On 27 March this year, ASIC released Regulatory Guide 247 which aims to guide and assist listed entities, their directors and preparers of Operating and Financial Review comply with section 299A of the Corporations Act allowing a reasonable assessment of the entity’s operations, financial position and business strategies and prospects. Partner, Greg English and Lawyer, Hai-Young Lu look at what this means for directors.
Financial reports to ASIC – What is an Operating Financial Review?
Companies, registered schemes and listed entities are required to prepare an annual report and accompanying directors’ report under the Corporations Act 2001 (Cth) (Corporations Act). Annual financial reports contain information about an entity’s financial position and performance, however, it will rarely provide all the information needed to assess its position, underlying reasons for its results and information about business strategies and prospects regarding future financial performance. An Operating and Financial Review (OFR) is required as part of a listed entity’s directors’ report and is designed to be read in conjunction with the financial report to complement and supplement it in order to better meet the information needs of shareholders.
The requirements of an OFR
The requirements of an OFR are set out in section 299A of the Corporations Act. It must contain information that members of the listed entity would reasonably require to make an informed assessment of:
- the operations of the entity reported on
- the financial position of the entity reported on
- the business strategies and prospects for future financial years.
It must exclude information that is likely to result in ‘unreasonable prejudice’ to the entity. Such information should be tailored to reflect individual circumstances of the entity and business environment it operates in.
Purpose of RG 247
ASIC released Regulatory Guide 247 (RG 247) on 27 March 2013, which aims to guide and assist listed entities, their directors and preparers of OFRs in complying with the requirements of section 299A of the Corporations Act in order to:
- promote better communication of useful and meaningful information to shareholders
- assist in understanding the existing OFR requirements.
Overview of RG 247
RG 247 contains guidance on the following:
- Discussion of the overall principles that should guide the preparer of an OFR (e.g. presenting a narrative and analysis of an entity’s financial position).
Guidance on each of the requirements contained in section 299A of the Corporations Act, including information that must be disclosed on:
- entity’s operations - utilising overviews of operations, results of operations, discussing significant changes during the reporting period. Relating information to the context of the business model of the company. Discussing key dependencies (such as contracts and underlying drivers of performance).
- financial position - Detailing the underlying drivers of and reasons for the financial position. Explaining accounting information in the financial report.
- business strategies and prospects for future years - Focusing on what may affect future financial performance including business strategies, prospects, business risks for future financial ‘years’.
- Guidance on the use of statutory exemption in s299A(3) of the Corporations Act regarding the exclusion of information in an OFR that is likely to ‘unreasonably prejudice’ an entity.
- Good disclosure practices that may assist in producing an OFR that aligns with the overall objectives of the OFR requirements and worked examples.
Considering the immediate effect of RG 247, preparers of OFRs should carefully consider its requirements. It may require additional or amended disclosure from previous OFRs, and may impact directors’ legal responsibility in disclosing prospective information. Directors should consider the way in which they will document any basis for utilising the unreasonable prejudice exemption.