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.

Integrated Reporting Update | August 2013

The concept of “value creation”

in Integrated Reporting

1
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.

Note: For a copy of this paper, please refer to the IIRC’s website www.theiirc.org/resources-2/framework-
development/background-papers/

Summary of the IIRC’s paper on value creation

Note: The paper only focuses on explaining the concept of value creation for IR purposes. It does not
define 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 organisation’s 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”.

Value is created Value is created, changed or destroyed though an organisation’s business model.
through an The business model is defined in the IIRC background paper on the business model
organisation’s as “the chosen system of inputs, business activities, outputs and outcomes that
business model aims to create value over the short, medium and long term.”
which takes input The capitals (financial, manufactured, intellectual, human, social and relationship
from the capitals 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 Value is created through the activities the organisation conducts (e.g. processes,
them through tools, technologies and innovation) in order to produce outputs and outcomes and
business these business activities ultimately create or destroy value.
activities and
interactions
to produce An organisation’s business activities apply, use, consume, destroy or transform
outputs 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 organisation’s business model results in outcomes (e.g. increased sales,
customer satisfaction) and outputs. Outcomes that have no financial impact or
that cannot be measured financially are as relevant to value creation as financial
revenue and capitals.
that over the Outcomes from the business model have both positive and negative effects
short, medium individually and collectively and these outcomes may manifest themselves over
and long term the short, medium or long term. Thus, whether business activities have created
create or destroy or destroyed value may be evident immediately or it may only become apparent
value over time.
for the An organisation’s ability to create value is closely linked to the reactions and
organisation, its outcomes for its stakeholders (including its supply chain, local communities
stakeholders, and the natural environment), which share in the value creation or destruction.
society and the The way in which all of these constituencies experience the outcomes of the
environment organisation’s business model informs the assessment of whether value was
created or not, and for whom.

2
Who assess value for IR purposes
Per the IIRC Consultation Draft, Integrated Reports’
primary audience are providers of financial capital.
Integrated Reports should enable providers of
financial capital to gain an understanding of
how an organisation creates and sustains value
in the short, medium and long term. Providers
of financial capital equate value creation with
the potential future cash flows and sustainable
financial 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 financial
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 financial 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 financial interests of the ultimate owners of
financial 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 financial 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 organisation’s strategy
• Information on the organisation’s governance
structure, conveying confidence 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 efficiency 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
• Management’s assessment of whether the
intended value has been created
• Management’s assessment of the way in which
various forms of capital have been affected by
the business model.
• Value drivers e.g. financial drivers (such as cost of
capital), non financial drivers (such as customer
relations and values (such as integrity)
• A description of stakeholders’ reactions in
response to the organisation’s 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
“butterfly effect” and interconnections between an
organisation’s 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 organisation’s Integrated
Report:
• Drawing a boundary around elements and
interactions that are most relevant to an
organisation’s 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 financial
information only. Information that supports
the communication of value creation may
be quantitative or qualitative in nature or a
combination of both.
3
Ernst & Young
Assurance | Tax | Transactions | Advisory

About EY
EY is a global leader in assurance, tax, transaction and
advisory services. The insights and quality services we deliver
help build trust and confidence in the capital markets and in
economies the world over. We develop outstanding leaders
who team to deliver on our promises to all
of our stakeholders. In so doing, we play a critical role in
building a better working world for our people, for our clients
and for our communities.

EY refers to the global organisation and may refer to one or

more of the member firms of Ernst & Young Global Limited,
each of which is a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee, does not provide
services to clients. For more information about our
organisation, please visit ey.com.

© 2013 EYGM Limited.

All Rights Reserved.

Creative Services Job Number:

130807

In line with EY’s commitment to minimise its impact on the

environment, this document has been printed on paper with a
high recycled content.

This material has been prepared for general informational

purposes only and is not intended to be relied upon as
accounting, tax, or other professional advice. Please refer to
your advisors for specific advice.

Contacts
ey.com

Key contacts that can assist

you in your IR journey

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