The lab’s report, Business Model Reporting, reflects the views of 19 companies, 36 investors from 27 investment and analyst organisations, and two retail shareholders who contributed to the project.

The FRC points out that the concept of the business model is relatively new, citing research that showed in 2009, only 42 companies mention ‘business model’ in their annual report, and only 12 of those disclosures were classified as ‘detailed’ or ‘very detailed’. In 2015, by contrast, all companies use the term ‘business model’, with 70 of their disclosures being rated ‘detailed’ or ‘very detailed’. However, it says that while practice has been improving, companies and investors believe there is significant room for further improvement.

The lab project found that investors were unanimous that business model information is fundamental to their analysis and understanding of a company, both at the initial investment stage and for their ongoing monitoring, and was particularly important for companies not well covered by analysts. A lack of good disclosure on business model raised concerns over the quality of management.

Investors commented that they were concerned when companies fail to articulate their business model well, and stated that many annual report business model disclosures do not yet fully meet their needs.

The lab’s research found that company practice varied, with business model disclosures ranging from very high level to quite detailed, and covering different information sets.  In particular, investors reported that disclosures often lacked details about key revenue and profit drivers; key assets and liabilities; and the company’s competitive advantage.

Investors suggested companies should assume the reader knows nothing about the company and provide disclosure that stands alone in describing the business model – something as fundamental as stating what the company does is often omitted from the disclosure as it is described elsewhere in the annual report or is assumed knowledge, the lab research found.

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 and also said it should link better and be consistent with other disclosures in the annual report. Once business model disclosure has been clearly defined and meets investor needs, investors expect that companies will only modify the disclosure to reflect changes to the model.

Sue Harding, director of the financial reporting lab, said: ‘Investors are seeking improved disclosure on business models to provide them with an understanding of the key drivers of each business, enabling them to better evaluate information across the annual report (such as principal risk and viability reporting) and analyse the company and its prospects.’

The lab’s report includes examples of current good practice, with Vodafone singled out as an example, as well as highlighting how disclosure could be modified to provide more value to investors.

The financial reporting lab report on business model disclosure is here.