evaluate the concept of integrated reporting, highlighting its stated advantages and key challenges.
Integrated Reporting Framework
Integrated thinking
•
content of IR
Because IR tells the business’s value creation story and is driven by the business’s situation, including its strategic plan, there is no standard format or model report (KPMG 2012, p. 14). The IIRC has developed a principles-based framework to guide organisations in creating their integrated reports, and this framework is discussed further below.
IR represents a step beyond separate financial reporting and sustainability reporting
• Integrates financial and sustainability issues (non-financial issues) into a single report with a forward-looking perspective.
click to edit
Six capitals
IIRC wants companies to consider the effect of their operations on:
MNFISH
• Financial capital
• Manufactured capital
• Intellectual capital
• Human capital
• Social and relationship capital
• Natural capital.
Are companies adding to the value of their capital or losing value? Linked to concept of sustainability.
click to edit
Seven guiding principles of IR:
scsmcrc
• Strategic focus and future orientation;
• Connectivity of information;
• Stakeholder relationships;
• Materiality;
• Conciseness;
• Reliability and completeness; and
• Consistency and comparability.
click to edit
Elements of Integrated Reports:
• Organisation overview and its external environment
• Governance
• Business model
• Risks and opportunities (and how the organisation is dealing with them)
• Strategy and resource allocation
• Performance (To what extent has the entity achieved its strategic objectives: what is the effect in terms of the six capitals?)
• Outlook
Basis of preparation and presentation (How does the entity decide what to include in the report and how are these items quantified/evaluated?)
IR requires integrated thinking about how an organisation creates value:
• ‘The active consideration by an organisation of the relationship between its various operating and functional units and the capitals that the organisation uses or affects. Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium and long term.’ (IIRC)
• Potential impact on investment appraisal? (e.g. importance of social and environmental considerations)
Integrated Reporting should change the way organisations think about value creation and the way they appraise potential investments or projects.
IFAC – Project and Investment Appraisal for Sustainable Value Creation
• Investment appraisal needs to facilitate long-term decision making; needs to consider sustainability.
• Good decision making relies on understanding the business, in the context of strategy as well as economic, social, environmental and competitive factors.
• Value-creating measures such as discounted cash flow (DCF) should be used to evaluate projects, rather than short-term criteria (e.g. payback periods).
• Discount rates used in DCF should reflect the risks associated with the project being appraised, not the organisation as a whole.
The IIRC defines IR as:
A process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation (IIRC 2013b, p. 33).
An integrated report shows how an organisation’s strategy, governance, performance and prospects create value over time.’ (IIRC)
Entities using integrated reporting are encouraged to focus on six capitals, and whether they have increased or reduced the value of each of these capitals. Capitals need not be owned by the entity. Reporting need not be in quantitative measurements.
6 capitals!!!!
click to edit
The business model is an important concept in integrated reporting.
need to consider aspects of social and environmental performance in appraisal decisions – not purely financial ones.
history
The IR initiative developed mainly because of concerns about the effectiveness of communication in the current major reports to stakeholders.
The major communication report, the annual report, is commonly criticised for being ‘cluttered’, meaning that key messages are getting lost in an overload of information.
Annual reports are also often criticised for being narrow in scope.
The GFC accelerated the push for better reporting with a greater focus on the longer term. Proponents of IR argue that the GFC resulted from a focus on short-term profits, with no regard for long-term sustainability. It is argued that this short-term focus was aided by
statutory financial reporting requirements, which emphasise past financial results at the expense of future strategic plans.
Crucial to IR is the notion that it is not just a reporting approach, but that it encourages the holistic management of the organisation. IR connects sustainability or environmental social and governance (ESG) dimensions of performance, which have a greater focus on longer-term issues, with the organisation’s business model and strategy.
IR helps bring the sustainability and financial data together to create a more profound and comprehensive picture of the risks and opportunities the company faces (IIRC 2011a).
According to advocates of IR, this provides a more robust basis for decision-making by those within the entity (IFAC 2013; Vesty et al. 2015) as well as a more meaningful foundation for reporting.
Possible approaches to adopting integrated reporting:
Produce a stand-alone integrated report, in addition to statutory financial report and accounts.
As an interim measure, publish the annual report and accounts and a sustainability report as a single document.
Consider how existing reports can be adapted to accommodate the IR approach.
The IIRC defines integrated thinking as:
The active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects. Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium and long term (IIRC 2013b, p. 33).
The explicit recognition of six types of capital in the framework encourages organisations to consider the effect of their operations on each and how pursuit of financial value creation could be at the cost of other capitals.
Business model = the entity’s system of transforming inputs through its business activities into outputs and outcomes that aim to fulfil its strategic purpose and create value in the short, medium and long term. (IIRC)
According to IR advocates, having separate reports makes the interconnections between the different dimensions of performance difficult to understand—a deficiency that IR approaches purport to overcome.
The organisation must consider issues under each of the eight elements, and then decide ‘what information is reported, as well as how it is reported’ (IIRC 2013b, para. 4.3). The organisation should consider its answers to each of the following questions for each of the content elements in order to determine the content of its IR: OBRSPOB
• Organisational overview and external environment: What does the organization do and what are the circumstances under which it operates?
• Governance: How does the organization’s governance structure support its ability to create value in the short, medium and long term?
• Business model: What is the organization’s business model?
• Risks and opportunities: What are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how is the organization dealing with them?
• Strategy and resource allocation: Where does the organization want to go and how does it intend to get there?
• Performance: To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
• Outlook: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
• Basis of preparation and presentation: How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?
(IIRC 2013b, p. 5)
content priciples!!!!
Given the principles-based nature of the IR framework, integrated reports produced by companies differ in their form and content, although various common themes exist. Potter and Soderstrom (2014) identify and discuss five themes: Catig
i. summarized and thematic discussion and reporting;
ii. discussion of how social and environmental performance is integrated into management and decision making;
iii. detailed discussion of governance;
iv. separate consolidated financial, social, and environmental statements; and
v. separate and limited or moderate assurance.
Although the above might, in some respects, seem relatively consistent with information currently reported by companies, there are some important differences. For example, integrated reports commonly contain summarised and thematic discussion; diagrams, figures and metrics for financial, social and environmental performance; and stock market dividends and share information. Integrated reports typically include a discussion of how social and environmental performance
is integrated into the management and decision-making of the company; they also map the company’s strategic goals to its initiatives, targets and performance
Integrated reports typically also feature a detailed discussion of governance, which goes beyond a simple discussion of structures, processes and details of meetings held. Themes such as trust, transparency and ethics are common
). Similar to sustainability reports, integrated reports generally receive independent assurance, although not always by the same entity that provides financial statement assurance.
users of IR
the IR framework states that the ‘primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time’ in both financial and other ways (IIRC 2013b, para. 1.7).
This is clearly more narrow than the interests of the user groups that integrated reports are likely to actually serve, perhaps indicating the importance of meeting the needs of financial capital providers of IR if this form of reporting is to become the norm in future.
What is the relationship between IR, financial reporting and sustainability reporting?
The IIRC believes that integrated reports have the potential to replace current disconnected and static reports under a number of different approaches
IR is not designed to be an additional report that is required to be produced by an organisation. It is intended to be a linking document that makes the connectivity of information explicit to provide a more holistic view of the organisation (IIRC 2013b). It is in this way that advocates of IR believe that it will ultimately result in reducing the reporting burden facing companies
The IIRC is seeking to redefine the nature of corporate reporting
(for both the public and private sectors) and to change the way that organisations operate and think about their resources.