and I do not expect private companies to go ‘overboard' in preparing additional information. A group of companies with 250 subsidiaries isn't going to want to prepare an elaborate Business Review for each legal entity, particularly when they are managed on a divisional basis. They are more likely to say that interested parties can find the information they need in the group accounts,” says Sharp.

Mark O'Sullivan OFR manager at PwC, the accounting firm underlined the confusion surrounding the Business Review. He told FSN, “There are difficulties about whether companies have to prepare a Business Review if they also produce a voluntary OFR. Additionally, who is the Business Review for? If the company is a private company with closely held shares then who needs to know the additional information, what is a ‘fair review' of the business of the company and how do you form a fair view?”

Despite these reservations, the Environment Minister, Elliot Morley, last week urged businesses to report on their environmental impacts, when announcing new Defra (Department for Environment Food and Rural Affairs) guidelines which he claims will make it easier than ever to do so.

The message comes on the back suggestions that environmental reporting was no longer necessary. However, Mr Morley, said this was ‘simply not the case'. “All quoted and large private companies preparing the new Business Review will need to report significant environmental issues.

“The Business Review represents a significant advance in narrative reporting standards, including those for environmental reporting. But these reports required under the EU Accounts Modernisation Directive need not be a burden,” claimed Morley even going so far as to say that the new easy-to-use DEFRA guidelines can be used by all companies, not just those that are legally obliged to prepare a Business Review. “Businesses measuring, managing and reporting their environmental performance can save on costs, enhance reputation and reduce risk,” claimed Morley.

Sir Digby Jones, Director General of the CBI, also welcomed the Reporting Guidelines, saying, "I'm a strong believer in businesses communicating their successes and being honest about the challenges faced. Companies that understand their links with the communities they operate in, and their impact on the environment, are most likely to prosper in the long-term."

The new generation of guidelines will help businesses address their most significant environmental impacts and report on these in a way that meets the needs of their shareholders and other stakeholders. They outline how environmental impacts can be measured through Key Performance Indicators (KPIs) – in many cases making use of standard business data that may already be collected – and how to report them easily.

Eighty per cent of UK businesses have just five or fewer significant Key Performance Indicators against which the Guidelines recommend they should report their performance. In fact, almost all of those who responded to the wide-spread consultation said the guidelines were simple to follow.

Mr Morley added that this left many businesses with ‘no excuse' to start reporting on their impact on the environment. “Currently, 140 of the top 250 companies report on their environmental performance: that's a good start, but many more of those that aren't have significant impacts on the environment.

“And then there are the companies outside the top 250. I want to see many more other companies actively managing and reporting their environmental performance too. Which is why the new Guidelines focus on performance indicators that are relevant to all types of businesses. They have been designed to help make reporting much sharper and more focused on key impacts – this is about cutting out the fluff.”

Dti Minister, Malcolm Wicks, said, "Removing the OFR has reduced costs for business but this does not mean companies shouldn't report their performance on employee and environmental issues. Indeed, companies are increasingly reporting these issues .This is a trend we are keen to encourage and the new Business Review will stimulate this further."

But there is even less guidance on the preparation of employee disclosures and KPIs. Martin Andrew, Head of the Human Capital practice at performance management software provider, SAS, told FSN, “Despite the recent decision not to go ahead with OFR, the requirements of the EU Accounts Modernisation Directive (AMD) will still need to be met. Surveys show consistently, that a high percentage of business leaders agree that Human Capital Management issues should be reported on. However surprisingly few companies actually do report HC indicators externally and few welcome legislation that requires them to do so.

Possibly the biggest challenge for most companies, particularly as this is evolving area, will be to devise appropriate non-financial KPI's, that can show a correlation with turnover or profit, or that show the company favourably against industry standards or peer company benchmarks. Another challenge will be to believe that HC measures can help to differentiate the company. Regard must be given, of course to the commercial sensitivity of HCM data. However, measures such as employee satisfaction, whilst giving nothing away, have been demonstrated to affect shareholder value positively.”

The precise position for most companies is unlikely to be clear for several months. The ASB has released its revision of RS1 as a Reporting Statement, though as expected, it is almost the same as the standard it replaces. The results of the government's consultation on the Business Review and amendments to the Company Law Reform Bill are expected in the spring.

In the meantime quoted companies will probably continue with preparations and private companies will sit on the fence whilst government ministers continue to exhort all involved to disclose more information. In the words of one senior FSN source, who did not want to be named, “It is a buggers muddle!”

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