The business model and value creation – Why management commentary often explains outcomes but not economics

IFRS Practice Statement 1 business model – Few concepts appear as frequently—and are understood as superficially—in management commentary as the business model. Almost every annual report contains a business model section. Yet in many cases, it explains structure without explaining economics, and activities without explaining value creation.

This is not a drafting problem. It is a conceptual one.

IFRS Practice Statement 1 positions the business model as the organising logic of management commentary. It is the mechanism through which resources, relationships and risks are transformed into outcomes. When the business model is poorly explained, everything downstream—performance, risks, KPIs, and outlook—loses explanatory coherence.

The irony is that the business model is often treated as a static description, while it is in fact the most dynamic governance construct in the report.

Why business model sections disappoint boards

Boards and audit committees regularly review business model disclosures, yet dissatisfaction is common. The reasons are consistent:

the description is generic,
it resembles a marketing narrative,
it lacks connection to financial performance,
and it remains unchanged year after year despite strategic shifts.

From a governance perspective, this signals a deeper issue: the business model is not being used as an economic explanation, but as a presentational layer.

IFRS Practice Statement 1 expects the opposite. It expects management commentary to explain:

how the entity creates value,
how that value is sustained,
and how changes in the environment affect that mechanism.

When this explanation is missing, boards are forced to infer economics from scattered disclosures.

Here is the link to the IFRS Practice Statement 1: Management Commentary on IFRS.org.

Business model ≠ organisational structure

One of the most common errors is equating the business model with organisational structure or activity lists. Many reports describe:

operating segments,
products and services,
markets served,
and value chain steps.

While informative, none of these explains why the entity makes money, where value is captured, or which assumptions must hold for performance to continue.

Under IFRS Practice Statement 1, the business model is not about what the entity does, but about how economic value is generated and retained.

That distinction matters. A company can keep doing the same activities while its economics deteriorate quietly—through pricing pressure, cost rigidity, regulatory change or weakened relationships.

A static business model description hides that erosion.

The economic logic boards actually need

For governance purposes, the business model should answer a small number of fundamental questions:

Where does economic value originate?
How is value captured, priced and protected?
Which costs are structural and which are flexible?
Which assumptions must remain true for margins and cash flows to hold?
Where does the model break under stress?

These questions are rarely answered explicitly in management commentary, yet they underpin every strategic and oversight discussion.

IFRS Practice Statement 1 does not require formulas or forecasts. It requires economic reasoning.

Value creation is not the same as revenue generation

Another frequent misunderstanding is equating value creation with revenue growth. Many business model narratives focus on expanding markets, increasing volumes or broadening offerings.

Revenue, however, is not value.

Value creation depends on:

pricing power,
cost discipline,
capital intensity,
working capital dynamics,
and risk allocation.

A business model that generates growing revenue while destroying margin resilience or consuming disproportionate capital is not creating value—it is deferring consequences.

IFRS Practice Statement 1 expects management commentary to explain how the business model translates activity into sustainable economic outcomes, not just top-line expansion.

Boards should be alert when value creation is described exclusively in non-financial or aspirational terms.

Why business models rarely change—until they do

Many annual reports present business models as stable constructs. In reality, business models evolve continuously:

supplier terms shift,
customer behaviour changes,
technology alters cost structures,
regulation reshapes economics.

Yet business model descriptions often remain unchanged until a disruption forces a rewrite.

This lag is governance-relevant.

IFRS Practice Statement 1 expects management to explain changes in the business model, not only after transformation, but as they occur. Incremental erosion is as important as radical change.

When boards see performance volatility without corresponding business model explanation, it usually indicates that the economic logic is shifting silently.

Business model as the bridge between strategy and performance

Strategy articulates intent. Performance reports outcomes. The business model explains the causal bridge between the two.

Without that bridge:

strategy reads as aspiration,
performance reads as coincidence,
and risk disclosures read as abstraction.

IFRS Practice Statement 1 positions the business model as the narrative anchor that connects:

resources and relationships (Blog 3),
performance measures (Blog 2),
and forward-looking discussion (Blog 1).

When the business model is underdeveloped, all other sections suffer.

Read more in our blog regarding IFRS 18: IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance.

The governance failure beneath weak business model disclosure

Weak business model explanations are rarely accidental. They often reflect:

discomfort with economic trade-offs,
sensitivity around margin drivers,
or uncertainty about future viability.

From a governance perspective, this avoidance is risky.

Boards that accept high-level or static business model narratives deprive themselves of a key oversight tool: understanding where value is actually made and where it is exposed.

IFRS Practice Statement 1 provides the framework to correct this—not by adding detail, but by demanding clarity.

This part establishes a simple but often neglected point:

the business model is the economic heart of management commentary, not a descriptive annex.

When it fails to explain value creation, governance conversations become reactive rather than anticipatory.

How business models erode, adapt and fail (and why reporting reacts too late)

If Part I established that the business model is the economic core of management commentary, Part II confronts the uncomfortable reality: business models rarely fail suddenly. They erode gradually, adapt imperfectly and only become visible in reporting once pressure is unavoidable.

This lag is not merely a reporting weakness. It is a governance risk.

IFRS Practice Statement 1 was designed precisely to reduce this delay by requiring management to explain how and why the business model changes over time—not just when transformation is complete.

Business model erosion is incremental, not dramatic

Most business models deteriorate through small shifts rather than sudden shocks:

pricing power weakens quietly,
costs become less flexible,
working capital stretches,
customer loyalty thins,
regulatory tolerance narrows.

Each shift is manageable in isolation. Together, they change the economics of the business.

Traditional financial reporting captures these effects late. Management commentary should capture them early—by explaining which assumptions underpin value creation and how those assumptions are evolving.

IFRS Practice Statement 1 expects this explanatory layer. Without it, boards are left to reverse-engineer economic change from fragmented signals.

The myth of “no change” business models

A common assertion in annual reports is that “the business model remains unchanged.” Often this is technically true—the products, customers and activities appear similar.

Economically, however, the model may be transforming:

margins compress despite stable revenue,
capital intensity rises without new assets,
risk shifts from customers to suppliers or vice versa,
cash generation weakens while earnings appear stable.

Declaring the business model unchanged in such circumstances obscures reality. IFRS Practice Statement 1 expects management to explain how the model’s economics evolve, not just whether the label still fits.

Boards should be sceptical of static business model statements in volatile environments.

Read more on the New Zealand External Reporting Board, XRB.nz: IFRS Practice Statement 1 – Management Commentary (MPS1).

Adaptation is not always improvement

Management commentary often frames business model adaptation as positive by default: digitalisation, platform expansion, sustainability integration, ecosystem development.

Adaptation, however, can also:

increase fixed costs,
dilute focus,
introduce execution risk,
or shift risk to areas the organisation cannot control.

IFRS Practice Statement 1 does not assume adaptation equals progress. It expects management to explain trade-offs:

what is gained,
what is lost,
and which new dependencies arise.

When adaptation is described only in aspirational terms, governance loses its analytical footing.

Why reporting lags economic reality

There are structural reasons why management commentary often reacts late:

uncertainty about whether changes are temporary or structural,
reluctance to expose margin drivers,
fear of signalling weakness,
or lack of internal economic clarity.

IFRS Practice Statement 1 acknowledges uncertainty but does not excuse opacity. It encourages management to explain what is known, what is assumed and what is uncertain.

Boards should view delayed explanation as a governance issue, not a communication one.

The role of assumptions in business model viability

Every business model rests on assumptions:

customer behaviour,
supplier reliability,
regulatory stability,
access to capital,
technological adequacy.

These assumptions rarely appear explicitly in management commentary. Yet they determine whether value creation persists.

IFRS Practice Statement 1 expects management to articulate these assumptions implicitly through discussion of resources, relationships and risks. When assumptions begin to weaken, early explanation becomes critical.

Without this, business model failure appears sudden—but only because erosion was never explained.

Read more in respect of assumptions in our blog: Significant assumptions – No 1 best read.

Connecting business model change to performance volatility

Performance volatility without business model explanation is a governance red flag.

Margins fluctuate, cash flows tighten or returns decline—but commentary attributes this to market conditions rather than model economics.

IFRS Practice Statement 1 expects management to connect performance outcomes to changes in value creation mechanics. This is where many reports fall short.

Boards that insist on this linkage gain insight into whether volatility is cyclical, structural or self-inflicted.

Why this part matters for governance

This part underscores a central governance insight: business model oversight is about monitoring assumptions, not structures.

IFRS Practice Statement 1 provides the narrative framework to surface assumption drift early—if boards demand it.

Where management commentary remains static, governance becomes reactive.

Business model oversight, board responsibility and credible management commentary

If Part I positioned the business model as the economic core of management commentary, and Part II showed how business models erode and adapt long before reporting reacts, Part III addresses the decisive governance question: how boards and audit committees should actively oversee the business model using management commentary.

This is where IFRS Practice Statement 1 reaches its full governance relevance. It is not merely a reporting framework; it is a discipline for economic accountability.

From narrative description to economic accountability

Most boards are accustomed to reviewing strategy documents, budgets and performance dashboards. Business model disclosures, however, are often treated as explanatory text rather than objects of oversight.

That is a missed opportunity.

IFRS Practice Statement 1 implicitly expects boards to use management commentary to assess whether the organisation’s stated value creation logic:

remains internally coherent,
is supported by resources and relationships,
and continues to justify reported performance.

When business model disclosure is read only for completeness or tone, boards relinquish one of the few tools that explicitly connects strategy, execution and outcomes in a single narrative.

Oversight begins where description ends.

What boards should actually test in the business model narrative

Effective board oversight does not require technical detail. It requires economic clarity.

Boards should expect the business model section of management commentary to withstand a small number of disciplined questions:

Where exactly is economic value created?
What protects that value from erosion?
Which assumptions are critical for margins and cash flows?
How sensitive is the model to changes in those assumptions?
What would fail first if conditions deteriorate?

IFRS Practice Statement 1 does not prescribe these questions, but it creates the conditions under which they must be answerable.

When management commentary cannot support this line of inquiry, the issue is not disclosure quality—it is economic opacity.

The audit committee’s role in business model credibility

Audit committees traditionally focus on financial reporting integrity and internal control. Business model oversight may appear peripheral.

Under IFRS Practice Statement 1, it is not.

The business model underpins:

revenue recognition judgments,
impairment assumptions,
provisioning and risk disclosures,
and the credibility of forward-looking statements.

If the economic logic of the business model is weakly articulated, financial judgments become harder to evaluate. If assumptions remain implicit, sensitivity to change is obscured.

Audit committees should therefore treat the business model narrative as a foundation of reporting quality, not as a strategic aside.

Early-warning signals embedded in business model explanations

One of the most underappreciated governance benefits of a well-articulated business model is its leading-indicator value.

Before financial performance deteriorates, the business model usually signals stress:

value shifts from margin to volume,
capital intensity increases quietly,
working capital stretches structurally,
risk migrates to less controllable parts of the value chain,
or returns become increasingly dependent on favourable external conditions.

IFRS Practice Statement 1 encourages management to explain these dynamics through discussion of resources, relationships and risks. When boards pay attention, they gain time.

Boards that rely solely on financial metrics react later—often when strategic options have narrowed.

Why business model disclosure is often defensive

There is a reason business model narratives tend to be high-level and stable: they expose economic vulnerability.

Explaining value creation clearly requires management to acknowledge:

IFRS Practice Statement 1 business model

trade-offs,
dependency,
margin drivers,
and points of fragility.

That can be uncomfortable, particularly in externally facing reporting.

IFRS Practice Statement 1 does not require disclosure of competitive secrets. It requires economic honesty. Boards that tolerate evasive narratives weaken their own oversight position.

Strong governance does not eliminate vulnerability. It makes it visible and manageable.

Connecting business model, performance and outlook

A core objective of IFRS Practice Statement 1 is coherence across management commentary:

the business model explains how value is created,
performance explains what happened,
and outlook explains what management expects, given current conditions.

When these elements are disconnected, credibility suffers.

A stable outlook without discussion of eroding business model assumptions is misleading. Strong performance without explanation of how the model supported it is incomplete. Strategy without economic grounding is aspirational.

Boards should insist that these sections reinforce each other.

A practical oversight framework for boards

Boards and audit committees can operationalise business model oversight by consistently asking five questions:

Economic clarity
Is the value creation logic explained in economic, not descriptive, terms?
Assumption visibility
Are the assumptions that sustain the model identifiable?
Change recognition
Does management commentary explain how the model is evolving, even incrementally?
Performance linkage
Are results plausibly explained by the stated business model mechanics?
Stress awareness
Does the narrative indicate where the model would strain under adverse conditions?

These questions transform management commentary from a reporting output into a governance tool.

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Why the business model is the anchor of credible reporting

Among all elements of management commentary, the business model is uniquely positioned. It connects:

resources, risks and relationships (Blog 3),
KPIs and performance measures (Blog 2),
and forward-looking information (Blog 1).

When the business model is weakly explained, every other section compensates with volume or abstraction. When it is strong, the entire report becomes more coherent—and more credible.

IFRS Practice Statement 1 recognises this centrality. Boards should too.

Integrated conclusion – Economic clarity is governance discipline

The business model is not a static description of what the organisation does. It is a living explanation of how value is created, sustained and threatened.

IFRS Practice Statement 1 elevates the business model from narrative filler to economic anchor. It challenges management to explain outcomes through mechanisms, not slogans.

For boards and audit committees, this is an opportunity to strengthen oversight where it matters most: at the intersection of strategy, execution and performance.

Business models rarely fail overnight. They fail quietly—through assumption drift, dependency creep and unacknowledged trade-offs.

Management commentary that explains the business model honestly does not eliminate that risk.
It makes it visible early enough to govern.

That is why, under IFRS Practice Statement 1, the business model is not just another section.

It is the backbone of credible management commentary and disciplined governance.

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FAQ’s – Business model Value creation Management commentary

FAQ 1 – What does IFRS Practice Statement 1 mean by “business model”?

Consolidated and unconsolidated financial statements

Under IFRS Practice Statement 1, the business model is the economic mechanism through which an entity creates and captures value. It is not a description of organisational structure or activities, but an explanation of how resources and relationships are transformed into sustainable financial outcomes. The business model explains why the entity makes money, not just what it does.

FAQ 2 – Why do business model disclosures often fail to explain value creation?

Many business model sections focus on products, markets or value chains rather than economics. They describe activities but avoid discussing pricing power, cost structure, capital intensity or key assumptions. IFRS Practice Statement 1 expects economic explanation, not marketing narrative. When that is missing, boards must infer value creation indirectly.

FAQ 3 – How does the business model connect strategy and performance?

Strategy expresses intent, performance reports outcomes, and the business model explains the causal link between the two. A credible management commentary uses the business model to explain how strategic choices translate into margins, cash flows and returns. Without this link, strategy appears aspirational and performance appears coincidental.

FAQ 4 – Why is business model erosion often recognised too late?

Business models typically erode gradually through weakening assumptions: declining pricing power, rising fixed costs, increasing capital needs or shifting risk allocation. These changes appear economically before they appear structurally. IFRS Practice Statement 1 is designed to surface this erosion early through narrative explanation rather than retrospective adjustment.

FAQ 5 – What role should the board and audit committee play in business model oversight?

Boards and audit committees should treat the business model narrative as an oversight instrument. They should assess whether value creation logic remains coherent, whether assumptions are still valid and whether performance volatility is plausibly explained by business model dynamics. Under IFRS PS 1, business model clarity underpins reporting credibility.

FAQ 6 – How does the business model section relate to KPIs and forward-looking information?

KPIs and MPMs measure performance, while forward-looking information discusses expectations. The business model provides the economic logic that makes both credible. IFRS Practice Statement 1 expects these sections to be coherent: performance and outlook should be explainable through the stated value creation mechanism.