IIRC publishes further background paper on the business model

  • IIRC (International Integrated Reporting Committee) (green) Image

27 Mar 2013

The International Integrated Reporting Council (IIRC) has published on its website a further 'background document' in the lead up to the expected issue of its consultation document on integrated reporting (stylised as <IR>) in mid-April. The latest background paper discusses the 'business model' concept, and follows earlier papers on the concepts of 'capitals' and 'materiality'.

Consistent with the previous papers, the paper have been prepared by the IIRC's Technical Collaboration Groups (TCGs) and do not necessarily reflect the views of the IIRC or the member organisations from which the participants of the TCGs were sourced.

The paper seeks to explore and reconcile current divergent approaches in business model reporting with the aim of reaching a common, widely-accepted definition of the business model within the context of integrated reporting.  To this end, the paper proposes to define the 'business model' as "the organization's chosen system of inputs, business activities, outputs and outcomes that aims to create value over the short, medium and long term".

The proposed definition builds on the concept of a 'business model' included in the IIRC's Discussion Paper which was released in September 2011, and the later Prototype Framework released in November 2012, by further emphasising that reporting on an entity's business model is central to an investors understanding of the entity and its strategy, governance, performance and prospects.  The paper also seeks to respond to constituent concerns about better understanding the interrelationship between the business model and capitals (financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital).

The paper includes a review of literature related to the business model concept, which included professional and academic articles and internet sources such as websites and blogs.  It also notes the increasing use of the business model concept in accounting standards:

The term has also gained attention in reporting for its link to accounting standards and financial statement preparation. Business model thinking provides an interesting paradigm for developing financial reporting standards. For example, a business model approach to the accounting for financial instruments determines that a debt security has to be measured at market value when it is held for trading purposes, but is reported at historic cost if it is intended to be held to maturity.

The paper's discussion around recurrent themes identified notes the importance of various aspects of the business model, including the nexus between an entity's business model and its financial performance, and the existence of of inputs, actions or activities, and outcomes or impacts on customers and other stakeholders.  The definition of business model put forward in the paper includes these concepts.  In doing so, it includes and distinguishes between 'outputs' (products and services) and 'outcomes' (internal and external impacts, such as environmental impacts) in order to present a broader overall view of the business model and provide a connection to the capitals.  The inclusion of 'outcomes' in the definition of business model adds to the definition that was present in the Discussion Paper and Prototype Framework and represents a stronger link to the short and long-term impacts of an entity's business activities on the capitals.

The paper concludes that business model reporting is integral to an entity's integrated report and that disclosures should facilitate an understanding of the entity's organisational aspects, posing the following questions:

  • What are the impacts of key external factors upon the organisation?
  • What does the organisation do to create value for customers and other stakeholders, and thereby for providers of financial capital?
  • What are the organisation’s desired outcomes?
  • What does the organisation rely on in terms of the capitals?
  • What is the organisation’s positioning in the value chain and the markets in which it operates?

The full background paper can be found on the IIRC's website.  The International Federation of Accountants (IFAC) was one of the organisations involved in preparing the background paper and has issued a press release (link to IFAC website).

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.