Enhancing Financial Reporting

The British Accounting Review 47 (2015) 262e274
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The British Accounting Review

journal homepage: www.elsevier.com/locate/bar
Enhancing nancial reporting: The contribution of business

models
Christian Nielsen a, Robin Roslender b, *
a
Aalborg University, Denmark
b
School of Business, University of Dundee, Dundee, Scotland, United Kingdom
a r t i c l e i n f o a b s t r a c t
Article history: The term business model has recently entered discussions on how it might be possible to
Received 6 August 2012 improve the information content of nancial statements. It has done so as part of the
Received in revised form 29 January 2015 rejuvenation of an earlier debate about moving from a corporate reporting to a business
Accepted 20 April 2015
reporting model of external reporting. Despite a urry of interest and exploration about
Available online 11 May 2015
how nancial reporting might be enhanced following the publication of the Jenkins
Report, the accountancy profession found itself confronted with other, more pressing
Keywords:
problems. Current interest in business models marks a return to these earlier concerns. The
Business models
Business reporting
paper provides further background to the business model concept, as well identifying a
Corporate reporting number of examples of frameworks capable of illustrating the dynamics of a business
Financial statements model, emphasising their links with the visualisation of value creation and delivery within
Value creation organisations, viewed as the basis for enhancing nancial reporting.
Value delivery Crown Copyright 2015 Published by Elsevier Ltd. All rights reserved.
Value capture
1. Introduction
In a recent paper in this journal Beattie and Smith draw together the greater part of the literature that has emerged during
the past few years considering the contribution that business models might make to the development of business reporting
(Beattie & Smith, 2013). The link Beattie and Smith make with current interest in integrated reporting is evidence that there is
valuable mileage in exploring a wide ranging literature on business models, much of which remains outwith the purview of
nancial reporting, something also acknowledged by Beattie and Smith. Their decision to argue for particular attention to be
afforded the relationship between intellectual capital, value creation and business models is useful to progressing the debate.
It is also signicant that the previous debate about business reporting, to which Beattie was an inuential contributor (ICAS,
1999), in some part focused attention on both intellectual capital, sometimes in the guise of intangibles, and value creation,
although this may have been forgotten to some degree in the interim.
The purpose of the present paper is to respond to a growing number of calls from accounting bodies such as the IASB and
EFRAG to explore the business model literature, initially by means of a more detailed discussion of the business model
concept as a preface to a review of several examples of frameworks for visualising business model frameworks that appear to
hold out promise for progressing business reporting. In contrast to Beattie and Smith, the principal focus here is on value
creation and value delivery, rather than intellectual capital. This said, intellectual capital is never far away from the actual
* Corresponding author.
E-mail address: r.roslender@dundee.ac.uk (R. Roslender).
http://dx.doi.org/10.1016/j.bar.2015.04.003
0890-8389/Crown Copyright 2015 Published by Elsevier Ltd. All rights reserved.
C. Nielsen, R. Roslender / The British Accounting Review 47 (2015) 262e274 263
discussion, since as Beattie and Smith report, intellectual capital is now regarded in some quarters, including OECD and the
World Bank, as the most important type of capital (Beattie & Smith, 2013: 244). One of the most interesting observations
contained in the paper is that three of the examples of business models that are identied and discussed already have a
presence within the accounting and nance literature, as well as the management literature. That their locus might be more
within the tradition of managerial accounting rather than nancial reporting is not without signicance. Overall this paper
reinforces the view that business model thinking should be enrolled in promoting integrated reporting or more radical
approaches to business reporting, as an enhanced approach to nancial reporting.
The paper is organised as follows. In the following section the main elements of the value creation perspective are dis-
cussed in order to establish how the successful value creation for and delivery to customers provides the focal point for
business model thinking. Section 3 begins by discussing a number of the meanings associated with business model concept
before briey identifying the Business Model Canvas as a widely employed example of business model thinking. The
remainder of the section provides brief overviews of three further examples of frameworks capable of representing business
models, all of which have some presence within the accounting and nance literature. The fourth section explores several of
the issues associated with combining business models and nancial reporting. In the concluding section the focus shifts to the
difculties that some of those who presently commend the exploration and incorporation of business model thinking face
from wide sections of a profession weaned on the primacy of shareholder value and jurisdictional exclusivity.
2. The value creation perspective
The generic process of creating value is very familiar within accounting and nance, in contrast to the concept of value
creation, which has only relatively recently become part of the accounting and nance vocabulary. The concept originates
outside of accounting and nance as part of the conceptual framework associated with Porter's competitive advantage theory
of strategic management (Porter, 1980, 1985, 1996). For Porter the challenge of accomplishing value creation is what calls into
existence the value chain, in the form of unique congurations of value adding activities that organisations assemble in the
pursuit of sustained competitive advantage. Organisations are required to continuously ensure the efcient and effective use
of their stocks of resources, inter alia by addressing or ultimately removing any non value adding activities from their value
chains. Insights on how this might be pursued are provided in Porter's strategic cost analysis technique (Porter, 1985, chapter
6).
This very brief description of value creation is probably better known within managerial accounting, particularly in the
context of Shank and Govindarajan's strategic cost management framework (Shank, 1989; Shank & Govindarajan, 1992, 1993),
with strong resonances also evident in connection with activity-based management (Kaplan & Cooper, 1998) and target
costing/cost management (Cooper & Slagmulder, 1997). All three contributions to managerial accounting can be characterised
as attempting to develop a form of managerial accounting that merits the designation strategic. Parallel and subsequent
developments within strategic management accounting, e.g. by Bromwich and Bhimani (1989, 1994) and Roslender and Hart
(2002a,b, 2003) are similarly heavily informed by the value creation concept, as a result of which they qualify as attempts to
account for value creation. Linking value creation with managerial accounting in this way is important because managerial
accounting's dening attribute is its future orientation. This ought to be immediately evident in all of the developments
identied in this paragraph. As a consequence, it would be more accurate to talk of accounting for future value creation, or
continued or sustained value creation.
A second, equally important aspect of linking value creation and managerial accounting in this way can be identied. From
the middle 1990s there has been a growing tendency to talk of value creation and delivery in both the managerial accounting
and strategic management literature. A major reason for this is evident in contemporary marketing theory, which draws
attention to the purpose of value creation e the delivery of value to customers. Unless it is possible to sell a product, i.e., deliver
something that customers wish to buy or consume, there is no point in seeking to create value, or more specically superior
value. The emergence of market orientation (Kohli & Jaworski, 1990; Narver & Slater, 1990) and relational marketing
(Gronroos, 1994; Sheth & Parvatiyar, 1995) theories from the early 1990s took as axiomatic that customers now wanted what
they wanted and could no longer readily be persuaded to buy what organisations sought to sell to them (McKitterick, 1957;
Webster, 1988). As a consequence, accounting for value creation is actually focused on how it might be possible to successfully
and continuously create and deliver value to customers, whose empowerment should only be disregarded as a last resort.
Porter's early distinction between cost leadership and product differentiation strategies is relevant here. Creation and de-
livery of value is equally applicable in the case of a value for money product or a product that is more expensive but is in line
with the values of the customer. Subsequent focus on the co-creation of value reinforces the centrality of the customer within
the value creation perspective (Cova & Dalli, 2009; Vargo, Maglio, & Akaka, 2008).
Embracing the value creation narrative should not be interpreted as a section of the managerial accounting sub discipline
going native. Initially there is no foundation to the view that the pursuit of prot has been forgotten. What is now being
emphasised is that the accomplishment of protable activity is increasingly reliant on delivering value to customers. Unless
customers are prepared to buy the product, the pursuit of cost management initiatives becomes a futile exercise. This position
was made explicit in the early discussions of target costing (Hiromoto, 1988, 1991; Monden & Hamada, 1991) that drew
attention to how Japanese businesses adopted a very different, externally-driven logic to activity-based costing, which
restricted attention to the identication of cost reductions within the organisation.
264 C. Nielsen, R. Roslender / The British Accounting Review 47 (2015) 262e274
A third aspect of the value creation perspective has recently emerged, that of value capture, which Beattie and Smith (2013)
refer to using the following phrase: value capture by the company (realisation to accountants) (p4). At its simplest value
capture means the realisation of the outcomes of value creation and delivery projections in the form of revenues against
which are set the relevant expenses, as in the conventional income statement. The introduction of the term value capture into
the discourse of value creation has the important consequence of re-focussing attention on the nancial reporting emphases
of accounting, and does so in what can be seen as a contestable way.
Value realisation has provided the key underpinning of nancial reporting for generations, contributing greatly to the
reliable, prudent image of those who engage in accounting practice. From this standpoint a prospective concern with value
creation might be adjudged rather reckless, and at the limit holding out the prospect of uncertain value realisation (capture).
This would be to miss a crucial point, however, since what a focus on value realisation ensures is a constraining of the excesses
of those who actually manage the organisation. For unless value is realised, it should not and cannot be distributed to
shareholders, thereby ensuring that the organisation remains nancially sound. In this regard we have a further truism:
realised shareholder value is much more robust than prospective customer value. And by implication, and more conten-
tiously, nancial reporting is much more robust than managerial accounting.
Accounting for shareholder value is not a notion that is much discussed, possibly because much of accounting, particularly
nancial accounting and reporting, is synonymous with it. Recalling Shank's term traditional management accounting, it is
possible to recognise the vast bulk of pre-relevant managerial accounting as being similarly oriented (Johnson & Kaplan, 1987;
Shank, 1989). Interest in developing a business reporting model of nancial reporting that incorporated the notions of
business models,1 following the Jenkins' Report (AICPA, 1994), very largely continued to privilege issues associated with
shareholder value, although it was always possible to read into contributions to the ensuing debate indications that the issues
associated with value creation and customers were not wholly unrecognised (e.g., in ICAEW, 2003; ICAS, 1999).
It is against this backcloth that the growing upsurge in interest in business models and their potential contribution to
nancial reporting (or in Beattie and Smith's case, business reporting) might best be understood. A critical tension can be
identied: business models are principally concerned with value creation, delivery and capture while nancial reporting has
as its hub an underpinned need to represent only the capture of shareholder value. One aspect of the value creation
perspective, i.e., value capture (realisation), is presently often accorded primacy over the other two, despite the observation
that they are focused on the processes that must necessarily be successfully accomplished in order to provide any shareholder
value. This being the case, it seems possible that a distorted perception of the potential of business models might be being
promoted in debates such as that currently evident in relation to integrated reporting (Eccles & Krzus, 2010; IIRC., 2013). The
aim of the remainder of the paper is to provide a platform to help avoid this.
3. Business models: an overview
While the term business model was introduced into the nancial accounting and reporting literature by the Jenkins
Committee in 1994 (AICPA, 1994), and subsequently expanded upon from an auditing perspective by Bell, Marrs, Solomon,
and Thomas (1997), it has only recently begun to gain widespread attention (Beattie & Smith, 2013; BIS, 2011, 2012; CFA
Institute, 2007; EFRAG, 2010; Haslam, Andersson, Tsitsianis, & Yin, 2012; ICAEW, 2010; IIRC, 2011, 2013; Leisenring,
Linsmeier, Schipper, & Trott, 2012). By contrast it has been more evident in several related literature, e.g. entrepreneur-
ship, innovation and management, for a number of years, while at the same time a range of examples of business model
activity can be identied in the managerial accounting literature. As the term business model itself suggests, this is a generic
idea that may assume a range of formulations, both in theory and in practice, as a result of which it is appropriate to begin the
discussion by identifying the scope of the term business model.
Whereas previously the name of the industry served as a shortcut for the prevailing business model (Sandberg, 2002: 3),
recent changes in the competitive landscape have given rise to a variety of new industry value creation and delivery models
(Hamel, 2000). Business models can be viewed as ...stories that explain how enterprises work (Magretta, 2002: 4) and the
coherent strategies that make value creation processes possible. In this vein, Bell and Solomon (2002) dene a business model
as:
[A] simplied representation of the network of causes and effects that determine the extent to which the entity creates
value and earns prots. (2002: xi)
More recently Teece has offered the following denition:
[A] business model embodies nothing less than the organizational and nancial architecture of a business. (Teece,
2010: 173).
These, like many similar denitions, communicate the fundamental relevance of a business model to any organisation,
including its potential importance in meeting the challenges facing those responsible for the provision of useful nancial
information.
1
The Jenkins Committee studied business models to identify the changes affecting the business environment and to understand the key activities that
create longer term shareholder value in business enterprises (AICPA, 1994: 10).
A business model is therefore better understood as a description of the organisation's concept for earning money and it
identies the platform that connects value creation and value delivery between the organisation, its stakeholders, and its
customers in order to capture value. From a traditional accounting perspective Haslam et al. (2012) argue that nancial
numbers depicting ows and stocks in nancial terms are the product of a focal reporting entity's relations and interactions
with a wide variety of stakeholders and can be used to classify business models according to their cash intensity and cash ow
generation (Haslam et al., 2012: 70). However, nancial numbers are merely the synthesis of the results of what is going on
within the organisation, or what the recent IIRC report would denote as the value outputs (IIRC, 2013), and furthermore, the
nancial dimension of the business model (or the prot model) may be independent of the actual processes going on in the
activities being performed to meet customer needs. The appeal of the concept of business models is that it has the potential to
constitute a framework for understanding how successful stakeholder relationships inter alia with customers in reality are
prerequisites for shareholder value.
Notwithstanding these traditional concerns with shareholders and protability, a business model must factor in what the
customer places value on2 (Magretta, 2002), which Osterwalder and Pignuer (2010) denote the value proposition. Although a
business model might incorporate an overview of an organisation's historic value creation process, much as is the case in the
previous paragraph, in the broader literature on business models it is predominantly conceived of as being forward-looking
and as going beyond the identication of the company's immediate cash ows. The problem with trying to visualise an or-
ganisation's business model is that it very quickly becomes a generic organisation diagram illustrating the process of
transforming inputs into outputs and outcomes in a chain-like fashion (cf. IIRC, 2013). The reader is thus, more often than not,
left wondering where the focus of the organisation is, as a consequence of which key differentiating aspects of the business
model are drowned in attempts to illustrate the total activities undertaken by the business. Consequently, the communicative
aspect of getting the message across to users is not an easy task (Nielsen & Madsen, 2009).
Osterwalder and Pigneur's (2010) Business Model Canvas provides an instructive and widely acknowledged example of a
business model visualisation that overcomes these problems. Evidence of this lies not only in its growing presence in the
academic literature (see for example Arend, 2013; Lund & Nielsen, 2014), but also in the fact that to date their 2010 text has
sold more than one million copies worldwide and has been translated into 18 different languages. Their framework for
understanding value creation and delivery places the value proposition at the centre of business model analysis as an aligning
feature between the components of infrastructure (such as competences, partner network and value conguration) and
customer interrelations (such as customer relationships, distribution channel, and target customers) (see Fig. 1).
The Business Model Canvas is offered as a template from which to discuss the hows and whys of the activities and choices
made by a rm in order to achieve a sustainable position within their industry and market. The model does not prescribe any
particular starting point for the analysis, nor any particular order of discussion. Rather, it prompts the user(s) to focus on
possible connections between its nine building blocks. Its ultimate aim is to provide the user with a clear understanding of the
organisation's uniqueness, and how it addresses the needs of its target customers. By embracing the Business Model Canvas,
an organisation's management team should be in a better position to understand the form and content of the value creation
and delivery processes by which their continuing pursuit of competitive advantage and superior performance is premised e
previously denoted by its concept for earning money. From an accounting and reporting perspective this may be synonymous
with the organisation's business logic.
In common with management commentary (IASB, 2010), the analysis of a business model is used to explain the ows of
value creation. In addition, Nielsen, Roslender, and Bukh (2009) advocate its helpfulness in linking relevant key performance
indicators (KPIs) to strategy in order to support the business model narrative. Mouritsen and Larsen (2005) label this a process
of entangling the indicators, arguing that individual pieces of information and measurements by themselves can be difcult to
relate to any concept of value creation. As such, this approach is concerned with identifying which knowledge resources drive
value creation instead of assigning a specic value to those resources (Bukh, 2002). The description of a business model
therefore provides connections between its different elements e an attribute also evident in the IIRC's recently published report
entitled Business Model: Background Paper for Integrated Reporting (IIRC, 2013). For example, rms often report extensive in-
formation about customer relations, employee competencies, knowledge sharing, innovation and risks, but this information
may seem unimportant if the company fails to show how these various elements of value creation relate to each other and also
to sustainable prot scenarios. Indeed, the interconnectedness between the various elements of value creation as well as to
value realisation are perhaps the two most important aspects of business models (see for example Teece, 2010). Consequently,
companies should present a coherent picture of the organisation's value creation and non-nancial reporting should
demonstrate the strategic plans of the organisation and its development of the business model.
The description of an organisation's business model should also be supported by facts, i.e. KPIs as previously mentioned,
or as Magretta (2002) labels it: the numbers test. For example, rather than stating that an organisation's business model is
based on mobilising customer feedback in the innovation process, it is more useful to explain by what means this will be done
by disclosing: 1) how many resources the company devotes to this effort; 2) how active the organisation is in this matter; and
3) whether the effort has had any effect on, for example, customer satisfaction, innovation output etc. According to Bray
(2010).
2
Value creation for customers might be related to solving a problem, improving performance, or reducing risk and cost (Sandberg, 2002, p. 4) which
might require specic value congurations (cf. Sweet, 2001) including relationships with suppliers, access to technologies, insight in the users' needs etc.
Fig. 1. The business model canvas (Osterwalder & Pignuer, 2010).
relevant KPIs measure progress towards the desired strategic outcomes and the performance of the business model.
They comprise a balance of nancial and non-nancial measures across the whole business model. Accordingly,
business reporting integrates strategic, nancial and non-nancial information, is future-performance focused,
delivered in real time, and is t for purpose (p. 6).
Thus, facts (including non-nancial performance measures) are linked to the critical success factors of the business model.
However, strategies will vary amongst different organisations and so one set of performance measures may not be appro-
priate to all organisations. In other words, it does not make sense to seek to insert such information into a standardised
accounting regime.
In summary: a rm's business model should capture (in a visualisation) the uniqueness of the enterprise and illustrate the
interrelatedness of the processes of value creation, value delivery and value capture within the organisation. The publication
of voluntary information about strategy, value creation processes, knowledge resources, etc. may be problematic because
such types of information are difcult to understand if they are not related to a relevant context,3 Hence from the perspective
of nancial reporting, a business model might initially be recognised as providing a platform for the organisation's voluntary
disclosures (Nielsen & Bukh, 2011).
As we observed at the outset, business model thinking has recently impacted the nancial accounting and reporting
literature in relation to more formal disclosure matters. In the main, these discussions have been divorced from the extensive
business model literature found in the entrepreneurship, management, innovation and managerial accounting literature.
Therefore, in order to further appreciate the potential signicance that business models might have for the future of nancial
(business) reporting, it seems apposite to consider a number of developments that are already embedded in the accounting and
nance literature. Below three further examples of frameworks that are capable of visualising business models are identied
and discussed in turn: the Strategy Map; Intellectual Capital Statements; and Economic Value Added. This notion of capability
has been assessed in the frameworks' ability to encapsulate the concepts of value creation, value delivery and value capture.
3.1. Strategy maps
As arguably the second most inuential contribution of the new management accounting, the Balanced Scorecard was
initially identied as providing a mechanism for internal management reporting using the growing body of KPIs that had
emerged in the previous decade (Kaplan & Norton, 1992, 1993; see also Maisel, 1992). Kaplan and Norton's generic scorecard
identied four perspectives: nancial; customer; internal business process; and growth and development (subsequently
renamed learning and growth). Each perspective was to be populated with between ve and seven KPIs, selected because of
3
Overall, such communication concerns themes such as the company's strategy, critical success factors, degree of risk, market conditions etc. in such a
way that the investors realistically can assess how the company is performing and what expectations they have of future developments. In practice, it has
proven fairly difcult to do this in a way which is not too comprehensive and complicated, and which does not get too close, in an inappropriate way, to
information which cannot be published, e.g. for the sake of legal requirements, partners or competitive conditions.
their relevance in communicating performance and which when taken together furnished a comprehensive, balanced ac-
count that was not possible when utilising only conventional nancial indicators. In the second iteration of the Balanced
Scorecard, Kaplan and Norton (1996) sought to emphasise the strategic management credentials of their development,
identifying it as a means of effectively translating an organisation's strategy into action. In the course of this reformulation
they also make a signicant assertion, that the four generic Balanced Scorecard perspectives can be regarded as constituting a
cause and effect chain that might be represented as a vertical conguration in which the (now) learning and growth
perspective provides the base (Kaplan & Norton, 1996: 30e1). Successful learning and growth is a prerequisite for effective
and efcient internal business processes that, in turn, are necessary to attract, satisfy and retain customers, and thereby
deliver superior nancial performance within the organisation.
In Kaplan and Norton (2001) this cause and effect chain is identied as providing a means of visualising how value is
created for and delivered to both customers and shareholders by organisations. Continuing their exploration of the Balanced
Scorecard/strategy interface, Kaplan and Norton develop a much elaborated cause and effect chain, which they term a
Strategy Map (see also Kaplan & Norton, 2004). They argue that a Strategy Map furnishes an organisation's game plan, thereby
aiding senior management to identify their long-term goals and objectives, together with an appreciation of means of
accomplishing these. Despite the positioning of nancial objectives at the head of the Strategy Map, Kaplan and Norton are
clear that success is critically dependent on creating and delivering value to customers through the continued provision of
attractive market offerings (value propositions). Customer loyalty thus becomes the key to the fullment of the value creation
and delivery aspirations of shareholders via the value capture process. Underpinning customer loyalty are successful internal
business processes that are designed to meet the value expectations of the organisation's customer base. In order to do so
effectively it is necessary to ensure that the resource inputs required for value creation and delivery are available and in
alignment with the overall strategy of the organisation.
While Kaplan and Norton do not utilise the term business model, it is clear that the Strategy Map concept provides an
accessible framework for visualising an organisation's business model as that concept has been identied earlier in this paper.
Underpinning both is a focus on the value creation, delivery and capture processes that are increasingly recognised to
constitute the mechanisms through which organisations strive to achieve sustained nancial protability, thereby consti-
tuting a core component of any enhanced nancial reporting approach such as business reporting or integrated reporting.
This said, it should not be concluded that the Strategy Map and any complementary Balanced Scorecard are envisaged as
replacing the existing set of nancial statements. What they furnish is additional information that will allow stakeholders to
better understand organisational performance.
A variation on the Strategy Map had been identied in the marketing management literature several years earlier, in the
guise of the Service-Prot Chain (Heskett, Jones, Loveman, Sasser, & Schelsinger, 1994). Reecting the new economics of
service theme of the time, the Service-Prot Chain encourages senior managers to recognise the need to focus on meeting
the expectations of customers (value delivery) and the key role played by employees in doing so (value creation) as the means
to enhanced market share and increased protability (and thus value capture). Fostering a highly positive attitude on the part
of employees, by inculcating tools for serving customers, becomes vital as it is they who are tasked with delivering service
to customers on a face-to-face basis.4 At this time the link between protability and high levels of customer retention,
sometimes denoted as the loyalty business model, was becoming increasingly apparent (see Reichheld & Sasser, 1990),
subsequently giving way to a recognition that beyond simply retaining customers, every opportunity for cultivating the
advocacy of service offerings should constantly be exploited.5
Sharing a horizontal formulation, the Service-Prot Chain exhibits a number of further commonalities with the Value
Reporting Framework that emerged in parallel with the Strategy Map (DiPiazza & Eccles, 2002; Eccles, Herz, Keegan, &
Phillips, 2001). Eccles et al. (2001) argue that nancial reporting had become progressively compromised in recent times
as a consequence of a growing emphasis on the production year-on-year increases in shareholder value, something the Value
Reporting Framework promised to avoid. In order to do this it is necessary focus attention on the process of value creation
(and delivery) within the organisation, thereby promoting a much-needed degree of transparency for stakeholders. The initial
step within the framework is to develop an overview of the market in which the organisation is currently operating, and
which is to be used to inform strategy. Once again, customers and people provide crucial organisational foci (ICAEW,
2003: 58). As with the both the Strategy Map and Service-Prot Chain concepts, the expectation is that the existence of
sound relationships between an organisation, its customers and its staff, i.e. the bases for value creation and delivery, will
result in sustained nancial performance and value capture.
3.2. Intellectual capital statements
The motivation to develop a range of approaches to intellectual capital reporting was a concern that conventional nancial
statements were unable to accommodate the growth in intangibles that had occurred from the early 1990s, as reected in
4
Heskett et al., 1994, identify a number of US businesses noted for their satised workforce and their exemplary customer service: Taco Bell; Southwest
Airlines; ServiceMaster; and Banc One.
5
Even in the case of exemplary levels of service provision, a degree of customer turnover is unavoidable as individuals nd their personal circumstances
change, however, ways of minimising such leakages become another strategic priority.
escalating market-to-book value ratios. Having recognised the limited utility of seeking to determine ways of providing
nancial valuations for such assets, thereby permitting their inclusion within the balance sheet, a number of scoreboard
approaches to reporting intellectual capital growth were advanced, the most widely canvassed being the Skandia Navigator
(Edvinsson, 1997; Mouritsen, Larsen, & Bukh, 2001a), the Intangible Assets Monitor (Sveiby, 1997) and the Value Chain
Scoreboard (Lev, 2001). In a similar fashion to the Balanced Scorecard, such approaches incorporated a sets of indicators that
documented the growth in stocks of intellectual capital, combining nancial and non-nancial information (Fincham &
Roslender, 2003; Starovic & Marr, 2003).
Some researchers quickly recognised the value of developing more radical approaches, of which the Intellectual Capital
Statement (ICS) is the most famous (DATI, 1999, 2001; Mouritsen et al., 2003). A similar approach was identied in the context
of the MERITUM Guideline (2002) (see also Bukh & Johanson, 2003), with a degree of further development in Australia
(Boedker, 2005) and Japan (Johanson, Koga, Skoog, & Henningsson, 2006), although thereafter little in the way elaboration.
The main difference between the ICS and similar frameworks and the rst wave of scoreboard approaches is that the
emphasis is more on narratives than on numbers, although the incorporation of sets of relevant indicators remains a common
feature. As Mouritsen and Larsen (2005) comment, in the ICS we have a powerful example of a reporting approach that is
underpinned by wide ranging interpretation of what might be entailed in contemporary accounting practices (see Fig. 2).
An ICS is constituted by four elements as in Fig. 2 below. Taken together they provide a narrative about the stock of
knowledge resources available to an organisation, the strategic challenges that management face in creating and delivering
value to customers, the various operational initiatives embraced in order to overcome these challenges together with the key
performance indicators identied by the organisation (Mouritsen et al., 2003). In its knowledge narrative, senior.manage-
ment sets out its value creation and delivery intentions in respect of the customers for the organisation's products and
services, i.e., its strategy. In the course of formulating such a narrative it is necessary to conduct a systematic appraisal of the
organisation's current resources and capabilities, and thereby identify any signicant constraints on the successful accom-
plishment of the organisation's value creation and delivery (and value capture) objectives. It is these that constitute the
management challenges that are to be set out in the second element of the generic ICS framework. These in turn are com-
plemented by an account of the various initiatives that senior management has elected to pursue to meet these challenges to
the realisation of its strategic intentions. The various operational outcomes are monitored and reported using a set of relevant
quantitative indicators, both nancial and non-nancial, as in the case of scoreboard approaches (Bukh, Larsen, & Mouritsen,
2001; Mouritsen, Larsen, & Bukh, 2001b).
While providing a means to enhance internal reporting within the Knowledge Age, the ICS was also regarded by its
proponents as having some potential for external reporting purposes, thereby responding to concerns such as those
expressed in Barth, Kasznik, and McNichols (2001) about traditional nancial statements failure to adequately represent
knowledge resources (see also ICAS, 1999). In some part this was the result of the involvement of the Danish auditing pro-
fession throughout the Danish Guideline Project. Equally, initial experimentation with the ICS framework (Bukh et al., 2001;
Mouritsen et al. 2001a, 2001b, Mouritsen, Bukh & Larsen 2002, Mouritsen, Larsen, Bukh, & Johansen, 2001c) indicated that
intellectual capital extended beyond knowledge resources in the form of human capital, customer capital and structural
capital to various complementary attributes. The productivity of one resource may improve as a consequence of investments
in another; for example, investments in employee training could improve the effectiveness of IT technology utilisation or
improved customer relations. Human capital should not be viewed as separate from organisational capital nor customer
capital, nor is there a causal relationship between them.
Despite being conceived beyond the business model space, an attribute shared with the Strategy Map, the ICS readily
exemplies the attributes of a business model as these have been identied within that literature. Once again the key point of
contact is the emphasis on visualising the value creation and delivery process as this is understood within the contemporary
strategic management literature and which any enhanced nancial reporting model must incorporate.
Fig. 2. The Danish Guideline for intellectual capital statements model (Mouritsen et al., 2003: 13).
3.3. Economic value added
Economic Value Added (EVA) is a development that is widely familiar across the accounting and nance eld. The concept
was devised by Stern Stewart and Co. in the early 1990s (Stern, Stewart, & Chew, 1995; Stewart, 1991, 1994), primarily as a
critique of, and a supplement to, the Dupont based ROI formula,6 and is widely regarded as a methodology for measuring the
true economic prot (value capture) of a rm based on residual income. Residual income is calculated by deducting the cost of
capital from the operating prot (adjusted for taxes on a cash basis) and is also often referred to as economic prot. It is
claimed to be a more accurate measure of company's economic results because:
By accounting correctly for the economics of the business and by subtracting the cost of all resources required to
produce revenues, including the cost of capital, EVA accurately captures the combined productivity of all factors of
production in a single measure. (Ehrbar, 1998: 129).
Whilst the calculation of invested capital can be relatively accurate, estimating the cost of capital is more problematic; this
is partly due to the fact that it relates to a uctuating asset base over time, while predicting capital costs in the future is at best
difcult, and at worst essentially guesswork.
EVA is widely recognised as providing a single number that represents successful economic performance (or otherwise),
for which reason it has been viewed with some scepticism by those who advocate the use of a portfolio of relevant KPIs for
such purposes (e.g. Bouwens & Spekle, 2007; Otley, 1999). In this way EVA is at odds with the performance measurement
practices associated with the general emphases of the new management accounting (Kaplan, 1994, 1995), despite being
regarded as an exemplar of the latter tradition. It would therefore seem counter-intuitive to present EVA as a development
that meets the criteria associated with a business model. However, an early paper by Mouritsen (1998), in which he considers
the respective merits of EVA and intellectual capital, argues that it is important to recognise EVA as a nancial management
system that is based on radical delegation and empowerment, i.e. decentralisation of management control, and thus creating
strongly independent business units within the rm (that have focus on value creation and value delivery). It is managers who
are responsible for the continual value creation, with their endeavours captured by the EVA metric, which is also used to
assess the relative performance of different managers. As such, EVA directs attention to the results created by managers and is
a metric that focuses on the nancial management skills of managers as the key value creating resource. Consequently, as well
as being reliant on a single number, EVA has often been seen as promoting the very short termism that the new management
accounting was in part designed to signicantly reduce (Malmi & Ika heimo, 2003).
It is possible to identify EVA as a variant of the value-based management (VBM) approach developed in parallel by
Marakon Associates' (McTaggart, Kontes, & Mankins, 1994). Although it is continued shareholder value enhancement that
provides the principal objective of VBM, and senior managers who are identied as being responsible for its accumulation, it
is again apparent that VBM is understood to be a managerial philosophy, and as such an alternative to competing philosophies
such as total quality management, relationship marketing, activity-based management, etc. In order to accomplish their value
creation targets, senior managers have to successfully communicate their intentions throughout the organisation and ensure
that employees at all levels are committed to the best use of the various value creating resources with which they are
combined to deliver value. Successful VBM requires that everyone embraces the quest for value at all times, and in due
course are satised by the rewards they receive for such a commitment. While the EVA literature emphasises that it is senior
managers who reap the rewards for successful shareholder value creation, unless these are appropriately cascaded down the
organisation successful value creation is likely to be at best sporadic and/or short lived.
Unlike the Business Model Canvas, Strategy Maps or Intellectual Capital Statements, EVA/VBM does not explicitly pay
much attention to the creation and delivery of value to customers. It is implicit, however, that in order to create shareholder
value it is necessary to actually sell the various outputs from the internal process to customers who are themselves prepared
to purchase these offerings. Simply developing a resource efcient value creation process is pointless unless customers value
these outputs. It follows that senior managers are also responsible for the identication of desirable products as much as they
are for embedding the quest for value within the workforce. In this way EVA/VBM can be understood to be an alternative
business model framework to that of Strategy Maps or ICSs offering a different means to the same end e successful value
creation and delivery. EVA/VBM conceived of as an inclusive managerial philosophy also has the capacity to generate a myriad
of performance metrics that parallel (and in practice might well overlap with) those associated with other business model
frameworks.
The attentive reader might question the appropriateness of models for representing use value (Business Model Canvas,
Intellectual Capital Statements), value creation and value delivery (Strategy Maps, Service-Prot Chain) and value capture
(EVA) as models for external reporting e and even question whether the prevalent external non-use of these models is
problematic. However, despite only sporadic explicit external reporting using these frameworks, the mere diffusion of them
in management circles through teaching and through ERP system integration suggests that it is likely many organisations use
such types of frameworks to derive relevant KPIs e and then disclose a subset of such KPIs in their annual reports.
6
The Dupont based ROI formula posed problems of best economic behaviour in circumstances where the measure was applied in connection with
incentive based salary.
4. Establishing the link between business models and nancial reporting
The previous section has sought to provide a more detailed discussion of a variety of business model frameworks than has
been evident in other contributions to the evolving literature that explores the potential of business models for progressing
nancial reporting. A common feature of all four examples has been identied as their focus on value creation and delivery,
rather than solely on value capture which, as was argued in Section 2, exhibits a greater afnity with the value realisation
underpinnings of nancial reporting, and nancial accounting in general. This is also held to be the case in respect of EVA, an
approach that many readers will probably immediately associate with value capture. Although it is valid to view EVA in this
way, this would seem to offer only a diminished interpretation, there being greater mileage in exploring a fuller one.
All four frameworks for representing business models share a number of similarities, several of which merit some further
brief comment. Initially, given that some have originated beyond accounting, their interdisciplinary character should be of
little surprise. Porter's value chain concept, which serves as a major underpinning to the value creation and delivery
perspective, is itself characteristically interdisciplinary in emphasis, an attribute that it shares with the bulk of developments
within strategic management thinking over the past three decades, and something that is also evident in Beattie and Smith's
discussion of that terrain. Secondly, these examples all indicate that understanding value creation and delivery processes
cannot be pursued as a mechanical exercise, and that such understandings necessitate the adoption of a more discursive and
reective attitude. Neither value creation and delivery nor their visualisations are something that can be readily formalised or
proceduralised. Thirdly, the predominant emphasis of all four frameworks is prospective rather than historical. This is not to
suggest that in practice there is a constant process of forgetting past business modelling, irrespective of whether it has proved
successful or otherwise. The principal concern is with future, i.e., sustained value creation and delivery, and how the orga-
nisation proposes to meet these challenges in the coming years. To the extent that a business model might also be understood
as being concerned with prospective value capture, some issues arise about whether value capture actually is synonymous
with value realisation as Beattie and Smith suggest. Such prospective emphases do not offer the luxury of certainty in the
same way that nancial, if not managerial accounting, does. Finally, business model visualisations will be most propitious
where they combine information that is varied in its form and content as appropriate. One way of conceptualising what is
envisaged is some form of Business Performance Scoreboard, which in addition to conventional nancial numbers and non
nancial performance metrics also incorporates a variety of narrative forms, of which those increasingly familiar to the
accountancy profession, e.g. management commentary or business review, are only one example. Roslender and Fincham's
proposals to make full use of narratives or self accounts that originate outwith the accounting and nance function or the
other management functions, e.g. from the workforce, customers, public interest groups, etc. may also have an important role
here (Roslender & Fincham, 2001, 2004).
So what exactly is being suggested in the guise of a marriage of the traditions of nancial reporting and business models? It
is something more than a perfunctory description of how the company seeks to create and deliver value to customers and
shareholders, in the manner of a further incremental contribution to the annual report, something akin to how integrated
reporting perhaps envisages such an addition, and quite different to how several contributions to the recent special issue of
the Accounting, Auditing and Accountability Journal characterise integrated reporting (de Villiers, Rinaldi, & Unerman, 2014).
Further along the implicit continuum of possible combinations is the idea of a business model report format where such a
report displaces the existing annual report package. This might initially seem to be a very radical option but possibly no more
radical than what was evident within The Corporate Report, almost four decades ago (ASSC., 1975). In principle it might be
possible to identify truly radical alternatives that begin by eschewing anything that has gone before but this would seem to be
both unnecessary and unrealistic at this time.
A useful way to begin to envisage the union of business models and nancial reporting can be found in the business
reporting concept that attracted much attention in the decade following the outcome of the Jenkins Committee's de-
liberations but which was then displaced by other more pressing concerns (AICPA, 1994; ICAS, 1999; Upton, 2001; Wallman,
1995, 1996, 1997). What Jenkins sought to address were concerns that the then current model of corporate reporting was
unable to fully meet the needs of a wider range of customers, including new categories of investors, the analyst community
and creditors. There was no suggestion that extant corporate reporting was without value for its intended users, rather that it
was time to consider how it might be enhanced. Three desirable attributes were initially identied: more information of a
forward-looking nature should be provided, including details of management's plans, opportunities, risks and measurement
uncertainty; a greater focus on the factors that affect long term value creation, including providing non-nancial measures of
key business processes; and a better alignment between the information management utilises to manage their business and
that which is presently reported externally. A key role is identied for ten major components of business reporting listed on
page 45 of the published report, which taken together reinforce the requirement to develop a greater business and man-
agement orientation within future of nancial reporting, in the pursuit of continued relevance to users/customers.
It is interesting to observe that the rst iteration of the Balanced Scorecard appeared shortly before the Jenkins Committee
reported (Kaplan & Norton, 1992, 1993; Maisel, 1992), and despite not identifying the Balanced Scorecard the report makes
reference to similar developments, including the Performance Measurement Manifesto (Eccles, 1991). Equally interesting to
note is that in the Institute of Chartered Accountants in England and Wales' discussion paper entitled New Reporting Models
for Business, which in retrospect marked the end of this particular debate, the Balanced Scorecard is identied as being the
rst such model that might be explored (ICAEW, 2003). While the Balanced Scorecard can readily be identied as a providing
the template for the sort of expanded, even integrated reporting that the business reporting concept pointed towards, the
previous section of the paper has documented that it would not be helpful to view a conventional Balanced Scorecard as an
example of a business model. Conversely, a Strategy Map does qualify as a framework for visualising business models and as
Kaplan and Norton themselves argue, reinforces their original view that a Balanced Scorecard is at base a reporting device
best used in combination with a Strategy Map (Kaplan & Norton, 2004: 33).
The latter combination returns to the previous idea of a Business Performance Scoreboard, with the proviso that it is
necessary to think in terms of combining some form of scoreboard that in turn has the capacity to incorporate both numbers
and narratives, including non nancial numbers and self accounts respectively, with a fully articulated business model. The
business model itself becomes the centrepiece of the report in much the same way that the balance sheet and income
statement form the centrepieces of a nancial report. However, in contrast to the latter arrangement, there is no intention
that the business model is regarded as being the predominant element of the envisaged report. A more perceptive way to
understand its signicance is as the organising component of the broader report, almost in the sense of a concept, as the
schematic representation of the enterprise's raison d'etre. This allows the various visualisations that constitute the incre-
mental accounts to be understood as constituting complementary elements, none of which again are to be regarded as more
or less important than the others. Consistent with this is the rejection of the idea of supplementary accounts. Importance or
signicance is something that users, who are now understood to extend beyond the Jenkins Committee's customers, will
determine, thereby placing a premium of the provision of comprehensive or total information sets, dened by their relevance
to all user groups.
Underlying these suggestions is an acceptance that in order to progress nancial reporting, the maxim that evolution is
inherently preferable to revolution, should be suspended. Rather than seeking to incorporate the business model concept, as
instantiated in ways outlined in the previous section, within the template of nancial reporting, the objective should be to
explore how these two traditions might most fruitfully be combined. Viewing the challenge in this way has the consequence
of raising the issue of how the accountancy profession might also envisage the future relationship between external and
internal reporting, i.e., between nancial reporting and managerial accounting. The business model frameworks discussed in
the previous section exhibit greater afnity with the emphases of managerial accounting as it has been recongured over the
past three decades. Indeed it might even be observed that they readily lend themselves to managerial reporting, which is
something different to nancial reporting. This is not to imply that the latter activity has nothing to learn from business model
thinking (or contemporary managerial accounting), but given the robustness of the nancial reporting tradition, any such
learning is likely to be limited and may amount to cherry-picking at that, and very cautious cherry-picking. From a business
model perspective, the sort of marriage between business models and nancial reporting envisaged within integrated
reporting might be adjudged as rather modest in that it lacks the adventurousness that might transcend the failures of the
business reporting movement over the past two decades (following Jenkins).
5. Concluding observations
This paper is based on the premise that a number of frameworks capable of visualising the specic details of organisations'
business models can be identied, and that, furthermore, these same frameworks hold out considerable promise for an
enhanced nancial reporting approach that seeks to fully incorporate a focus on value creation and delivery. More specically,
business model informed nancial reporting is particularly appropriate for providing information that is explicitly focused on
the creation and delivery of value to customers, via a focus on the key notion of the value proposition, now recognised to
provide the means to sustained business performance. Hence it is concerned with reporting about a reporting entity's
stakeholder relations and their impact upon nancial viability. Such performance will also ensure that organisations continue
to be able to deliver shareholder value, the conception of value that is implicitly embedded within the current corporate
reporting approach, which in turn is more oriented towards the issue of value realisation than value creation and delivery. It is
not a case of wholly abandoning the former approach in favour of the latter, however, rather combining the two in order to
ensure that both shareholder value and customer value creation and delivery are accorded the same importance within an
enhanced, and extended, nancial reporting approach, thereby taking account of the changed realities of the contemporary
market place. In this manner, the strength of the business model concept might promote a closer alignment of managerial
intent and strategy through business model based disclosures with nancial disclosure. This potentially aids the alignment
between managerial and nancial reporting.
These motivations are not identical to those of the Jenkins Committee twenty years ago, which were related to leveraging
the concept of business models as a link between business activities, stakeholder value and creating longer term shareholder
value in business enterprises. Together with Beattie and Smith (2013), we see any emergent approach that incorporates
business model thinking to be a worthy successor to business reporting as envisaged at that time, i.e. as an approach capable
of delivering the information relevant to the needs of a growing number of users. The scope and scale of any resultant new
information set is likely to be much greater than that previously envisaged for business reporting, however. Equally, it seems
highly likely that this information set will assume a wider variation in form and content to that normally associated with
nancial reporting, regardless of focus on either a broad or narrow stakeholder boundary.
For many within the accountancy profession, platitudes and proposals of this sort, as envisaged in corporate reporting,
business reporting or integrated reporting, are likely to engender antipathy if not outright rejection. While the prevailing
approach to nancial reporting is by no means perfect, since the millennium the profession has demonstrated a preparedness
to take on board a myriad of incremental modications to reporting practices, inter alia the IFRS initiative, while succeeding in
putting its house in order following Enron and similar nancial scandals, with such success that it has come the recent global
nancial crisis largely unscathed (Laux & Leuz, 2009). In the current argot, this is a profession that continues to evolve a set of
practices that are essentially t for purpose. Such a view is at odds with the suggestion in the closing paragraph of the
previous section that it seems desirable to suspend the evolution not revolution maxim in order to ensure that the current
interest (fascination) in exploring how nancial reporting and business models might be combined be allowed to deliver to
the maximum.
From the accounting practitioner perspective, it might be reasonable to ask a very simple question: in what way will
business model thinking contribute to improved shareholder value delivery? The answer, as documented in some detail
throughout the paper, is as a consequence of sustaining successful value creation and delivery to customers via the
provision of attractive value propositions. Business model driven disclosures have the potential to inform both a narrow
stakeholder focus to nancial decision makers like investors, analysts and creditors, but also a broader group of stake-
holders, such as customers, employees, government and society. Both broad and narrow sets of stakeholders will have a
genuine interest in knowing how a company seeks to sustain itself in the long-term. While the narrow group of stake-
holders interest is mainly related to the return on their investment case, the broader set of stakeholders, in addition to
return on investment within the organisation, also have an interest in understanding how they are a part of the com-
pany's value creating activities. While stakeholder breadth has been contested over time, especially in nancial
reporting, as well as within managerial accounting, it is therefore questionable whether this constitutes a useful oppo-
sition anymore.
However sound, business model informed disclosure is not a solution with which practitioners can readily or easily
identify, particularly if their professional jurisdiction is limited to nancial accounting and reporting. Such ideas and ter-
minology are the substance of the discourse of others, of functions and colleagues who have very different contributions to
make within the organisation. Implicit in these discourses are spaces that the accountancy profession has not sought to
colonise and is probably well advised to continue to exclude itself from. Or put more simply, the rm ground for effective
nancial accounting and reporting remains value realisation (capture), rather than value creation and delivery.
The recent monograph by Haslam et al. (2012) offers an interesting insight on how business models might become
embedded within nancial reporting in a more palatable manner than has been identied in these pages. Haslam et al. focus
on the capacity of business model thinking to allow companies to generate sustainable cash ows rather than simply prots,
thereby offering a timely critique of the traditional accruals underpinnings of conventional nancial reporting. To the extent
that such cash ows provide a reliable mechanism for creating and delivering sustainable shareholder value in the
increasingly competitive market place, Haslam et al.'s thesis provides a more practical alternative than the thinking evident in
either the ICAEWs 2010 exploration of business models, which seeks to link them with the economic theory of the rm, or in
the abstract visualisation of value creation offered by the IIRC. In the last analysis, however, none of these contributions seek
to place the necessary emphasis on the creation and delivery of value to the customer via the concept of the value proposition
that is central to any business model informed approach.
It would seem fairly probable that a wholehearted engagement with business models, as these have been documented in
this paper, will promote signicant unease within large sections of the accountancy profession. The emphases and inten-
tionalities of business model thinking are much easier to understand in the context of managerial accounting rather than
nancial reporting, and the new management accounting in particular, understood as a set of developments designed to
make managerial accounting much more relevant to the needs of contemporary business (Johnson & Kaplan, 1987; Kaplan,
1994; 1995; Roslender, 1995). This was also understood by some of the academic contributors to the earlier debate on the
desirability of fashioning a business reporting approach as the necessary successor to corporate reporting, not least in the
context of the challenges associated with the necessity of taking intangibles (intellectual capital) into account.
Unfortunately, old professional distinctions and enmities die hard, as a result of which it seems unlikely that many
nancial accounting and reporting specialists will readily engage in a process of learning about the potentialities of modern
day managerial accounting, which becomes ever less focused on accounting as it has traditionally been understood. The
characteristic inclusivity of many of the developments associated the new management accounting, in common with busi-
ness models, is unlikely to appeal to many within a profession whose carefully guarded exclusivity has served it well for many
generations. The same reasoning would seem to be the case in relation to the necessity to cease to continue to privilege
shareholder value concerns within nancial reporting, combined with a requirement to be at least equally as focused on the
creation and delivery of value to customers. At the limit, such a reformulation of the purpose of nancial reporting might be
construed as signalling the end of nancial reporting as fashioned to date, something that many would nd uncomfortable, if
not intolerable.
Acknowledgements
The authors wish to thank Alison Fox for her contributions to an earlier iteration of this paper. Thanks also to the editors,
Nathan Joseph and Alan Lowe, and two anonymous reviewers who provided an array of challenging comments that have
contributed to the production of a greatly improved paper, as well as to participants at staff seminars at Aalborg University,
Stockholm Business School, Uppsala University and the University of Dundee, and at the 2012 British Accounting and Finance
Association and European Accounting Association Conferences.
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Enhancing Financial Reporting

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Enhancing Financial Reporting

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The British Accounting Review 47 (2015) 262e274

Contents lists available at ScienceDirect

The British Accounting Review

Enhancing nancial reporting: The contribution of business

2. The value creation perspective

3. Business models: an overview

Fig. 1. The business model canvas (Osterwalder & Pignuer, 2010).

3.1. Strategy maps

3.2. Intellectual capital statements

3.3. Economic value added

4. Establishing the link between business models and nancial reporting

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