Business model reporting - Room for improvement

Business model reporting - Room for improvement

UK reports tend to emphasise a short-term view of performance at the expense of the longer-term.

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KPMG International’s Survey of Business Reporting covers some 270 larger listed company annual reports, of which one tenth are from the UK FTSE100. The survey highlights the gap between the information investors need to assess the health and prospects of companies, and the information they are currently receiving through corporate reporting channels. UK Company reports scored well in a number of aspects of the survey - notably, they tended to be more concise, and delivered more focused risk discussions. However, they also share many of the challenges apparent in the global survey particularly when it comes to providing a deeper view of business strategy and performance. The result is that UK reports tend to emphasise a short-term view of performance at the expense of the longer-term.

This is reflected in the Financial Reporting Council’s (‘FRC’) reporting lab report published in October 2016, which focused on business model reporting. The FRC found that:

  • 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?

KPMG’s survey of business reporting in the UK highlighted three broad areas requiring attention:

  • Ensure the strategy discussion strikes the right balance between short term improvement tweaks and long-term strategy

A third of UK reports focused only on short-term matters such as efficiency programmes and incremental revenue initiatives. Addressing underlying competitive strengths, such as the customer experience, and explaining how these are being developed and protected could help companies to provide a longer-term perspective.

  • Close the gaps in business model descriptions

UK business model descriptions can lack depth and often focus on only a few aspects of the business. The most common gaps in descriptions related to know how and supplier relationships which can represent key areas of competitive advantage and challenge. The gaps in these descriptions can be carried through to the rest of the report, and they can also make it difficult for investors to interpret the implications of external factors and events without further guidance from the company.

  • Make better use of non-financial KPIs

The best company reports include a range of relevant measures covering, for example, brand, research, staff, customer base, product base, and efficiency. UK companies typically provide KPIs over two or three of these areas, but German companies, which scored particularly strongly in this area, average four or five.

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