(c) Chartered Accountants Ireland. Contact Chartered Accountants Ireland for permission to reproduce this article., Financial Reporting

The rise of integrated reporting

Corporate reporting needs to adapt to economic reality and stakeholder expectations. Could integrated reporting be the solution?

By Brendan Sheridan

Integrated reporting (IR) represents “an umbrella report for an organisation’s broad suite of reports and communications, enabling greater interconnectedness between different reports – the way to achieve a more coherent corporate reporting system, fulfilling the need for a single report that provides a fuller picture of an organisation’s ability to create value over time.” This is an extract from a report published by the International Federation of Accountants (IFAC) earlier this year.

The IFAC report, Enhancing Organisational Reporting: Integrated Reporting Key, represents a significant milestone in the journey towards recognition for – and more comprehensive adoption of – IR at a global level. It also strongly supports the International Integrated Reporting Council (IIRC) and the implementation of the IR framework. IFAC recognises the fragmentation that arises from different reporting by companies of different capitals, and sees IR as a model that champions a clear direction for corporate reporting.

The IIRC’s 2016 annual report, which was published in July of this year, demonstrates growing participation in international IR networks, the increasing influence and reach of the IIRC council, and an expanding role for the IIRC in bringing about alignment in the reporting system through the Corporate Reporting Dialogue.

What will IR deliver?

The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and non-governmental organisations (NGOs). Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting. It considers how corporate reporting needs to adapt to economic reality and stakeholder expectations, which create change in the underlying dynamics of how a business operates and responds to its responsibilities.

IR applies principles and concepts that are focused on bringing greater cohesion and efficiency to the reporting process, and adopting “integrated thinking” as a way of breaking down internal silos and reducing duplication. IR may be expected to improve the quality of information available to providers of financial capital, thereby enabling a more efficient and productive allocation of capital.

Furthermore, it focuses on value creation and the “capitals” used by the business to create value over time, which contribute to a more financially stable global economy.

Broadening and deepening our understanding of “value” is vital if we are to improve performance and build credibility in an entity’s relations with its investors and stakeholders.

Capitals – what are they?

The capitals of a business are stocks of value that are increased, decreased or transformed through the activities and outputs of an organisation. IR categorises capitals as follows:

  • Financial capital: the pool of funds available;
  • Manufacturing capital: manufactured physical objects;
  • Intellectual capital: intellectual property (e.g. patents, software and licences together with knowledge, systems and procedures);
  • Human capital: people’s competencies, capabilities and experience, and their motivations to innovate;
  • Social and relationship capital: the institutions and the relationships between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being; and
  • Natural capital: all renewable and non-renewable environmental resources and processes.

Value is not created by, or within, an organisation alone. It is influenced by the external environment, created through relationships with stakeholders and dependent on various resources.These capitals, along with their influences and contributors, are key factors in an organisation’s business model. However, the extent to which they individually matter will depend on the nature of the organisation together with the industry and environment within which the business operates.

The term “business model” is well-established, but some organisations are not in tune with the concept. This can increase risk within an organisation as not understanding your business model and adapting it to market changes, new technologies, risks and threats can damage your organisation.

Innovation – creating value

An example of useful comment and guidance issued by the IIRC can be found in a paper released earlier this year entitled Innovation in Banking – Are We Communicating the Value Created? This paper focuses on the need for businesses to innovate to remain competitive and shows how the IIRC’s framework provides a useful tool to help banks think about innovation and be proactive in a manner that can lead to increases in financial and intellectual capitals in later periods.
Encouraging a culture of innovation is a key business activity in terms of generating new products and services that anticipate customer demand, introducing efficiencies and better use of technology, substituting inputs to minimise adverse social or environmental effects, and finding alternative uses for outputs.
Innovation will focus an organisation on what gives it competitive advantage and what will enable it to create value.

IIRC – practical guidance

The IIRC has a series of publications under the overall title of “creating value”. This collection brings together trends, research, market views and case studies. Topics include:

  • The cyclical power of integrated thinking and reporting;
  • The value of human capital;
  • Integrated reporting and investor benefits;
  • Value to investors; and
  • Value to the board.

These publications provide valuable insight into the benefits to be gained from adopting IR.

European perspective

The European Union’s (EU) Non-Financial Reporting Directive will see at least 6,000 companies across Europe enhance their reporting during the next 12 months.

The European Commission (EC) has adopted non-binding guidelines on the disclosure of non-financial information by companies, which aims to help them to disclose relevant and useful information on environmental and social matters in a consistent and comparable way. These guidelines follow on from the EU directive on disclosure of non-financial and diversity information by certain large undertakings and groups, which came into force on 6 December 2014. Companies will have to be compliant as of 2018 on information relating to financial year 2017.

Conclusion

Globalisation and interconnectivity mean that the world’s finances, people and knowledge are inextricably linked – as evidenced by the global financial crisis. In the wake of the crisis, the desire to promote financial stability and sustainable development by better linking investment decisions, corporate behaviour and reporting has become a global need.

Today, we are well aware that focusing on economic and financial results alone is not sufficient to sustain an institution’s value. Organisational market value has slowly shifted from price-based tangible capitals to intangible capitals such as intellectual assets, research and development strength, brand value, and social and human capital. Several developments have shown that risks which are effectively not accounted for in the financial statements may have a significant impact on financial results. Investors – having seen that environmental, social and governance risks and uncertainties faced by companies directly affect company sustainability – have started to demand information on companies’ non-financial performance.

Be a leader, not a follower and show your investors and stakeholders that you mean business.

This article was originally published in the October 2017 issue of Accountancy Ireland.