Corporate reporting - A way forward?

Brendan Sheridan, director Deloitte financial reporting technical team, writes about the recently published Integrated Reporting Framework. First published as part of January 2014 edition of Financial Reporting Brief.

Corporate reporting must evolve to communicate the full range of factors affecting an organisation’s ability to create value over the short, medium and long term. These factors are not purely traditional financial or manufactured capital but include, equally, the human intellectual, social and relationship, and natural capital that an organisation relies on to do business in the 21st century.

The evolution of approach to how best to communicate key messages to investors and other stakeholders forms the basis on which the international Integrated Reporting Council (IIRC) has worked. The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and others who are firmly of the view that evolution to Integrated Reporting (IR) must take place. The IASB has committed to a memorandum of understanding with the IIRC to develop an overall framework.

On 9 December 2013 the IIRC released the International Integrated Reporting (IR) Framework.

Integrated reporting – The framework
An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term. An integrated report should be prepared in accordance with the IR framework. An integrated report should be prepared primarily for providers of financial capital in order to support their financial capital allocation assessments. It should, however, be of benefit to all stakeholders interested in an organisations ability to create value over time.

The Framework establishes Guiding Principles and Content Elements that govern the overall content of an integrated report, helping organisations determine how best to express their unique value creation story. The requirements of the Framework are principles based and do not focus on rules for measurement or disclosure, with senior management needing to collectively exercise judgement to determine which matters are material. A principles based approach is intended to strike an appropriate balance between flexibility and prescription that recognises the wide variation in individual circumstances of different organisations.

A standalone integrated report will, under the proposals, be prepared annually in line with the statutory financial reporting cycle, and may be linked with other reports including financial statements and sustainability reports.

Guiding principles and content elements
The guiding principles that underpin the preparation of an integrated report are:

  • Strategic focus and future orientation
  • Connectivity of information
  • Stakeholders responsiveness
  • Materiality and conciseness
  • Reliability and completeness
  • Consistency and comparability

An integrated report should include the following Content Elements:

  • Organisational overview and external environment
  • Governance
  • Opportunities and risks
  • Strategy and resource allocation
  • Business model
  • Performance
  • Future outlook

The Content Elements are fundamentally linked to each other and are not mutually exclusive with an integrated report presented in a way that makes the connections between the Content Elements apparent. They are stated in the form of questions rather than as checklists of specific disclosures, with executive judgement to be exercised in their application.

Questions to be answered:
An integrated report should answer the following questions:

  • What does the organisation do and what are the circumstances under which it operates?
  • How does the organisation’s governance structure support its ability to create value in the short, medium and long term?
  • What are the specific opportunities and risks that affect the organisations ability to create value over the short, medium and long term and how is the organisation dealing with them?
  • Where does the organisation want to go and how does it intend to get there?
  • What is the organisation’s business model and to what extent is it resilient?
  • To what extent has the organisation achieved its strategic objectives and what are its outcomes in terms of effects on the capitals?

Implementing the framework
The IIRC is firmly of the view that the launch of the Integrated Reporting Framework is set to herald a new era in the relationship between business, society and the environment and elevates sustainability thinking to the boardroom. Steps must be taken to:

  • Prepare for integrated reporting which will need an assessment of the adequacy of the stakeholders’ engagement processes currently in place and its ability to communicate material issues from a broad stakeholder perspective;
  • Achieve buy-in at board and senior management level with agreement on the reporting package, including the elimination of non – material information
  • Develop integrated thinking and get agreement on the business model including determining the material issues which may impact on achieving objectives with articulation of the plan and the issues in the integrated report.

Achieving the objective
A stated aim of integrated reporting is to support integrated thinking and decision making. Integrated thinking is ‘the active consideration by an organisation of the relationships between its various operating and functional units and the capitals that the organisation uses or affects’. Integrated reporting should be an output of integrated thinking.

The vision of the IIRC is that integrated thinking and integrated reporting will become the norm, with the concepts thoroughly embedded in every form of communication by an organisation to stakeholders both external and internal. The IIRC is of the view that the more integrated thinking is embedded into an organisation’s activities, the more naturally will the connectivity of information flow into management reporting, analysis and decision making.

The cycle of integrated thinking and reporting, resulting in efficient and productive resource allocation, should act as a force for financial stability and sustainability.

The recent Deloitte report ‘A New Beginning’, following their review of UK corporate reporting, comments that where companies have tended to fall down in their quest to make their reports fully comprehensible to stakeholders is linking together different parts of the story.

Integrated reporting should provide an approach to how companies can communicate more effectively with investors and other stakeholders. It is key that the IIRC keeps in focus the end in mind – disclosure that better informs investors as to the sustainable value creation capability and capacity of an organisation, and simplifying the reporting process.

Our Deloitte Global IR in Focus publication comments in more detail and provides observations on the Integrated Reporting Framework.

This article will also appear this month in Finance Dublin.

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