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, finds a report.
Released by the Chartered Institute of Management Accountants (CIMA), the International Federation of Accountants (IFAC), and PwC, the background paper titled "Business Model" 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.
“Corporate reporting plays an essential role in the effective functioning of the market economy," says Charles Tilley, chief executive of CIMA.
Tilley explains that 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 organization, and how organisations create value that is sustainable over time,” says Tilley.
Mark O’Sullivan, director of PwC, comments that 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% of the FTSE 350 mention business models in their accounts, but only 40% provide insightful detail about those models. And only 8% 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, notes that an understanding of the business model is at the center 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,” says Ball.
The paper comes in advance of the IIRC’s International Integrated Reporting Framework due to be released for comment on April 16, 2013.