Financial Reporting Brief - January 2015
Integrated Reporting – crossing the chasm
Welcome to our Financial Reporting Brief for January, our opportunity to update you on recent developments with our featured article "Integrated Reporting – crossing the chasm" commenting on the progress and momentum towards a wider global acceptance of Integrated Reporting and the challenge of assurance.
Integrated Reporting – crossing the chasm
One year on from the publication of the International Integrated Reporting Framework, where is it now?
While the publication in 2013 of a Framework was a major milestone in the journey to integrated reporting, the challenge for 2014 and going forward is progress and momentum towards a wider acceptance.
The Chairman of the International Integrated Reporting Council (IIRC) believes that the momentum is there, and argues that Integrated Reporting is now inevitable with Integrated Reporting having crossed the chasm from having hundreds of companies taking up the idea and implementing the concepts, to thousands. Integrated Reporting is no longer an experimental way of changing the balance in explaining what a company has done and is doing, with the levels of credibility and momentum growing rapidly. The Chairman emphasises his long-held belief that Integrated Reporting should act as the catalyst which encourages companies to explain themselves better.
Integrated Reporting has been supported at the highest level internationally, with such organisations as G20 and the World Bank extolling its virtues. The International Corporate Governance Network of investment professionals and governance experts has announced that it expects its members to ask companies they invest in to follow Integrated Reporting.
Integrated Reporting – What is it?
So what is the purpose of integrated reporting? 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”. The primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time.
To achieve the goal of integrated reporting, companies need to embrace what the IIRC calls Integrated Thinking. They need to bring all the many disciplines within the organisation out of their siloes and to start collaborating and sharing expertise with each other. It is the benefit of this process which is the real goal, the real value to an organisation.
The challenges facing company boards in terms of building trust, communicating strategy to shareholders and fulfilling their broadened governance role are significant. As companies grapple with these challenges, the need for integrated thinking is increasingly being identified.
The challenge of assurance
Two papers were released by the IIRC in July regarding assurance on integrated reporting – (1) Assurance on IR: an introduction to the discussion, and (2) Assurance on IR: an exploration of issues. Together, the papers discuss issues such as the nature of assurance and how different mechanisms contribute to credibility and methodology issues dealing with, for example, future oriented information, soft narrative and completeness of a report; and materiality, the reporting boundary and connectivity for assurance purposes.
As corporate reporting evolves to enhance more fully the relevant aspects of value creation, and the interaction between the capitals, the needs for assurance are ever present. Credibility and trust in corporate reporting are the corner-stones of the work of regulators and auditing standard setters.
Integrated reports need to provide ‘investment grade’ information and many think that assurance may be a way of ensuring this. If investors are going to encourage or insist on companies producing integrated reports they will also want assurance that what is reported is reliable and trustworthy. In a world purely made up of financial reporting this was relatively easy. Integrated Reporting is inevitably made up of softer information. Assurance is going to be needed to take the concept to the next stage of its journey.
IR in context
Important themes were raised during the recent World Congress of Accountants. Two of the most pressing issues, frequently noted by leaders from all sectors, were planning for the long term and making effective use of data and technology. These illustrate a shift in outlook in business towards a wider concept of value creation.
In an Integrated Report, the concept of interconnectivity of information demands that different departments overseeing different aspects of operations in the organisation interact and communicate with one another. It provides an opportunity for organisations to re-examine the way they report, which in turn is a catalyst for change in behaviour and mindset.
Corporate Reporting Dialogue
In recent months, the IIRC has introduced the Corporate Reporting Dialogue (CRD) which brings together organisations that have significant influence on the corporate reporting landscape, among them the IASB and the US FASB. Other participants include the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Public Sector Accounting Standards Board (IPSASB), the International Organisation for Standardisation (ISO) and the Sustainability Accounting Standards Board (SASB). The participants aim to work together to respond to market calls for better alignment and reduced burden of corporate reporting. The initial deliverable will be to develop a corporate reporting landscape highlighting the connectivity of the various reporting frameworks and standards and their relevance to integrated reporting.
EU adds weight
The EU has added still more weight to requiring larger companies to include information of this nature in their annual reports. Under the recently published Directive on disclosure of non-financial and diversity information, companies with more than 500 employees are required to disclose relevant and material environmental and social information in their annual reports with disclosures at group level. Large listed companies will also be required to provide information on their diversity policy. The Directive is required to be transposed into national law by December 2016.
Implementing Integrated Reporting is a journey that will take several reporting cycles to get right. Accountants will therefore need to be change managers and key participants in strategic thinking.
Emerging opportunities will lead to a range of benefits, from attracting more long-term investors, through to better understanding of the business model, better long-term outlook and improved decision-making.
The crossing of the chasm by a growing number of listed groups and other public interest entities globally will surely lead to enhanced relevance and transparency of reporting.
What’s new - monthly reporting pack
Irish/UK GAAP/GAAS and related developments
- FRC consults on EU Audit Directive and Regulation: impact on auditing and ethical standards
- FRC updates pension communications standard
- FRC consults on amendments to FRS101
- FRC year end advice to preparers
- FRC urges clarity in the reporting of complex supplier arrangements by retailers and other businesses
- FRC publishes review of audit of UK banks’ loan loss provisions
IFRS and related developments
- Responses to the European Commission consultation on the impact of IFRSs in the EU
- SEC may propose a new approach to IFRS in the United States
- FASB and FAF comment on voluntary disclosure of IFRS information
Regulatory and related developments
Financial Reporting Brief
- Quarterly Financial Reporting Brief: January 2014
- December 2014: Clear and concise reporting – achievable?
- November 2014: Supervisory authorities - fundamental to consistent reporting
- Quarterly Financial Reporting Brief: October 2014
- October 2014: Group reporting – A way forward
- September 2014: The Financial Reporting Lab – An experiment that works?
- August 2014: Financial Instruments – Accounting we can all understand?
- July 2014: Standards – the current state of play
- Quarterly Financial Reporting Brief: July 2014
- June 2014: Revenue – getting the top line right
- May 2014: The quest for improved disclosure
- Quarterly Financial Reporting Brief: April 2014
- April 2014: Sustainable investment – accounting a concern?
- Financial Reporting Brief special edition (March 2014): FRS 103 Insurance Contracts
- March 2014 - Annual reports – Achieving their goal?
- February 2014 - Pensions – more than an accounting challenge?
- January 2014 - Quarterly edition of Financial Reporting Brief