FRC’s Lab report on business model reporting
11 November 2016
The FRC Financial Reporting Lab’s recent review of business model reporting highlights the importance of business model information to investors, and the type of information they are seeking. It includes several real-life examples of good practice.
The Lab explains that business model information is fundamental to investors’ analysis and understanding of a company - particularly for smaller listed companies where analyst coverage can be significantly less detailed. It emphasises that clear and well communicated business model disclosures can:
- Avoid the risk that stakeholders and potential stakeholders who are not close to the business develop their own, inaccurate, opinion of the business model
- Build investor trust by demonstrating the board’s clear understanding of the business and its key drivers
- Strengthen the alignment of understanding within the company.
Conversely, a lack of good business model disclosures can raise concerns over the quality of management.
The Lab asserts that investors want a company to set out:
- What it does and where it sits in the value chain
- Key divisions and their contribution, and legal structure
- Key markets and market segments
- Its competitive advantage
- Direct threats and market share
- Key inputs (assets and liabilities, relationships and resources) and how they are maintained and enhanced
- Key revenue and profit drivers
- Value created for other stakeholders that supports economic value generation
- Statistics to indicate the relative importance of elements of this business model.
When it comes to presentation of business model disclosures, the Lab recommends:
- They should be positioned towards the front of the strategic report to provide the context for the other information
- Where a company operates a number of business models, disclosure of each significant business model is desired
- Better natural linkage to other sections of the strategic report, and consistency with disclosure in the annual report.
Read the report on business model reporting.
For more information on financial reporting issues please contact Richard Matthews.
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