Tuesday, 2 July 2013

Integrated financial reporting and key issues arising from ASIC’s new Regulatory Guide 247

The concept of integrated financial reporting has received greater attention from ASIC recently.  It is a process that involves a listed entity reporting on a wider set of ‘non-financial’ matters to the more usual financial disclosures included in the annual report (e.g. a company’s ‘social’ and ‘relationship’ capital).

Developments in this area have included the recent release of ASIC Regulatory Guide 247: Effective disclosure in an operating and financial review (RG 247), aimed at improving disclosure in the annual reports of listed entities via the operating and financial review (OFR).

The changes have been introduced to bring Australia in line with international accounting standards and are aimed at creating a ‘level playing field’ for companies that are proactive in their disclosure obligations with those that may be less transparent.  In doing so, it is hoped that investors will ultimately benefit.

ASIC has stated that its aim with RG 247 is to lift the standard of disclosure by:
  • promoting better communication of useful and meaningful information to shareholders, and
  • assisting directors to understand the requirements for an OFR (which is a requirement derived from section 299A Corporations Act).
ASIC has taken a generally sensible approach to RG 247, having taken on submissions provided during the consultation process.  ASIC has provided reasonable examples and, importantly, has clarified that OFRs are not intended to include ‘prospectus level’ disclosure. 

RG 247 emphasises the need for directors to take into account and include statements in the OFR on a company’s future prospects.  This has been done in an attempt to alleviate concerns that traditional financial reporting promotes short-term analyst reports, rather than setting a long-term strategy.  This has, understandably, raised concerns that an increased level of disclosure may provide more material to be reviewed against the “misleading and deceptive” statement provisions of the Corporations Act.

As with all public disclosure statements, we recommend that a verification process is undertaken as a means of limiting the risk that an incorrect disclosure is made (in the OFR or otherwise) and, of course, forward looking statements must be founded on a reasonable basis.

Unlike many other jurisdictions, such as the United States, there is no ’safe harbour’ defence against claims for forward looking statements which are ultimately found to be incorrect (e.g. where those statements are made in good faith).  As the potential liability regime has been extended via ASIC guidance, rather than through a legislative process, many directors are likely to approach the OFR disclosure obligations with caution, particularly in the absence of a safe harbour defence.

Care should be taken with use of section 299A(3) Corporations Act, which provides an exemption from disclosing information about business strategies and prospects for future years if disclosure of that information is likely to result in ’unreasonable prejudice‘ to the entity.  ASIC has previously interpreted such provisions sparingly and in RG 247 recommends that directors document their reasons ahead of publication if they are seeking to rely on this exemption.

RG 247 should also stand as a warning from ASIC on its intention to scrutinise the use of non-standard financial reporting to mask problems or show the company’s financial situation in a more favourable light.

An OFR is not required to be audited.  However, as it is part of the annual report, the auditor may draw out any inconsistencies.  ASIC has also indicated that it will undertake an active surveillance campaign for annual reports.  Companies should engage with their auditors early as to any additional scope of work that may be required.

Additional time should also be allowed for management and boards to prepare, review and settle the OFR and future financial prospects commentary.

For a full copy of RG 247, click here.