Business Model Disclosure: Evidence from Annual Reports of Italian Listed Companies

The European Union (EU) Directive 51/2003, “Modernisation of Accounts,” together with the recent issue (June 2009) of the International Accounting Standards Board (IASB) Exposure Draft (“the draft”) on management commentary, attest implicitly to the narrative power of the “Business Model” concept, stressing its role in garnering forward-looking information and its relevance for financial reporting. According to the draft, if listed companies want this narrative report to be decision-useful for present and prospective capital providers, they will soon have to include much more information related to their own business model within the management commentary (Relazione sulla Gestione in Italy). The business model concept has gained a large popularity over time, despite its lack of a generally accepted definition. In brief, the business model describes how a company has configured its structure (in terms of processes, resources, and competences) in order to create and capture value in its own competitive context; for this reason, it is doubtless a high-end non-financial piece of information for firms, analysts, and investors. Against this framework, the paper investigates the extent to which Italian listed companies are acquainted with the business model concept and whether they voluntary disclose it by performing the qualitative analysis of their annual reports. The resulting analysis reveals that the vast array of meanings associated with the business model concept complicates the value-relevance of this high-end non-financial piece of information. Finally, this ambiguity results in both a “cognitive” gap (the lack of a business model definition) and in a “technical” gap (a lack of guidelines) which companies must address when reporting on their own business model. To our knowledge, this is the first study in the field of financial reporting which investigates voluntary business model disclosure within financial statements. It intends to offer a useful insight into the current disclosure behaviours of Italian listed companies; this can be helpful for security regulatory and accountancy bodies, complementing the IASB’s guidelines for a fair representation of business model within the future management commentary.