The Financial Reporting Lab (FRC Lab) has published a project report on business model reporting, ‘Business Model Reporting’ (the Report), which forms part of the FRC’s Clear & Concise reporting initiative that promotes transparent and accessible reporting. The Report examines the reporting of quoted companies' business models in the annual report and, according to the FRC’s press release, provides valuable insight for companies on the importance of business model information to investors and the type of information investors are seeking.

Background

The business model reporting project is the first in a series of projects announced by the FRC Lab in July 2015, and considers the reporting of quoted companies' business models in the annual report, as required by the Companies Act 2006 and the UK Corporate Governance Code, and also examines the reporting of principal risks and the new viability statement.

The aim of the projects is to assist companies in understanding how the investment community is using disclosures on business models in their decision making processes, what information is most useful and how it may be best presented. The business model reporting project therefore considers, amongst other things, the definition of "business model", the preparation of business model disclosures, investor use of the business model disclosures and the attributes that characterise good business model reporting.

The Report

The Report sets out the findings of the FRC Lab, including the following:

  1. Investors are unanimous in agreeing that business model information is fundamental to their analysis and understanding of a company and its performance, position and prospects, both at the initial investment stage and for their ongoing monitoring and stewardship responsibilities.

  2. Investors are concerned when companies fail to articulate their business model well, and comment that many annual report business model disclosures do not yet fully meet their needs. Investors are looking for more detail than is currently provided by most companies and ask companies to assume the reader knows nothing about the company and provide disclosure that stands alone in describing the business model.

  3. A lack of good disclosure on a company’s business model raises concerns over the quality of management.

  4. Most investors want to see the business model presented near the front of the Strategic Report, with some wanting it presented as the first section, as it provides context to the remainder of the information in the annual report.

  5. 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?

  6. 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.

  7. Where a company operates more than one distinct business model, investors want to see each significant business model disclosed, together with the rationale for having the different businesses within one company.

  8. Investors want the business model description to be written in plain, clear, concise and factual language. Many investors commented that current disclosures often include promotional and aspirational language and statements, which they do not find helpful.

  9. Most investors believe that business model information is best communicated through a combination of narrative and infographics, tables and charts.

The report also includes examples of what is seen as current good practice, as well as highlighting how disclosure could be modified to provide greater value to investors.