Included in this issue: FRC Lab report on business model reporting; Tax disclosures – FRC publish thematic review.
FRC Lab report on business model reporting
The Financial Reporting Council's (FRC) Reporting Lab has published a project which examines the reporting of business models in annual reports. The report reflects the views of 19 companies, 36 investors and two retail shareholders and found that:
- business model information is fundamental to an investors' 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;
- investors are concerned when companies fail to articulate their business model well, commenting that many disclosures do not meet their needs fully and that a lack of good disclosure raises concern over the quality of management;
- as business model disclosure provides context to the other information in the annual report, most investors want it positioned at the front of the Strategic Report;
- where a company operates a number of business models, disclosures of each significant model is desired;
- investors often find that disclosures lack 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; and
- what is the competitive advantage of the company – investors believe that companies can balance commercial sensitivity with providing sufficient disclosure to enable them to understand what differentiates the company;
- investors are looking for better natural linkage of business model information to other information in the annual report as well as consistency with that information;
- in terms of presentation, the report notes that:
- nearly all investors want the business model to be presented near the front of the report;
- plain, clear, concise and factual language should be used. Promotional and aspirational language obscures understanding;
- a combination of infographic and narrative presentation methods should be considered; and
- changes during the year, and those contemplated in future, should be clearly identified.
The Lab argue that business model disclosure is even more important for companies not well covered by analysts – such as smaller listed and AIM-quoted companies.
The report also includes examples of what is seen as current good practice, as well as highlighting how disclosures can be adapted to take account of the report itself and direct investor feedback.
Tax disclosures – FRC publish thematic review
The FRC has also published a review setting out its detailed findings from the targeted review of certain aspects of companies' tax reporting, against which they suggest that companies can assess and enhance their own disclosures.
In December 2015, the FRC wrote to 33 FTSE 350 companies informing them that the tax disclosures in their next annual reports would be reviewed. The objective of the FRC's review was to encourage more transparent reporting of the relationship between tax charges and accounting profit and the factors that could affect that relationship in the future, in accordance with existing requirements.
Most companies proactively improved certain aspects of their disclosures. Particular points of note from the review include:
- good practice in strategic reporting disclosures was evidenced by:
- the provision of more information on material tax matters likely to be important to investors, including emerging risks;
- discussion of the effective tax rate, including commentary on variances over prior periods, key influences and the expected future rate,
- there is scope for companies to articulate better how they account for tax uncertainties by explaining the bases for recognition and measurement. The FRC will continue to challenge companies which do not disclose the amount of uncertain tax provisions when these are subject to risk of material changes in the following year; and
- companies should consider whether there are significant judgements and estimation uncertainties relating to tax and appraise what specific information about them would be most helpful to users of the accounts.