26 March 2013

IFAC: Companies lagging on business model reporting

The CIMA, the IFAC, and PwC, at the request of the IIRC, released a background paper, 'Business Model', which highlights the business model as being at the heart of integrated reporting.

Currently, there is wide variation in how organisations define their business models and approach to disclosure. This highlights the need for a clear, universally applicable, international definition of a business model. The proposed definition and discussion in the paper aim to bridge the varied interpretations by highlighting common areas and ensuring a consistent application across industries and sectors.

The background paper found that, in a complex financial climate that has seen investors demand greater transparency, reporting on business models is currently inconsistent, incomparable, and incomplete because of a lack of consistent guidance.

Charles Tilley, chief executive of CIMA, said: “Corporate reporting plays an essential role in the effective functioning of the market economy. Corporate reports have become more complex yet provide less insight to investors on how value is created or destroyed. Integrated reporting will involve a change in mind-set for many organisations as they think about how to better communicate strategy, performance and prospects. High quality business model reporting is critical to helping investors better understand performance in terms of the impact external factors have on an organisation, and how organisations create value that is sustainable over time.”

Mark O’Sullivan, director, PwC, commented: “A previous review of narrative reporting practices which are summarised in this background paper shows that very few companies clearly articulate their business model—what they do, what they rely on, and what sets them apart from the competitors. PwC research found that 77 per cent of the FTSE 350 mention business models in their accounts, but only 40 per cent provide insightful detail about those models. And only 8 per cent integrate business model reporting with strategy and business risks.

“This information is critical if investors are going to form a view of how they create and sustain value. The pace of technological change and growing complexity of business relationships will only increase the demand for insights into strategy and business models. It will also challenge the relevance, reliability, and timeliness of the information businesses use to back up reporting of their performance and prospects.”

Ian Ball, IFAC principal advisor and chair of the IIRC Working Group, commented: “An understanding of the business model is at the centre of integrated reporting. Being able to communicate effectively on an organisation’s capitals, business activities, products and services, and the outcomes they generate is essential if a company is to communicate how it creates value over time. The concept of the business model is also critical to understanding other areas of integrated reporting, such as the concepts of materiality and capitals.”

The paper comes in advance of the IIRC’s International Integrated Reporting Framework due to be released for comment on April 16, 2013.

In addition to providing the background and the context to how business model reporting should be undertaken in an integrated report, the background paper suggests content for business model reporting to be presented in the proposed framework.

Press release

Background paper

© IFAC