Definition
The Operating and Financial Review (OFR) is a comprehensive statement published alongside a company’s annual accounts and directors’ report. In this statement, the directors offer an insightful interpretation of the financial statements and delve into the company’s performance. This review highlights both the favorable and adverse points, providing a balanced view.
The OFR is analogous to the management discussion and analysis (MD&A) statement required by US companies. It includes detailed considerations of various performance metrics and strategic assessments.
Background & Development
Under the EU’s Accounts Modernization Directive (2003), UK-listed companies were initially mandated to prepare an OFR, which required reporting on key performance indicators, employee information, and environmental impacts. Later, with the enactment of the Companies Act 2006, the requirement for a separate OFR was eliminated. However, the relevant information persisted and was migrated into an enhanced directors’ report.
Examples
Example 1: Financial Health Overview
Scenario: A technology company publishes its annual report, including an OFR focusing on an overview of their financial health. They highlight increased revenues from new product launches but also detail challenges in supply chain disruptions affecting margins.
Example 2: Environmental and Social Governance (ESG)
Scenario: A manufacturing firm includes in its OFR a segment dedicated to ESG initiatives. They discuss improvements in reducing carbon footprint and increased diversity in their workforce while acknowledging the higher compliance costs.
Example 3: Strategic Developments
Scenario: A retail chain reviews its strategic developments in their OFR. They explain the expansion into new markets, positive consumer feedback on enhanced services, and competitive pressures leading to the decision to close underperforming stores.
Frequently Asked Questions
What is the main purpose of an Operating and Financial Review (OFR)?
The principal purpose of an OFR is to provide stakeholders, including investors and analysts, with an in-depth interpretation of the financial statements and to discuss the business’s performance comprehensively.
How does an OFR differ from a standard financial statement?
While a financial statement presents quantitative data about the company’s performance, an OFR interprets this data and provides qualitative insights into the factors influencing performance, including strategic decisions, risks, and market conditions.
Are all companies required to publish an OFR?
No, with changes in regulations, UK-listed companies now incorporate the essence of the OFR into an expanded directors’ report under the Companies Act 2006, rather than a separate document.
Does the OFR include non-financial information?
Yes, OFRs often include non-financial information such as employee relations, environmental impact, and other social responsibilities reflective of the company’s broader impact and strategies.
What types of key performance indicators (KPIs) are usually discussed in an OFR?
KPIs in an OFR may encompass financial metrics like revenue growth, profitability margins, and return on capital, as well as non-financial metrics such as customer satisfaction, employee turnover, and environmental performance.
Related Terms with Definitions
Financial Statements
Documents that provide an overview of a company’s financial condition, including the balance sheet, income statement, and cash flow statement.
Management Discussion and Analysis (MD&A)
A section of a company’s annual report in the US where management discusses the financial performance, risks, and future outlook.
Directors’ Report
A mandatory report prepared by a company’s board of directors that includes information on the company’s operations and financial condition, providing context to the financial statements.
Accounts Modernization Directive (2003)
An EU directive aimed at modernizing and harmonizing financial reporting across member states, introducing requirements for broader disclosure.
Online References
Suggested Books for Further Studies
- “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- “International Financial Reporting Standards (IFRS) – A Practical Approach” by Hennie Van Greuning and Hedge Whitehouse
- “Accounting for Managers: Interpreting Accounting Information for Decision Making” by Paul M. Collier
Accounting Basics: “Operating and Financial Review (OFR)” Fundamentals Quiz
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