28 November 2015

OFR Revisited

After writing about the Operating and Financial Review (OFR) requirements under ASIC Regulatory Guide (RG) No. 247 in Corporate Reporting Insights 2014, we thought we would take a look at how companies are approaching the OFR since the release of RG247 in March 2013.

By way of reminder, the Corporations Act requires that a listed entity’s Directors’ Report (as part of a Company’s Annual Report) must contain information that shareholders would reasonably require to make an informed assessment of the entity’s:

a) operations
b) financial position
c) business strategies (and risks) and prospects for future financial years.

The part of the Directors’ Report containing this information is called the OFR.

Clearly, many more companies embraced the OFR in their 2014 Annual Report after initial adoption mainly by larger companies in FY2013. As expected, the style of OFR and its placement in the Annual Report has been varied.

In the first year it seemed that companies were fairly evenly divided in the placement of the OFR. Many decided to place it in the Directors’ Report strictly in accordance with the wording of RG247. However, this means that the OFR appears later in the Annual Report in the ‘compliance’ section of the Report (or in the separated compliance only Annual Report) rather than in the management commentary at the front of the Annual Report (or separate from the Shareholder Review if the content is split). The compliance section of the Annual Report is usually printed in black and white text and includes the Corporate Governance Report (now optional in the printed report), the Directors’ Report, the Remuneration Report, and the Financial Statements and associated notes to the accounts.

Even though many OFRs located in the Directors’ Report have been extremely comprehensive, they are easily missed compared to those placed in the commentary section at the front of an Annual Report or Review. Under this model, there have also been examples of duplication where a Review of Operations at the front section of the Annual Report covers similar operational information to that included in the OFR in the Directors’ Report.

Other companies have chosen to replace the traditional Review of Operations found in the in the front section of the Annual Report with an OFR. However, this outcome has been somewhat mixed as the OFR, by definition, should not only be a review of the operational performance of the company for the year.

The OFR should crucially include information on business strategies and prospects for future financial years. Those companies producing the highest quality OFRs include information on the company’s strategy and outlook and also contain a section or table on major business risks and how the company manages and mitigates those risks.

The other major issues regarding the OFR that we have observed relate to the length and visual appearance of the OFR.

It seems that corporate Boards and Management of most medium to large listed companies have taken their OFR reporting obligations very seriously indeed. Many of the OFRs that we have seen add to a significant number of pages. While this means that the OFR is fulfilling its obligation to help shareholders make an informed assessment of the company’s business operations, financial position and strategy and outlook, we must consider whether an OFR of this length becomes just another information-overloaded document in order to tick the regulatory box.

In addition, some OFRs have almost started to look like financial statements, with many tables set out in similar style to the financial statements that appear at the back of the Annual Report. This can be confusing to readers who, if Annual Report navigation is unclear, might wonder what part of the report they are reading.

Clearly, the larger and more complex the company, the longer and potentially more complex the OFR. However, companies must be mindful of information overload, overly detailed or complex financial tables and consequent potential reader fatigue.

We have found that the most informative OFRs include succinct, well-structured financial tables and graphs supported by concise, relevant, commentary. Remember that a well-constructed infographic, graph or table can also replace a significant number of words.

Frequently, these informative tables, graphs and infographics can be found in the company’s results presentations to financial market professionals and the media. There is no reason why these can’t be adapted to the Annual Report, especially as they are often insightful and succinct. And they could certainly replace overly long financial statement type tables that currently appear in OFRs.

It is worth repeating a paragraph from the OFR article in Insights 2014:

‘… the OFR should highlight, analyse and provide meaningful discussion of relevant information about the entity’s operations, financial position and business strategies and prospects for future financial years. It should be presented in a clear, concise and effective manner, with a focus on the quality, rather than the quantity of information.’

In summary, while OFR reporting has been adopted widely and is generally of a high quality, companies should be mindful of the potential for information overload and poor presentation. Concise and insightful commentary with complementary and helpful infographics, charts and tables are key to successful OFR reporting. Work with our communications specialists to help ensure that your OFR is an engaging and insightful component of your Annual Report.

Michael Roberts
Investor Communications Director