The Financial Reporting Council’s Financial Reporting Lab has published a report on business model and risk and viability reporting by companies.
Listed companies are required to include a “longer term viability statement” in their annual report, setting out the company’s prospects over a chosen period. Companies can choose in which part of their report to include their viability statement, although the majority of FTSE 350 companies appear to include it in their strategic report.
Separately, large and medium-sized companies are required by statute to include details of their business model and principal risks in their strategic report.
The report states that there have been good developments in reporting, but that investors are still looking for more consistent and clearly linked reporting in companies’ annual reports. The Lab has made the following comments in particular:
- Investors feel that business model disclosures act as a guide for the content of the rest of the annual report, but many reports sampled by the Lab added neither a broad understanding nor company-specific detail, and they lacked connections to the wider annual report.
- A number of companies have taken up the FRC’s recommendations on risk reporting, but there is still a lack of detail in certain areas. The FRC highlights mitigating actions and links to the business model and key performance indicators as examples of areas for improvement.
- Companies have begun to separate their longer-term viability statement into two separate sections dealing with prospects and viability. However, investors would like more disclosure on the sensitivity analyses that underpin the statement, and the reason for the period selected. In particular, the lack of consistency suggests that investors do not currently find a company’s longer-term viability statement useful.