News October 2016 FRC Lab report confirms the importance of business model disclosure to investors

FRC Lab report confirms the importance of business model disclosure to investors

27 October 2016
PN 61/16

The Financial Reporting Council’s (FRC) Financial Reporting Lab has published a report on Business Model Reporting which provides valuable insight for companies on the importance of business model information to investors, and the type of information they are seeking.

This report forms part of the FRC’s Clear & Concise reporting initiative that promotes transparent and accessible reporting. The report reflects the views of 19 companies, 36 investors from 27 investment and analyst organisations, and two retail shareholders who contributed to this Lab project.

The Lab found:
  • Business model information is fundamental to investors’ analysis and understanding of a company and a lack of good disclosure on business model raises concerns over the quality of management;
  • As business model information provides context to the other information in the annual report most investors want it positioned towards the front of the Strategic Report;
  • Where a company operates a number of business models, disclosures of each significant business model is desired;
  • Investors are looking for better natural linkage of business model information to other sections of the Strategic Report, and consistency with disclosure in the annual report; and
  • Investors are looking for more detail than is currently provided by most companies. In particular investors find disclosures are often lacking information that answers questions such as:
  • What are the key revenue and profit drivers and how do profits convert to cash?
  • Are there any key asset and liability items that support the business model?
  • What is the company’s competitive advantage?
 
Sue Harding, Director of the Financial Reporting Lab, said:

“Investors are seeking improved disclosure on business models to provide them with an understanding of the key drivers of each business, enabling them to better evaluate information across the annual report (such as principal risk and viability reporting) and analyse the company and its prospects. Companies have been developing their reporting in this area and tell us the insight obtained from investors during the project has helped them to understand the information investors are looking for and why it is important to them.”

The Lab report also includes examples of current good practice as well as highlighting how disclosure could be modified to provide more value to investors.

Notes to editors:
  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We are the UK competent authority for audit and set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent enforcement arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
  2. The Financial Reporting Lab was set up, and is funded by, the FRC as a hub, bringing together companies and investors to support improvement and innovation in reporting. More information about the Lab’s work can be found at: https://www.frc.org.uk/Lab.

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