Jurisdiction - Australia
Australia – New ASIC Consultation Paper 187: Effective Disclosure In An Operating And Financial Review.

21 November, 2012


Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance


In brief


  • On 17 September 2012, ASIC released Consultation Paper 187 Effective disclosure in an operating and financial review (“CP187“).
  • The aim of CP187 is to assist directors in understanding the operating and financial review requirements and to promote better communication of useful and meaningful information to investors.
  • Submissions on CP187 close on 23 November 2012.


Background – the OFR requirements


In response to a recommendation by the HIH Royal Commission, section 299A was introduced into the Corporations Act 2001 (Cth) (“Corporations Act“) in 2004 as part of the “CLERP 9” audit and corporate disclosure reforms.


Under section 299A(1), listed entities are required to include in their directors’ report information that investors would reasonably require to make an informed assessment of the entity’s operations, financial position and business strategies and prospects for future financial years. This information is referred to as the operating and financial review (“OFR“).


Under section 299A(3), there is an exemption from disclosing business strategies and prospects for future financial years if such disclosure is likely to result in “unreasonable prejudice” to the disclosing entity.


Consultation paper 187 and draft regulatory guide


While ASIC’s surveillance programs have revealed that many entities provide OFRs of “reasonable quality”, ASIC believes that there is room for improvement. In particular, ASIC has found, in some instances, that there is a lack of analytical information in OFRs and a repetition of information that is already contained in the financial report without further analysis or explanation. ASIC has also found that there is uncertainty in the market about the correct application of the exemption in section 299A(3), leading to some instances where the exemption has been misapplied.


On 17 September 2012, ASIC released CP187 with an aim of issuing guidance to promote better communication of useful and meaningful information to investors and assist directors in complying with the section 299A disclosure requirements.


CP187 is the latest in ASIC’s suite of disclosure-driven regulatory guides released over the last 24 months (eg Regulatory Guide 228 on prospectuses, Regulatory Guide 230 on non-IFRS financial information and Regulatory Guides 231 and 232, dealing with certain investment schemes) and also follows CAMAC’s recent discussion paper on Annual General Meetings, which considers the annual report.


In CP187, ASIC notes that the importance of high-quality OFRs is recognised globally and that the standard of disclosure in OFRs of Australian companies has a significant role to play in ensuring that investors in Australian companies receive high-quality information.


ASIC also notes that, given the broad language of section 299A, and the need for an OFR to reflect the particular matters relevant to the entity producing the OFR, its proposed guidance is not an exhaustive list of all matters that may be relevant in an OFR. Rather it focuses on the principles that underlie the disclosure requirements in section 299A, and identifies the key matters that are relevant to compliance with that provision. Summarised below are some of the key issues addressed in CP187.


Preparing the OFR


Throughout CP187, ASIC stresses the importance of the OFR in meeting the information needs of investors.


ASIC notes that:


  • an OFR is an important opportunity to provide investors with an “analysis and narrative” about an entity’s business to supplement and complement the information contained in the entity’s annual financial report;
  • an OFR should highlight, analyse and, ultimately, provide a meaningful discussion of relevant information about an entity’s operations, financial position, and business strategies and prospects for future financial years;
  • much of the information on which the OFR will draw may have already been provided to the market; and
  • despite similarities in the wording of the OFR requirements in section 299A and the content requirements for prospectuses in section 710, it does not expect an OFR to contain the same level of disclosure, generally, as a full prospectus.


Disclosure of operations and financial position


ASIC considers that information about “operations” should enable investors to understand an entity’s business performance and the factors underlying its results.


This disclosure should:


  • include information about significant factors affecting an entity’s income and expenses overall and for major operating segments;
  • be prepared and presented in a way that explains the data in the financial report;
  • where relevant, clearly state the entity’s business model with regard to Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors (which contains guidance on business models disclosure); and
  • give sufficient context to understand the information, for example by explaining the entity’s longer-term trends and reiterating information disclosed earlier.


ASIC considers that information about “financial position” should deal with the underlying drivers of, and reasons for, the financial position. This involves explaining the accounting information and other details contained in the financial report (rather than simply repeating it). This information might include: 


  • significant changes in assets and liabilities as a result of major business acquisitions or disposals;
  • funding or dividend strategies;
  • references to any “going concern” issues about the entity; and
  • any unrecognised or undervalued assets or exposures.


ASIC also notes that non-IFRS financial information may be included in an OFR, provided care is taken to ensure that such information is not presented in a misleading manner, having regard to Regulatory Guide 230 Disclosing non-IFRS financial information.


The draft regulatory guide includes some useful examples of disclosure relating to operations and financial position.


Disclosure of business strategies and prospects for future financial years


ASIC states that information on business strategies and prospects for future financial years should:


  • focus on matters that may have a significant impact on the future financial performance and position of the entity;
  • discuss strategies and prospects in the short term as well as the long term, and not be limited to just the next financial year; and
  • contain balanced discussion about prospects, for example, by outlining the main risks which could adversely affect the entity’s achievement of its outcomes.


In addressing prospects, ASIC has stated that a narrative discussion will be sufficient, but if financial forecasts are included, the guidance in Regulatory Guide 170 Prospective financial information should be considered.


The draft regulatory guide provides useful examples of disclosure about business strategies and prospects.


Use of the unreasonable prejudice exemption


The draft regulatory guide seeks to give guidance on the application of the disclosure exemption in section 299A(3). Separately dealing with the concept of “unreasonable prejudice” and “likelihood”, ASIC states that:


  • a useful approach to considering unreasonable prejudice is to identify the adverse consequences likely to occur (ie the prejudice) and then consider whether these consequences are unreasonable, for example because disclosure of information is likely to give third parties a commercial advantage; and
  • at a minimum, the word “likely” means “more than a possibility”, or “more probable than not”.


While acknowledging commercial sensitivity as a possible basis for unreasonable prejudice, ASIC states that it would be rare to establish that unreasonable prejudice is likely if that information has already been disclosed or can be inferred from material already in the public domain, and it would be rare to disclose no information at all about business strategies and prospects in reliance of the exemption. ASIC also considers that entities should consider, taking into account the passage of time and the current circumstances, whether information omitted earlier under the confidentiality carve-out to the continuous disclosure obligations should be disclosed in the OFR.


As a practical matter, ASIC notes that entities should:


  • prepare the OFR with the purpose of providing an informed assessment of business strategies and future prospects, then assess whether any information should be omitted on the basis of unreasonable prejudice (and not the other way round); and
  • consider whether the information being considered for omission under the exemption is already publicly available, whether it can be presented at a level of detail that does not materially detriment the entity, whether competitors are already likely to have access to the information from public or non-public documents or other sources and can cause significant detriment to the entity and whether the detriment outweighs the value of the information to investors.


ASIC suggests that, in addition to disclosing the fact that information has been omitted (a requirement under section 299A(3)), a summary of the type of information omitted and the reasons for the omission should be disclosed and notes that it may ask why information has been excluded, encouraging directors to keep an internal record identifying the information and explaining the basis for its non-disclosure.


Presentation of the analysis and narrative


One of the objectives of the OFR requirements is that the OFR should be “presented in a manner which maximises usefulness to all users, having particular regard to the needs of people who are unaccustomed to reading financial reports”.


The draft regulatory guide sets out ASIC’s views on good disclosure practices in preparing and presenting the OFR.


In particular, ASIC encourages the OFR to be a single, self-contained section of the annual report, containing information which is complementary and consistent with the information in the financial report and is balanced and unambiguous (for example, by giving equal prominence to “good news” and “bad news”), with such information being presented in a clear, concise and effective manner.


Next steps


  • ASIC invites feedback on its proposed guidance, and in particular the role of the OFR, the nature of disclosure required to comply with the statutory requirements, applying the statutory exception to disclosure and ASIC’s suggestions on good disclosure practices.
  • Submissions on CP187 close on 23 November 2012. The final regulatory guide is expected to be released in March 2013 (in time for the June 2013 reporting season).


For further information, please contact:


Garry Besson, Partner, Ashurst

[email protected]


Andrew Kim, Ashurst 

[email protected]


Jade Droguett, Ashurst 

[email protected]


Ashurst Regulatory & Compliance Profile in Australia

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