Financial Reporting Brief
Our featured article for August is 'Integrated Reporting – A Solution?' with Brendan Sheridan commenting on the continuing progress of IR as a potential way forward towards a more coherent corporate reporting system.
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Integrated Reporting – A Solution?
Integrated Reporting (IR) – ‘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’ - an extract from the report of the International Federation of Accountants (IFAC) published earlier this year.
The IFAC report ‘Enhancing Organisational Reporting: Integrated Reporting Key’ represents a significant milestone in the progress towards recognition of and more comprehensive adoption of IR at a global level, and 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 that IR is a model that champions a clear direction for corporate reporting.
The 2016 annual report of the IIRC, published in July, 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?
Previous articles have commented on IR and we briefly summarise the position here. The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that communication about value creation should be the next step in the evaluation of corporate reporting. It questions how corporate reporting needs to adapt to economic reality and stakeholder expectations which create change in the underlying dynamics in 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 to enable a more efficient and productive allocation of capital. IR focuses on value creation, and the ‘capitals’ used by the business to create value over time, which contribute toward a more financially stable global economy.
Broadening and deepening our understanding of ‘value’ is absolutely vital for improving performance and building credibility in an entity’s relations with investors and stakeholders.
Capitals – What Are They?
Stocks of value that are increased, decreased or transformed through the activities and outputs of an organisation – these are the capitals of a business. IR categorises the capitals as follows: -
- Financial capital – the pool of funds that is available;
- Manufacturing capital – manufactured physical objects;
- Intellectual capital – intellectual property e.g. patents, software and licences, together with knowledge, systems and procedures;
- Human capital – peoples’ 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 wellbeing; 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
- Dependent on various resources
These capitals, and their influences and contributors, are all key factors in an organisation’s business model although the extent to which they individually matter will depend on the nature of the organisation together with the industry and environment within which it operates.
The term ‘business model’ is well-established but it is a concept which not all organisations are in tune with. This can increase risk within an organization 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 is the paper released earlier this year ‘Innovation in Banking – are we communicating the value created?’. This 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 pro-active in a manner which 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 use 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’ bringing together trends, research, market views and case studies and including:-
- The cyclical power of integrated thinking and reporting
- The value of human capital
- Integrated reporting and investor benefits
- Value to investors
- Value to the board
All of these provide valuable insight into the benefits to be gained from adopting IR.
Reports have also been published by other organisations which are useful in relation to the adoption of IR. In recent times, these include a report published by the Association of Chartered Certified Accountants (ACCA) which highlights the benefits and challenges that early integrated reporting adopters have experienced. 41 corporate reports which were produced by participants of the IIRC’s Business Network were reviewed. The ACCA report comments that IR is enabling companies to articulate more clearly and fully what truly drives them forward. This in turn is leading to greater clarity on, and management of, challenges and opportunities. In essence, integrated reporting is a means to an end, rather than an end in itself – and the final destination is integrated thinking. The report focuses a spotlight on five principles which represent challenges to its implementation.
- Connectivity of information – to give a holistic picture of the combination, interrelationships and dependencies between the factors that affect an organisation’s ability to create value over time;
- Materiality – the need to disclose information about matters that substantively affect an organisation’s ability to create value over the short, medium and long term;
- Conciseness – the need to provide sufficient content to help readers understand an organisation’s value creation process and performance, looking at such techniques as modular reporting which would allow different users to navigate to those parts of the report most relevant to them;
- Reliability of information – an integrated report should include all material matters, both positive and negative, in a balanced way and without material error; and
- Consistency and comparability – the information should be presented (a) on a basis that is consistent over time, and (b) in a way that enables comparison with other organisations to the extent it is material to an organisation’s own ability to create value over time.
The report comments on the many benefits of adopting IR, including:-
- More integrated thinking and management;
- Greater clarity on business issues and performance;
- Improved corporate reporting and shareholder relationships;
- More efficient reporting; and
- Employee engagement.
The report offers advice for new adopters based on discussions with preparers who suggest some core advice for effective IR.
The European Union’s 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 companies to disclose relevant and useful information on environmental and social matters in a consistent and comparable way.
These guidelines follow on the EU Directive on disclosure of non-financial and diversity information by certain large undertakings and groups which entered into force on 6 December 2014. Companies will have to be compliant as of 2018 on information relating to financial year 2017.
Globalisation and interconnectivity mean 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 merely economic and financial results are not sufficient for institutions to sustain their value. Organizational market value has slowly shifted from price-based tangible capitals to intangible capitals such as intellectual assets, research and development strength, brand value and also social and human capital. Numerous developments have shown that risks that are effectively not accounted for in the financial statements may lead to significant impacts 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!
What's New Monthly Reporting Pack - August 2017
Irish/UK GAAP & Related Developments
- IAASA publishes “Desktop survey – disclosures of the new accounting standards in issuers’ 2016 annual financial statements”
- FRC issues Amendments to FRS 101 – 2016/17 cycle
- FRC defers decision on updating FRS 102 for major changes in IFRS
- Feedback statement on FRC's DP Improving the Statement of Cash Flows
- Technical Release (TR) 03/2017 ‘Companies Act 2014 – Winding up’
IFRS & Related Developments
- ESMA issues report on the application of IFRS 13
- ESMA publishes new Q&A on alternative performance measures guidelines
- European Banking Authority reports on second impact assessment of IFRS 9
- European Systemic Risk Board Report on financial stability implications of IFRS 9
- Recent sustainability and integrated reporting developments
Legal & Regulatory Developments
- ESMA recommends improvements in financial information enforcement
- FRC publishes Non-Financial Reporting Directive Factsheet
- ODCE Annual Report 2016
Financial reporting Brief
- July 2017: Balance Sheet Size To Grow? – New Leases Standard
- Quarterly Financial Reporting brief July 2017
- June 2017: Revenue - A New Standard for All
- May 2017: Financial Instruments Accounting – A New Age
- April 2017: The New Standards - Busy Times Ahead
- Quarterly Financial Reporting Brief: April 2017
- March 2017: Long–Term Value Focus - ESG Reporting
- February 2017: Financial reporting - Incremental Improvement
- January 2017: The Future of Financial Reporting
- Quarterly Financial Reporting Brief: January 2017
- December 2016: 2016 Reporting - The Challenges
- November 2016: Financial Reporting – The Supervisors’ Views
- October 2016: A New Challenge – The Companies Accounting Bill
- Quarterly Financial Reporting Brief: October 2016
- September 2016: Corporate Reporting - Where to now?
- August 2016: Uncertainty – The Accounting and Reporting Challenge
- July 2016: Non-GAAP Measures – Focus of Attention
- Quarterly Financial Reporting Brief: July 2016
- June 2016: The Challenges of a New Leasing Standard