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The concept of value creation

in Integrated Reporting
Integrated Reporting Update | August 2013
This Integrated Reporting
Update comprises the following:
- What value creation means for IR
purposes
- Who assesses value for IR purposes
- What information enables readers
and users of Integrated Reports to
assess value creation.
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Integrated Reporting Update | August 2013
This document summarises the Value Creation background paper (paper) released by the International
Integrated Reporting Council (IIRC) in July 2013. The IIRC considered aspects of this paper in the
development of the International Integrated Reporting (IR) Framework Consultation Draft.
Summary of the IIRCs paper on value creation
Note: The paper only focuses on explaining the concept of value creation for IR purposes. It does not
defne the term value. This is because value means different things for different people in different
contexts.
What value creation means for IR purposes
Value creation is explained as follows Value is created through an organisations business model, which
takes inputs from the capitals and transforms them through business activities and interactions to produce
outputs and outcomes that, over the short, medium and long term, create or destroy value for the
organisation, its stakeholders, society and the environment.
Note: For a copy of this paper, please refer to the IIRCs website www.theiirc.org/resources-2/framework-
development/background-papers/
Value is created
through an
organisations
business model
Value is created, changed or destroyed though an organisations business model.
The business model is defned in the IIRC background paper on the business model
as the chosen system of inputs, business activities, outputs and outcomes that
aims to create value over the short, medium and long term.
which takes input
from the capitals
The capitals (fnancial, manufactured, intellectual, human, social and relationship
and natural capital) are stores of value from which value is released when the
capitals are combined, transformed and leveraged to produce outputs and
outcomes, resulting in value creation or value destruction.
and transforms
them through
business
activities and
interactions
Value is created through the activities the organisation conducts (e.g. processes,
tools, technologies and innovation) in order to produce outputs and outcomes and
these business activities ultimately create or destroy value.
to produce
outputs
An organisations business activities apply, use, consume, destroy or transform
different types of capitals to produce outputs (products and services).
and outcomes The process of changing the inputs from the different types of capitals through
the organisations business model results in outcomes (e.g. increased sales,
customer satisfaction) and outputs. Outcomes that have no fnancial impact or
that cannot be measured fnancially are as relevant to value creation as fnancial
revenue and capitals.
that over the
short, medium
and long term
create or destroy
value
Outcomes from the business model have both positive and negative effects
individually and collectively and these outcomes may manifest themselves over
the short, medium or long term. Thus, whether business activities have created
or destroyed value may be evident immediately or it may only become apparent
over time.
for the
organisation, its
stakeholders,
society and the
environment
An organisations ability to create value is closely linked to the reactions and
outcomes for its stakeholders (including its supply chain, local communities
and the natural environment), which share in the value creation or destruction.
The way in which all of these constituencies experience the outcomes of the
organisations business model informs the assessment of whether value was
created or not, and for whom.
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Who assess value for IR purposes
Per the IIRC Consultation Draft, Integrated Reports
primary audience are providers of fnancial capital.
Integrated Reports should enable providers of
fnancial capital to gain an understanding of
how an organisation creates and sustains value
in the short, medium and long term. Providers
of fnancial capital equate value creation with
the potential future cash fows and sustainable
fnancial returns, but also take the importance
and limitations of different forms of capital for
value creation into account. Concerns are however
acknowledged about whether providers of fnancial
capital adequately promote the goals of and act
as stewards for individuals who have invested with
them, the reasons include: a focus on achieving
short-term results ; value only considered in terms
of shareholder value (e.g. return on investment,
share price, dividends); a lack of consideration
for the value of and reliance on natural and other
forms of capitals; and agency and contractual
arrangements between fnancial actors. However,
IR intends to provide greater clarity and insight to
allow investors to more comprehensively consider
the mutual inter-dependence between the long-
term fnancial interests of the ultimate owners of
fnancial capital, corporate practice and the public
interest for the creation and preservation of value.
Information that enables readers and users of
Integrated Reports to assess value creation.
Integrated Reports should communicate
information that enables intended report users
to assess whether and to what extent value
has been created so as to add to fnancial value
and understand how value has been created or
destroyed though the increase or decrease in the
pool of capitals on which the organisation relies.
The type of information that facilitates such an
assessment varies, but should be balanced and
concise.

The information to be disclosed in terms of value
creation should include:
A description of the business model including
inputs, business activities, outputs and outcomes
and links to the organisations strategy
Information on the organisations governance
structure, conveying confdence in the business
resilience and ability to implement the business
model successfully
Innovation and future outlook including the
research and investment by the organisation to
ensure resilience and effciency of the business
model
Performance this will provide the extent to
which an organisation has created value through
the achievement of performance goals
Type of value the organisation intends to create,
how, for whom and why
Managements assessment of whether the
intended value has been created
Managements assessment of the way in which
various forms of capital have been affected by
the business model.
Value drivers e.g. fnancial drivers (such as cost of
capital), non fnancial drivers (such as customer
relations and values (such as integrity)
A description of stakeholders reactions in
response to the organisations performance in
terms of creating value.
The communication of value creation within an
Integrated Report is complex and has practical
limitations. The full extent of the so-called
butterfy effect and interconnections between an
organisations activities and its outcomes cannot
be fully known by an organisation. Given this,
consideration should be given to the following
when attempting to communicate the value
creation process in an organisations Integrated
Report:
Drawing a boundary around elements and
interactions that are most relevant to an
organisations business model and strategy (this
boundary should be disclosed).
Selecting on an organisation by organisation
basis, the appropriate timeframe for considering
value creation prospects.
The communication of value creation is
not restricted to quantitative fnancial
information only. Information that supports
the communication of value creation may
be quantitative or qualitative in nature or a
combination of both.
Jeremy Grist
Director
Climate Change & Sustainability Services
Tel: +27 (11) 772 3029
email: jeremy.grist@za.ey.com
Kelly Gilman
Senior Manager
Climate Change & Sustainability Services
Tel: +27(21)443 0473
email: kelly.gilman@za.ey.com
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