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Comments from ACCA
September 2003

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to respond to the above consultation document. ACCA has been deeply involved in the development of non-financial forms of reporting since the early 1990's, with a particular focus on environmental, social and sustainability reporting. In addition to the answers to the specific questions included in the document, we also have some general comments to make.

General comments

ACCA broadly welcomes the guidance emerging in the document, and the approach adopted.

It is not clear precisely in what form guidance on materiality issues will finally be presented, but we assume that it, and subsequent guidance on the content and presentation of the statutory OFR, may be produced by a "standards board". The Accounting Standards Board (ASB) is currently responsible for guidance on the OFR. The future statutory OFR will contain a good deal of material relating to operating items, but there will nevertheless continue to be a significant element of financial items which will relate closely to the information in the financial statements.

Any change in the scope of activity of a body (such as the ASB) raises questions about its constitution, for instance whether there should be changes in the composition of its board members. We would hope that the current Financial Reporting Council and ASB would be able to cover these responsibilities (perhaps with a suitable advisory body) and not need to be replaced by new structures and institutions.

The consultation document deals with what is material for the users of a company�s OFR. We have three main concerns.

Firstly there is the question of defining clearly who these expected users actually are. We deal with this matter in more detail below in our response to

Question 2.

Secondly, we believe that there may be items which are not judged to be material to users when users are defined narrowly as "investors" or "members", but which may be considered significant for the wider community nonetheless.

These might include carbon emissions or health and safety related performance. There are also a number of disclosure issues currently included in the (presently) required Directors� Report concerning political donations, the employment of disabled people and payment practices. If the current Directors� Report is to be abolished and partially replaced by a statutory OFR, there is a risk that such disclosures might be �lost� on the grounds that they are not material for members or investors. This would be unfortunate.

Thirdly, and closely related to the foregoing, is a sense that whatever is included in the formal guidance on materiality, it will nevertheless be difficult to avoid the impression in the minds of preparers especially, of the lesser significance attached to those OFR subjects marked as "only when material", as compared to the compulsory items.

Answers to specific questions

We agree with the six criteria and their elaboration in paragraph 20.

The first refers to building on existing guidance. It is fair to say that much of this guidance would refer to the materiality of historically generated information, and as such may need some adaptation for the more forward-looking basis intended for the OFR.

There should be some reference to the possibility that directors may need to consider the time-scale over which issues become material. In this context, the materiality rules should acknowledge that, under likely changes to company law in the near future, company directors are to be expressly required to take into account, in their decision-making processes, both long-term and short-term consequences. So, for example, climate change is a long term issue of great significance to many non-investor groups, but which may not be of immediate (short term) significance to many investors. Nevertheless, companies with high levels of carbon emissions will necessarily be looking further into the future in terms of potential legislation or production technologies for example. Alert investors will be doing the same.

We generally agree with the definition. The use, however, of the terms �members�, �users� and �stakeholders�, all within the definition of materiality, complicates the definition and raises questions as to the precise definition of each of these terms. There are issues which may be very material to certain classes of investor, for example those in the socially responsible investment group, but not at all material to others, such as index tracker funds. �Users� may be civil society organisations as opposed to investors.

As an example of the disclosure dilemma companies will face, socially responsible investors will almost certainly be interested in the level of environmental fines and prosecutions and the company�s record in its sector in respect of issues such as contractor related injuries/fatalities. Mainstream investors may not be interested in such performance statistics and directors will have to decide which section of the investor body to satisfy.

We agree with these and think that this material will be helpful for directors.

Two issues need to be addressed in addition, both of which are alluded to in paragraph 43 of the section on process, but not included here as principles.

Firstly, the usefulness of the end product may be diminished if OFRs are clearly non-comparable between companies and within sectors and in terms both of content and in the calculation of performance indicators. Directors should consider best practice, as well as feedback from users, to help comparability. Secondly, communication and clarity will be improved if immaterial items are excluded from OFRs.

We agree with these.

Generally this material will be helpful. In terms of Questions 3 and 4, there should be complementarity between the process to identify material issues to stakeholders (for a sustainability report for example) and the process used to identify material issues to 'members' (for the OFR). Guidance material already exists on stakeholder engagement issues, and companies could use the issues material to their wider stakeholders as a starting point to identify the issues which may be material to members for the purposes of the OFR.

We note, however, that recent research indicates that just over half of the FTSE 250 are now issuing stand-alone social and environmental reports. Although this should be interpreted as �good news� when compared with the low numbers reporting such data only a decade ago, there is a more negative interpretation. Probably less than 20% of the companies which may have to produce a mandatory OFR currently have management information systems or processes in place specifically designed to identify and engage with stakeholders. The final guidance on materiality needs to emphasise the importance of stakeholder engagement processes and provide some �signposts� for the many companies which have not yet accepted the beneficial logic of dialogue.

In Question 9 we agree that the OFR should not be seen as a substitute for separate environmental or social reports. There should, however, be clear cross-referencing from the one to the others.

The OFR and the process by which it has been developed seem likely to be subject to review by auditors. Directors will therefore need to ask whether the process has been documented in a way that can be reviewed externally.

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