Abstract
The paper observes that the term ‘business model’ has been incorporated in recent financial reporting regulations. The first section of the paper describes various meanings of ‘business model’ and demonstrates that the term has no settled or agreed meaning. The second part of the paper considers the suitability of the term ‘business model’ as a basis for a measurement standard (IFRS 9) or for requirements for narrative reporting and concludes it is not suitable for either purpose. Examples from the UK FTSE 100 index companies are used to illustrate existing usage in narrative reporting, finding varying levels of informativeness of disclosures about business models. The final part of the paper discusses reasons for incorporating an ambiguous and contested term in reporting guidance. It identifies parallels with ambiguity in other branches of financial reporting and the potential utility of ambiguity in allowing consensus to be arrived at on a form of words, apparently tightening up reporting regulation, while allowing participants ‘wiggle room’.
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Notes
Note the emphasis on the contractual characteristics rather than the substance of the arrangements.
This characterisation seems to embrace ‘value’ as both a stock and a flow. Generating value seems to imply a flow, whereas preserving value seems to imply a stock.
It is very difficult to write about strategy without ascribing to organisations human traits of wants and desires, intent, objectives and so on. For the most part this article will adopt such a ‘pathetic fallacy’ but it needs to be borne in mind at all times that ‘Company X’s objective is Y’ is probably best interpreted as ‘The senior management of Company X would like people to believe that the company will act in a way that is consistent with the achievement of objective Y’. Clearly the management of Company X may be lying, or deceiving themselves, and other people in the organisation may be working to achieve other objectives so that the behaviour of the organisation may turn out not to be consistent with the announced objective.
Because of discontinuities arising from regulation and agreements entered into by firms, there is no general fixed point theorem that says that there will be a market price of an item and a value reported by a company that is consistent with that price, or if there is such a price, that it will be unique. For example, there is the possibility that reporting values of items will be self-negating. Suppose a company has a choice of two measurements of a liability and that if it chooses the higher value, the market will be nervous about the company’s stability and mark down the liability. If the company chooses the lower value of the liability then the market will be reassured and the company will eventually discharge the full value. There is no value for the liability that the company can report that is consistent with the eventual realisation.
Note that there is clear duplication with the ASB (2006) guidance which nevertheless remains in force.
For example, the draft definition of an asset in the IASB’s conceptual framework project defines the once reasonably well understood term ‘asset’ concepts of concepts of ‘present right of other access’, ‘economic economic resource’ ‘generating’ and ‘economic benefits’ that themselves will become the subject of debate and elaboration.
A lurid kind of nineteenth century periodical for teenagers that published serialised, cliff-hanger adventure stories.
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Page, M. Business models as a basis for regulation of financial reporting. J Manag Gov 18, 683–695 (2014). https://doi.org/10.1007/s10997-012-9239-0
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DOI: https://doi.org/10.1007/s10997-012-9239-0