Made | 21st March 2005 | ||
Coming into force | 22nd March 2005 |
(5) In these Regulations, "the 1985 Act" means the Companies Act 1985.
(2) For a financial year in which -
the directors' report must be a consolidated report (a "group directors' report") relating, to the extent specified in the following provisions of this Part, to the company and its subsidiary undertakings included in the consolidation.
(3) A group directors' report may, where appropriate, give greater emphasis to the matters that are significant to the company and its subsidiary undertakings included in the consolidation, taken as a whole.
(4) In the case of a quoted company, a directors' report need not contain any information included in the operating and financial review for that financial year (see section 234AA).
(5) If a directors' report does not comply with the provisions of this Part relating to the preparation and contents of the report, every director of the company who -
is guilty of an offence and liable to a fine.
234ZZA.
Directors' report: general requirements
(1) The directors' report for a financial year must state -
(2) In relation to a group directors' report subsection (1)(b) has effect as if the reference to the company was a reference to the company and its subsidiary undertakings included in the consolidation.
(3) The report must also comply with Schedule 7 as regards the disclosure of the matters mentioned there.
(4) In Schedule 7 -
234ZZB.
Directors' report: business review
(1) The directors' report for a financial year must contain -
(2) The review required is a balanced and comprehensive analysis of -
consistent with the size and complexity of the business.
(3) The review must, to the extent necessary for an understanding of the development, performance or position of the business of the company, include -
(4) The review must, where appropriate, include references to, and additional explanations of, amounts included in the annual accounts of the company.
(5) In this section, "key performance indicators" means factors by reference to which the development, performance or position of the business of the company can be measured effectively.
(6) In relation to a group directors' report this section has effect as if the references to the company were references to the company and its subsidiary undertakings included in the consolidation."
Auditors' report on directors' report
3.
In section 235 of the 1985 Act (auditors' report)[3], for subsection (3) substitute -
Special provision for small companies
4.
For paragraph (a) of section 246(4) of the 1985 Act (exemptions for small companies from disclosures in directors' report)[4] substitute -
Special provision for medium-sized companies
5.
After subsection (2) of section 246A of the 1985 Act (special provisions for medium-sized companies)[5] insert -
Cases in which special provisions for small and medium-sized companies do not apply
6.
In section 247A of the 1985 Act (cases in which special provisions in sections 246 and 246A do not apply)[6], for subsection (1) substitute -
(1B) A company is ineligible if -
Amendments to Schedule 7
7.
- (1) Schedule 7 to the 1985 Act (matters to be dealt with in directors' report) is amended as follows.
(2) In paragraph 1 (asset values)[7] -
(3) In paragraph 5A (use of financial instruments)[8] -
(b) after that sub-paragraph insert -
(4) In paragraph 6 (miscellaneous matters)[9] -
(c) after that sub-paragraph insert -
the operating and financial review must be a consolidated review (a "group operating and financial review") relating, to the extent specified in Schedule 7ZA, to the company and its subsidiary undertakings included in the consolidation.
(4) A group operating and financial review may, where appropriate, give greater emphasis to the matters that are significant to the company and its subsidiary undertakings included in the consolidation, taken as a whole.
(5) If an operating and financial review does not comply with the provisions of this Part relating to the preparation and contents of the review, every director of the company who -
is guilty of an offence and liable to a fine.
234AB.
Approval and signing of operating and financial review
- (1) The operating and financial review must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.
(2) Every copy of the operating and financial review laid before the company in general meeting, or that is otherwise circulated, published or issued, must state the name of the person who signed it on behalf of the board.
(3) The copy of the operating and financial review delivered to the registrar must be signed on behalf of the board by a director or the secretary of the company.
(4) If a copy of the operating and financial review -
the company and every officer of it who is in default is guilty of an offence and liable to a fine."
Objective and contents of operating and financial review
9.
After Schedule 7 to the 1985 Act insert -
prepared so as to assist the members of the company to assess the strategies adopted by the company and the potential for those strategies to succeed.
3.
- (1) To the extent necessary to comply with the general requirements of paragraphs 1 and 2, the review must comply with paragraphs 4 to 6.
(2) If the review does not contain information and analysis of each kind mentioned in paragraphs 4 and 5, it must state which of those kinds of information and analysis it does not contain.
4.
- (1) The review must include -
(2) The review must, in particular, include -
5.
The review must also include -
6.
- (1) The review must include analysis using financial and, where appropriate, other key performance indicators, including information relating to environmental matters and employee matters.
(2) In sub-paragraph (1), "key performance indicators" means factors by reference to which the development, performance or position of the business of the company can be measured effectively.
9.
In relation to a group operating and financial review this Schedule has effect as if the references to the company (other than the last such reference in paragraph 1) were references to the company and its subsidiary undertakings included in the consolidation."
Auditors' reports on operating and financial reviews
10.
In section 235 of the 1985 Act (auditors' report), after subsection (3) insert -
Reporting standards for operating and financial reviews
11.
After section 256 of the 1985 Act (accounting standards)[11] insert -
(2) References in this Part to relevant reporting standards, in relation to a company's operating and financial review, are to such standards as are, in accordance with their terms, applicable to the company's circumstances and to the review.
(3) Where or to the extent that the directors of a company have complied with a reporting standard, they are presumed (unless the contrary is proved) to have complied with the corresponding requirements of this Part relating to the contents of an operating and financial review."
(3) In subsection (2), for "section 238(1)" substitute "section 238(1A)".
(4) After subsection (2) insert -
must publish its operating and financial review on a web site throughout the period beginning at least 21 days before the date of the meeting at which the accounts and directors' remuneration report from which the statement is derived are to be laid and ending with the conclusion of that meeting."
(5) In subsection (2C)(a), for "directors' report" substitute "directors' remuneration report".
(6) In subsection (2D) -
(c) in paragraph (b), after "publish that" insert "review or".
(7) For subsection (3) substitute -
as the Secretary of State may by regulations specify, including information derived from the company's directors' report or (in the case of a quoted company) operating and financial review.
(3A) Nothing in this section or regulations made under it prevents a company from including in its summary financial statement additional information derived from the company's annual accounts, directors' remuneration report, directors' report or operating and financial review."
(8) In subsection (4) -
(c) in paragraph (b) for "is consistent with those accounts and those reports and" substitute -
(d) after paragraph (c) insert -
were qualified or unqualified and, if either was qualified, set out the qualified statement in full together with any further material needed to understand the qualification;".
Transitional provision
13.
As respects companies' financial years beginning on or after 1st April 2005, regulations made by the Secretary of State under section 251 of the 1985 Act before the date on which these Regulations come into force have effect as if -
(3) In subsection (2), for "or report", in each place, substitute ", report or review".
(4) In subsection (3), after " a revised directors' report" insert ", a revised operating and financial review".
(5) In paragraphs (a) and (b) of subsection (4), for " statement or report" substitute ", statement, report or review".
(6) In paragraph (c) of subsection (4) -
Secretary of State's notice in respect of reports and reviews
15.
- (1) Section 245A of the 1985 Act (Secretary of State's notice in respect of annual accounts)[14] is amended as follows.
(2) For subsection (1) substitute -
and it appears to the Secretary of State that there is, or may be, a question whether the accounts, report or review comply with the requirements of this Act, he may give notice to the directors of the company indicating the respects in which it appears to him that such a question arises or may arise."
(3) In subsection (2), for "or prepare revised accounts" substitute ", report or review or prepare revised accounts or a revised report or review".
(4) In subsection (3), for the words from "no satisfactory explanation" onwards substitute -
he may if he thinks fit apply to the court."
(5) For subsection (4) substitute -
Application to court in respect of defective reports and reviews
16.
- (1) Section 245B of the 1985 Act (application to court in respect of defective accounts)[15] is amended as follows.
(2) In subsection (1) -
(3) After subsection (3) insert -
(4) In subsection (4) -
(5) In subsection (5), after "accounts" (in both places) insert ", report or review".
(6) For subsection (7) substitute -
Persons authorised to apply to court in connection with defective reports and reviews
17.
In subsection (1) of section 245C of the 1985 Act (other persons authorised to apply to court)[16] -
Power of person authorised to require documents, information and explanations
18.
In subsection (1) of section 245F of the 1985 Act (power of person authorised to require documents, information and explanations)[17] for "annual accounts of a company" substitute " a company's annual accounts, directors' report or operating and financial review".
(b) for paragraph (d) substitute -
3.
In subsection (1) of section 239 (right to demand copies of accounts and reports)[19] -
(b) for paragraph (d) substitute -
4.
In subsection (1) of section 241 (accounts and reports to be laid before company in general meeting)[20] -
(b) for paragraph (d) substitute -
5.
In subsection (1) of section 242 (accounts and reports to be delivered to the registrar)[21] -
(b) for paragraph (d) substitute -
(c) after paragraph (d) insert -
6.
In subsection (1) of section 245F (power of person authorised to require documents, information and explanations) after "requirements of this Act" insert "(or, where applicable, of Article 4 of the IAS Regulation)".
7.
In the Table in section 262A (defined expressions)[22], at the appropriate places insert -
"directors' report | section 23" |
"group directors' report | section 234" |
"group operating and financial review | section 234AA" |
"operating and financial review | section 234AA" |
"reporting standards and relevant reporting standards | section 256A" |
"234AA(5) | Non-compliance with Part 7 as to operating and financial review and its content; directors individually liable |
1.
On indictment 2. Summary |
A fine The statutory maximum |
234AB(4) | Laying, circulating or delivering operating and financial review without required signature | Summary | Level 3 on the standard scale". |
Part 1 of the Regulations (regulation 1) is introductory. It includes provision applying the amendments to the 1985 Act made by Parts 2, 3, 4 and 6 of the Regulations to companies' financial years beginning on or after 1st April 2005. The amendments in Part 5 of the Regulations (revision of defective reports and reviews) are to apply in respect of annual accounts, directors' reports and OFRs for companies' financial years beginning on or after 1st April 2006, save that the amendments to section 245 of the 1985 Act in regulation 14, which permit quoted companies voluntarily to revise their OFRs, will apply from 1st April 2005.
Part 2 of the Regulations (regulations 2 to 7) replaces section 234 of the 1985 Act, inserts new sections 234ZZA and 234ZZB, and amends Schedule 7 to the 1985 Act in order to provide for further disclosures in the directors' report in implementation of articles 1.14, 1.17 (in part) and 2.10 of the Accounts Modernisation Directive. New section 234 contains a re-worded offence of failing to comply with the 1985 Act's requirements in respect of the preparation and content of the directors' report.
Regulation 3 implements the second part of article 1.17 of the Accounts Modernisation Directive, requiring auditors to report on whether information in the directors' report is consistent with the annual accounts.
The existing exemption for small companies in section 246(4)(a) of the 1985 Act from the requirement to give a fair review in the directors' report is applied to the enhanced disclosure requirements (regulation 4). Medium-sized companies are exempted from making the disclosures concerning non-financial information (regulation 5 amending section 246A of the 1985 Act). Small and medium-sized companies will not be prevented from taking advantage of these exemptions even if they are part of an ineligible group (regulation 6 amending section 247A of the 1985 Act).
Part 3 of the Regulations (regulations 8 to 11) introduces a new requirement in section 234AA for quoted companies to prepare an OFR complying with the requirements of new Schedule 7ZA to the 1985 Act inserted by regulation 9. A quoted company is defined in section 262 of the 1985 Act as a company whose equity share capital has been included in the official list in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000 (c.8), is officially listed in an EEA State, or is admitted to dealing on either the New York Stock Exchange or the exchange known as Nasdaq.
Failure to comply with the requirements of the 1985 Act concerning the preparation and contents of the OFR will constitute a criminal offence (section 234AA(5)). New section 234AB imposes a criminal penalty for failure to comply with requirements in that section for the approval and signature of the OFR.
Regulation 10 inserts a new subsection (3A) into section 235 of the 1985 Act to provide for a review by a quoted company's auditors of the OFR.
Regulation 11 inserts a new section 256A into the 1985 Act providing that directors who comply with a reporting standard for the OFR issued by a body or bodies specified in an order made by the Secretary of State are presumed (unless the contrary is proved) to have complied with the provisions of the 1985 Act relating to the contents of an OFR.
Part 4 of the Regulations (regulations 12 and 13) amends the regulation-making power for summary financial statements in section 251 of the 1985 Act to make provision concerning the operating and financial review and the amended directors' report. Regulation 13 makes transitional provision for regulations made under section 251 before the date on which these Regulations come into force.
Part 5 of the Regulations (regulations 14 to 18) amends sections 245 to 245C and 245F of the 1985 Act to provide for the voluntary revision by the directors of a defective OFR, and for the compulsory revision of defective directors' reports and OFRs by application to the court by the Secretary of State or a person authorised by her.
Part 6 of the Regulations (regulation 19 and the Schedule) makes minor and consequential amendments to Part 7 resulting from the introduction of the OFR. Paragraph 5(c) of the Schedule reinstates the second paragraph of section 242(1) of the 1985 Act which was omitted in error by regulation 10(8) of the Directors' Remuneration Report Regulations 2002 (S.I. 2002/1986). Paragraph 6 makes a minor amendment to section 245F of the 1985 Act (inserted by section 12 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (c.27)) to take account of EC Regulation No.1606/2002 of the European Parliament and of the Council of 19th July 2002 on the application of international accounting standards (Official Journal No. L243/1 of 11th September 2002).
A full regulatory impact assessment of the effect that this instrument will have on the costs of business is available from the Department of Trade and Industry, Corporate Law and Governance Directorate, Elizabeth House, 39 York Road, London SE1 7LJ (it is also available electronically at www.dti.gov.uk/cld). A copy has also been placed in the libraries of both Houses of Parliament.
[2] Section 234 was substituted by section 8(1) of the Companies Act 1989, and amended by regulation 5 of S.I. 1996/189, by regulation 2 of S.I. 1997/571, and by section 9(2) of the Companies (Audit, Investigations and Community Enterprise) Act 2004. Section 234ZA was inserted by section 9(3) of the Companies (Audit, Investigations and Community Enterprise) Act 2004.back
[3] Section 235 was substituted by section 9 of the Companies Act 1989, and amended by regulation 4 of S.I. 2002/1986 and by regulation 6 of S.I. 2004/2947.back
[4] Section 246 was substituted by regulation 2(1) of S.I. 1997/220, and amended by regulation 6(1) of S.I. 1997/570, by regulation 8(1) of S.I. 2000/1430 and by regulations 3 and 13(2) of, and paragraph 12 of Schedule 1 to, S.I. 2004/2947.back
[5] Section 246A was inserted by regulation 3 of S.I. 1997/220, and amended by regulation 3 of, and paragraph 13 of Schedule 1 to, S.I. 2004/2947.back
[6] Section 247A was inserted by regulation 4 of S.I. 1997/220, and amended by article 11 of S.I. 2001/3649.back
[7] Paragraph 1 of Schedule 7 was amended by regulations 14(4)(a) and 15(3) of S.I. 1996/189.back
[8] Paragraph 5A was inserted by regulation 13(1) of S.I. 2004/ 2947.back
[9] Paragraph 6 was amended by section 8(2) of, and paragraph 2(2) of Schedule 5 to, the Companies Act 1989, and by regulations 3 and 8(a) of S.I. 1992/3178.back
[10] Section 234A was inserted by section 8(1) of the Companies Act 1989.back
[11] Section 256 was substituted by section 19 of the Companies Act 1989.back
[12] Section 251 was substituted by section 15 of the Companies Act 1989, and amended by regulation 3 of S.I. 1992/3003, by article 14 of S.I. 2000/3373, by article 15 of S.I. 2001/3649, by regulation 8 of S.I. 2002/1986, and by regulation 11 of S.I. 2004/2947.back
[13] Section 245 was substituted by section 12 of the Companies Act 1989, and amended by regulation 4 of, and paragraph 2 in Part 1 of Schedule 1 to, S.I. 1994/1935, by regulation 10(9) of S.I. 2002/1986 and by regulations 3 and 10 of, and paragraph 11 of Schedule 1 to, S.I. 2004/ 2947.back
[14] Section 245A was inserted by section 12 of the Companies Act 1989, and amended by regulation 3 of, and paragraph 11 of Schedule 1 to, S.I. 2004/2947.back
[15] Section 245B was inserted by section 12 of the Companies Act 1989, and amended by regulation 10 of S.I. 2002/1986 and by regulation 3 of, and paragraph 11 of Schedule 1 to, S.I. 2004/2947.back
[16] Section 245C was inserted by section 12 of the Companies Act 1989, and amended by sections 10 and 64 of, and Schedule 8 to, the Companies (Audit, Investigations and Community Enterprise) Act 2004 and by regulation 3 of, and paragraph 11 of Schedule 1 to, S.I. 2004/2947.back
[17] Section 245F was inserted by section 12 of the Companies (Audit, Investigations and Community Enterprise) Act 2004.back
[18] Section 238 was substituted by section 10 of the Companies Act 1989, and amended by article 12 of S.I. 2000/3373, and by regulation 10(4) of S.I. 2002/1986.back
[19] Section 239 was substituted by section 10 of the Companies Act 1989, and amended by article 13 of S.I. 2000/3373 and by regulation 10(6) of S.I. 2002/1986.back
[20] Section 241 was substituted by section 11 of the Companies Act 1989, and amended by regulation 10(7) of S.I. 2002/1986.back
[21] Section 242 was substituted by section 11 of the Companies Act 1989, and amended by sections 30(1) and (4) and 35(1) of, and Schedule 2 to, the Welsh Language Act 1993 (c.38), and by regulation 10(8) of S.I. 2002/1986.back
[22] Section 262A was inserted by section 22 of the Companies Act 1989, and amended by regulation 6 of, and paragraph 3 of Schedule 2 to, S.I. 1991/2705, by regulation 5 of, and paragraph 5 of Schedule 2 to, S.I. 1993/3246, by regulation 4(2) of S.I. 1994/233, by regulation 4 of, and paragraph 3 of Schedule 1 to, S.I. 1994/1935, by regulation 12(2) of S.I. 1996/189, by regulation 7 of S.I. 1997/220, by regulation 4(4) of S.I. 1997/2306, by article 16(2) of S.I. 2000/3373, by regulation 10 of S.I. 2002/1986, and by regulation 3 of, and paragraph 21 of Schedule 1 to, S.I. 2004/2947.back
[23] The entry for section 234A(4) was inserted by section 23 of, and paragraph 24 of Schedule 10 to, the Companies Act 1989.back