The lab’s latest report on the issues considers how reporting practice has developed since it published its original reports in 2016 and 2017.  It conducted a desk-top review of a sample of more than 100 annual reports from 2017/2018 and looked for signs of change. Where change was indicated, it undertook further analysis and showed the resulting examples to some of the investors that participated in the original projects.

The lab says its most recent work confirms the original findings. Whilst there have been some good developments, investors continue to emphasise the need for reporting to be more consistent and clearly linked throughout a company’s annual report. Investors value disclosures that tie business model, strategy, risk and viability together to enable them to assess progress against strategy and management of risks through the use of key performance indicators (KPIs).

With regard to business model reporting, the lab says investors wanted more detail on what makes a business unique. They believe companies can balance commercial sensitivity with providing sufficient disclosure to enable them to understand what differentiates the company and how the board is responding to emerging risks.

In the lab’s original report, investors highlighted certain types of information they wanted within a business model, such as how the company makes money, key sources of value and drivers of that value.

In the latest report, the lab suggests the message is more subtle. Investors do not expect the information to always reside within the business model disclosure itself and appreciate the need for flexibility and for companies to structure their communications in a way that best meets their stakeholders’ needs. They do, however, seek clear disclosure that builds understanding either directly or through cross-referencing and coherent, meaningful linkage.

Investors felt that successful business model disclosures often acted as a guide for the content of the rest of the annual report, and it is here that the disclosure of business models are falling short. Whilst there has certainly been some innovation, many of the changes across the sample of companies reviewed add neither broad understanding nor company specific detail, and lacked connections to wider information within the annual report.

On risk reporting, the lab reported there continues to be a lack of detail in certain areas, such as mitigating actions and links to the business model and KPIs, and this lack of detail is heightened by overall changes in the risk environment.

Disclosures around the UK’s withdrawal from the EU were a particular focus for investors. Whilst many companies highlight that various Brexit scenarios create a principal risk, investors expect more detail on the level of preparedness, the current stage of implementation of mitigating activities and numerical breakdowns to help them assess the impact. This type of disclosure was rare, although more detailed disclosure is to be expected in the current period as the Brexit arrangements become clearer.

There are some promising developments with regard to viability reporting, with companies separating the viability statement into an assessment of prospects then an assessment of viability, providing more disclosure on both. The lab says this two-stage disclosure works best where each element is supported with sufficient detail and linkage to the rest of the report.

Investors also seek more disclosure on scenario and sensitivity analysis that supports the statement, and reasoning behind the period selected. However, because of the lack of consistency in application, viability statements are not always seen as providing useful information to investors.

Phil Fitz-Gerald, director of the Financial Reporting Lab, said: ‘The lab’s report highlights the importance of business model and risk and viability disclosures. It provides practical examples from companies that have adopted the recommendations of previous lab reports and reiterates investor views on how these improvements help to meet their needs.’

Risk and viability reporting: where are we now? is here

Report by Pat Sweet