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Comments from ACCA
February 2005

ACCA is pleased to have this opportunity to comment on the exposure draft (ED) of Reporting Standard 1 on the above topic. The ED was considered by ACCA’s Financial Reporting Committee and by our internal team which deals with social and environmental issues.

We have some general comments to make and then we have responded to ASB’s specific questions.

General comments

ACCA supports the statutory OFR as representing an important step in improving corporate reporting in the UK. We welcome the proposed standard as a clear and helpful interpretation of a statutory OFR and as an appropriate elaboration of the statutory requirements.

The scope and status of the standard should be made clearer. For listed companies coming within the scope of the statutory OFR there is no issue – they are required to prepare an OFR by law (which will refer to the ASB’s standard) and so will be obliged also to comply with this standard. It is not clear exactly what other entities are obliged to do by this standard. The possibilities might include

• If they prepare something which they chose to call an OFR they should follow this standard
• If they prepare a narrative statement which, though called something else, might meet the definition of an OFR in paragraph 4, they are obliged to follow the standard

We would be uneasy with the second of these possibilities, given that the definition in the ED might arguably include any directors’ or trustees’ report and other forms of narrative reporting. Our preference for the avoidance of doubt would be for this standard to apply to the statutory OFR and be a best practice guide for any other form of narrative reporting.

The new standard should include some derogation for matters which might be seriously prejudicial to the commercial interests of the company. It should be consistent at least in this respect with the law, for the avoidance of doubt for listed companies and as part of a best practice statement for other entities.

The ED says that the OFR should supplement the financial statements in certain areas. Some further elaboration of this would be helpful, which might include the following.

• There are a number of areas where there could be clear overlap with certain requirements under accounting standards, for instance some of the requirements in paragraphs 60, 62 and 72. Any requirements already covered by accounting standards would be best eliminated.
• Some indication of how the OFR requirements fit with accounting standards for example paragraphs 28 and 36 and segment reporting.
• Where sufficient disclosures exist in the financial statements to meet the OFR objectives would a cross reference suffice or should the OFR be a stand alone document? If so what would be the position with summary financial statements?

Social, environmental and other related stakeholder matters

ACCA does not believe that the statutory OFR should be considered as a near-term substitute for stand alone environmental, social or sustainability reporting. Non-financial reporting of this latter kind addresses a wider stakeholder community and a wider set of issues. We think, however, that it would be useful for the ASB standard to emphasise this difference in objective. There is a danger that companies coming to the “new” OFR for the first time – especially the 70-80% of listed companies that do not currently issue environmental, social or sustainability reports – may believe that in fulfilling the OFR requirements they are also satisfying wider stakeholder concerns. This would be an unfortunate and undesirable misinterpretation and ASB potentially has the ability to signal the differences in objective between the two strands of reporting.

The ASB draft implementation guidance includes some useful material dealing with environmental, social and other related matters. ACCA believes that the ASB should underline the importance of comparability and consistency in the disclosure of selected KPI’s by emphasising that – in the ideal world – there should be no inconsistency between social and environmental KPI’s (metrics) used for OFR reporting purposes and social and environmental KPI’s (metrics) used elsewhere by the reporting entity – for example in published environmental, social or sustainability reports. We understand that ASB may feel unable to explicitly “signpost” emerging generally accepted frameworks of non-financial reporting (such as the Global Reporting Initiative) but we believe that ASB can play a constructive role in preventing potential inconsistencies between respective areas of KPI application.

Responses to ASB’s specific questions

Q1. Do you agree with the proposed principles for the preparation of an OFR contained in the draft text? Do you think that there are any other principles that should be included?

We agree with the proposed principles and would not add any further principles.

 

Q2. Do you agree with the proposed approach whereby the Reporting Standard provides a disclosure framework rather than any more detailed list of requirements for the preparation of an OFR?

We agree with the framework approach and do not believe that a more detailed or specific set of disclosure requirements would be consistent with the principles set out, particularly that the OFR should be management’s view of the business and that it report on key matters.

Q3. Do you think there are any other elements to the framework that should be added in order to encourage focused and relevant reporting in the OFR?

No.

 

Q4. What are your views on the Board’s proposal to extend the list of particular matters in paragraph 27 beyond those specifically referred to in the Regulations?

In our view the standard should be supporting the statutory OFR and therefore the particular matters should remain limited to those specified in the law. The matters noted in paragraph 27 (a) to (c), however, are likely to be significant and so should be included in the explanatory paragraphs that follow as items that might well need to be covered by the OFR.

 

Q5. Do you agree with the proposal that the Reporting Standard should not specify any particular Key Performance Indicators (KPIs) that entities should disclose in the OFR, nor the number of KPIs that should be included?

We agree on both of these.

 

Q6. Do you agree with the proposed disclosure requirements for KPIs? Do you think they will encourage entities to report on KPIs or result in less disclosure?

We agree with the proposed disclosures, as it is critical that the basis of calculation is fully transparent. Given this more rigorous position compared to current OFRs, it seems likely that fewer KPIs will be disclosed.

 

Q7. Do you agree with the proposal that the Reporting Standard should encourage “other measures and evidence”, both quantitative and qualitative, in addition to the KPIs to support the information in the OFR?

Yes.

 

Q8. Do you agree with the proposal that where quantified measures, other than KPIs, are included the disclosure requirements should be les onerous than those for KPIs?

Yes.

 

Q9. Do you agree with the proposal that illustrative examples of KPIs should be given in the implementation guidance that accompanies but is not part of the Reporting Standard?

The risk with implementation guidance is that it comes to be seen as influential and compulsory as the standard itself. If viewed however in the proper light then this guidance should be helpful to companies in developing their OFR without constraining them.

 

Q10. What are your views on the implementation guidance? Are there any further examples that might usefully be provided?

Please see our comments above under the heading “Social, environmental and other related stakeholder matters”.

We would not add further examples.

It would be helpful to indicate in appropriate examples (perhaps that dealing with greenhouse gas emissions for instance) that directors will probably want to use widely recognised industry norms in calculating KPIs. This would give both greater credibility and comparability to the performance measure, but also would simplify some of the disclosure requirements.

We have some more detailed comments on the examples given

• Example 10 refers to a utility company, but the KPI would appear more typically relevant to an oil and gas company.
• Example 11 refers to customer churn by product initially, but the description then appears to chiefly deal with it geographically.
• Example 15 refers to a total CO2 emission KPI for an energy company. We are not clear how good an example this would be for the OFR. Would not a KPI that dealt with emissions per KWH produced or one that linked actual emissions with those permitted under an emissions trading scheme be more realistic?

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