Final Shape of the Business Review
The Companies Act 2006 introduced enhanced Business Review requirements for quoted companies applicable for financial years beginning on, of after, 1 October 2007.
With the passing of the Companies Act, the overall requirements of the Business Review have now become clear and we're finally in a position to examine the final shape of the legislation and the similarities and differences between the Operating and Financial review and the Business Review.
For financial years beginning on, or after, 1 April 2005 all companies except small companies (as defined by section 247 of the Companies Act) will be required to prepare a Business Review in accordance with Companies Act legislation section 234 ZZB. The key requirements are as follows:
- The directors’ report for a financial year must contain –
- a fair review of the business of the company, and
- a description of the principal risks and uncertainties facing the company.
- The review required is a balanced and comprehensive analysis of –
- the development and performance of the business of the company during the financial year, and
- the position of the company at the end of that year, consistent with the size and complexity of the business.
- The review must, to the extent necessary for an understanding of the
development, performance or position of the business of the company, include
-
- analysis using financial key performance indicators, and
- where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.
In the case of a quoted company, for financial years beginning on, or after 1 October 2007, the Business Review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include:
- the main trends and factors likely to affect the future development, performance and position of the company's position;
- information about:
- environmental matters (including the impact of the company's business on the environment),
- the company's employees, and
- social and community issues, including information about any policy of the company in relation to those matters and the effectiveness of those policies; and
- subject to sub-section (11), information about persons with whom the
company has contractual or other arrangements which are essential to the
business of the company.
iii) A comparison of the Operating and Financial Review with the Business Review
Given the overall shape of the final Business Review legislation it is clear there are genuine similarities between the legislation and the Operating and Financial Review (OFR). Both require companies to report on their key performance indicators and principal risks, and quoted companies to ultimately report on the trends and factors likely to influence future performance, as well as information on employee, environmental and community issues.
However, unlike the OFR, the legislation underpinning the Business Review omits two important building blocks - the requirement to explain the market context and strategy of the company. We believe these elements, originally in the OFR, provide context to the information that follows and therefore should be the cornerstone of any Business Review.
Given the similarities between the final Business Review and the OFR, and the need for these two important building blocks, PricewaterhouseCoopers encourages quoted companies to look to the Accounting Standards Board’s Reporting Statement as best practice when considering how to respond to the legislation.
Our Business Review: illustrative examples offer an insight into the type of information companies might be expected to provide in order to meet the requirements set out above.