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May 20, 2010

UK companies face more disclosures

A new operating and financial review (OFR) could make UK companies disclose more information related to transparency, environment and social responsibility, a move that could be unpopular with companies but welcome by investors.

An OFR was introduced in the UK in 2005, but replaced by the business review only a few months later. The new UK coalition government now plans to replace the business review with the OFR.

Both the OFR and the business review are meant to present the directors’ analysis of the business in the annual report, in order to provide investors with historical and prospective analysis of the reporting entity.

Lessons learnt

Institute of Chartered Accountants in England and Wales (ICAEW) financial reporting head Nigel Sleigh-Johnson said the government is perhaps responding to lessons learnt in the financial crisis about transparency and is listening to pressures for greater disclosure in areas such as environmental impact.

KPMG associate partner Tim Copnell said any extra reporting requirement at this time, when businesses are focusing on recovery, are likely to be unpopular, however investors are more likely to welcome the increase in quality of disclosure.

Sleigh-Johnson said the UK Accounting Standards Board (ASB) reviewed the current business review in October 2009 and one finding was there is too much information in financial reports, on issues such as sustainability, that does not necessarily address the needs of users.

Sleigh-Johnson said there should be carful consideration about what should be communicated in annual reports and that the reports are not the only communication tool for information on transparency, social and environmental responsibility.

The government has not disclosed any details or plans on how it plans to reinforce the OFR.

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