Financial Reporting Brief June 2018

Insights

Financial Reporting Brief   

June 2018

This month’s article 'Corporate Reporting – An Integrated Approach' comments on developments in corporate reporting, with particular regard to Integrated Reporting. Our Monthly Reporting Pack provides a signpost to significant accounting and reporting developments during the month.

Corporate Reporting – An Integrated Approach

Our March article commented on the ‘European Commission Fitness Check’, a public consultation launched earlier this year. The purpose is to review European public reporting requirements to assess whether the EU Reporting framework is still fit for purpose. It set out strategic recommendations for a financial system that supports sustainable investments.

In response to the recommendations, the EC published an action plan in March. Legislative proposals have recently followed that aim at identifying which investments are sustainable.

The key features of the proposed measures aim at:

  • A unified EU classification system setting harmonised criteria to determine whether an economic activity is environmentally sustainable;
  • Consistency and clarity on how institutional investors should integrate environmental, social and governance (ESG) factors in their investment decision-making process;
  • Benchmarks reflecting companies’ carbon footprint;
  • Improved information and advice for organisations in key areas.

The proposals aim to establish a framework that can be used for judging whether the public reporting obligations including financial and non-financial reporting requirements for EU companies are meeting their objects, which is the aim of the EU ‘Business Check’.

The EC identified one of the main areas as being the review and consideration of the benefits that integrated reporting could bring and the role it could play in the future of reporting in Europe.

Reporting – The Broad Picture
In recent years, enlightened businesses and governments have recognised the importance of presenting a more complete story of an enterprise, with regard to both its financial and non-financial wellbeing.

The International Integrated Reporting Council (IIRC), together with other similar organisations, including the World Business Council for Sustainable Development and Climate Disclosure Standards Board, are key elements in a commitment to advancing and aligning the global mainstream corporate reporting model to ensure that companies disclose environmental, natural and financial capital using the same approaches.

The thinking on and reporting of the wide spectrum of non-financial capitals is continually the subject of developments, with in recent weeks, for example:

  • The World Business Council for Sustainable Development launched the ‘Social and Human Capital Coalition’, designed to help companies recognise, measure and value the importance of people and communities;
  • The Task Force on Climate-related Financial Disclosures has launched the TFCD Knowledge Hub, a platform with relevant insights, tools and resources to help organisations implement the TFCD recommendations. On this topic, the Institute of Chartered Accountants in England and Wales (ICAEW) has produced a practical guide, ‘Reporting on Climate Risks and Opportunities’.
  • The United Nations has published ‘Connecting Finance and Natural Capital’, a tool for financial institutions to assess how their business is impacted by, and depends upon the natural world.

IR – The Benefits
With diminishing resources, significant climate changes and other similar factors, the pursuit of systems within organisations to make business more sustainable has become more and more a fundamental requirement. An enterprise faces the challenge of understanding a multi-capital scenario and committing resources to understanding how to dovetail the existing flows of thought, work and experience in how to channel capitals, showing how their potential can be ultimately maximised.

Integrated reporting is an evolution of corporate reporting making the reporting process more productive, improving the quality of information contained in the final report, resulting in tangible benefits. IR maximises the concept of connectivity of information to best tell an organisation’s value creation story.

Integrated reporting has greatly assisted those that have adopted it with understanding value creation, greater collaboration within their teams, more informed decision making and positive impacts on stakeholder relations. Integrated reporting brings about and promotes more positive integrated thinking within an organisation.

IR – Materiality Consideration
Recognising the unique nature of each enterprise, a discussion of materiality serves to identify which aspects of the operational environment internally and externally should be reported on. This is key to transparency and understanding. Strategy formulation is the point at which the centrality of key influencers and resources of enterprise activity come together i.e. the business model is determined. The discussion of and decision making about the business model should be cross-functional and reflect consideration of all capitals, its results should clearly reflect a broad base of attributes relative to strategically important elements within and across the capitals.

The Board and management must have a clear picture of how the six capitals are employed, and a holistic picture of how they drive value creation and how their business model works to create value.

Developments in Recent Years
It should be borne in mind that integrated reporting is a means of developing better and more coherent leadership and governance. Recent surveys have shown that significant advances are being made by reporters adopting integrated reporting to the IR framework. The past year has seen many organisations making explicit reference to the IR Framework underlining their commitment. Other factors that are encouraging include consistency of performance measures from year to year, more robust basis for comparison and the reducing length of reports. Innovative approaches to meaningful reporting are also developing.

A survey carried out by ACCA of the 2017 reports of organisations adopting IR indicate substantial internal and external benefits are being achieved. Internal benefits include:

  • 95% of respondents say they have a better understanding of how their organisation creates value as a result of embarking on their integrated reporting journey; 
  • 70% have seen more connection between different departments, leading to broadening of perspectives.
  • External benefits include: 
  • Heightened awareness of the confluence of financial capital and the multiple other capitals;
  • Significant positive impact in engagement with investors and other stakeholders.

Organisations have found that integrated reporting can transform organisations from the inside out, bringing organisations to enhanced integrated thinking. At the heart of integrated reporting and integrated thinking is the ability to face constructively the tension of opposing ideas and generating a creative resolution of the tension in the form of new ideas that contains elements of the different ideas but are superior to each.

IR – A Challenging Outlook
New challenges continue to come to light, particularly in the following areas:

  • The linking of strategy and performance through to key resources and value creation over the short, medium and long-term;
  • The description of the board’s role in enabling value creation; 
  • Discussions about the organisation’s outlook, and;
  • The application of materiality.

These challenges demand cohesive integrated thinking to think beyond reporting practice and organisational limitations, and their engagement with internal and external stakeholders. The challenges of implementing integrated thinking, as the foundation for integrated reporting, is an onerous one.

The IIRC’s long-term vision is ‘a world in which integrated thinking is embedded within mainstream business practice, facilitated by integrated reporting as the reporting norm. The premise is that to create an integrated report, a corporation must have integrated thinking or it will not be able to articulate clearly the value it creates in the long term. Put simply, the IR Framework proposes that if a corporation does not know what impact its activities will have on its resources, how can it know if it is viable?

Conclusion
Organisations should recognise that information about not only financial capital, but all capitals, is equally essential for an understanding of corporate performance.

Meeting investor expectations in this respect will lead to competitive advantage, greater confidence in business and ultimately to enhanced access to capital.  

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