Financial Reporting Brief March 2016 | Deloitte Ireland | Audit has been added to your bookmarks.
Financial Reporting Brief
Our featured article for March is Integrated Reporting – A Way Forward for Corporate Reporting? with Brendan Sheridan commenting on developments in Integrated Reporting and its significance for the future of corporate reporting.
Integrated Reporting – A Way Forward for Corporate Reporting?
Our January 2015 article ‘Integrated Reporting – Crossing the Chasm’ commented that Integrated Reporting (IR) is a journey that will take several reporting cycles to get right. However, the development process will yield benefits with the crossing of the chasm to IR by a growing number of listed groups and other public interest entities globally expected to lead to enhanced relevance and transparency of reporting.
Some fourteen months later, how far has IR progressed?
The current chairman of the International Integrated Reporting Council (IIRC) has recently commented that IR has now worked its way forward from ‘headlines to trendlines’; the shock of the new has become something much more mainstream, with integrated reporting taking a place on government and business agendas around the world, becoming a settled and largely accepted business reporting system within the underlying process.
Significant attention has been brought to IR by leading figures, perhaps the most notable recently has been the Chief Executive of the world’s largest investor who has written to the chief executives of the Fortune 500 largest companies. He calls on them to lay out for shareholders each year a strategic framework for long-term value creation, with the responsibility for the Board being to review, understand, discuss and challenge a company’s strategy for achieving strategic goals. He expresses concern that one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses.
What is integrated reporting trying to achieve?
The Chairman of the IIRC has stated that the IR Framework is a tool for the better articulation of strategy, and to engage investors on a long-term journey to attract investment that will be crucial to achieving sustained and sustainable prosperity. Integrated reporting is an evolution of corporate reporting, with a focus on conciseness, strategic relevance and future orientation. As well as improving the quality of information contained in the financial report, IR makes the reporting process itself more productive, resulting in tangible benefits. IR requires and brings about integrated thinking, enabling a better understanding of the factors that materially affect an organisation’s ability to create value over time. The Framework brings together an organisation’s strategy, governance, performance and prospects in the context of the external environment.
Investor Decision - Making
The IIRC strategy rightly emphasises building a bridge from corporate reporting to investment decision-making. A fundamental element is to embed the concept of long-term value creation in capital markets, based on the multi-capital approach to valuation which has been pioneered through the global IR movement. Major recent developments which could make a step change, include: -
- The letter written by the CEO of the world’s biggest investor, as referred to earlier, and
- The S&P Long-Term Value Creation Index, designed to measure companies that have the potential to create long-term value based on sustainability criteria and financial quality.
The third improvement step is for IR to become embedded in these developments as the means for providing information to investors that will help them appraise value and performance in the light of these defining elements. IR helps firms to understand aspects of their business strategy and external environment that materially affect their long-term ability to create value.
Guidance on IR
There is a very significant level of comment and guidance about IR in recent weeks, with the IIRC publishing two volumes on creating value – (1) Value to the Board, and (2) Value to Investors.
These publications highlight that there is a recognised need to provide financial stability and sustainable development. Demonstrating the link between investment decisions, corporate behaviour and reporting is a primary aim of the Creating Value series, building a bridge from corporate reporting to capital allocation. Investors are starting to see the correlation between sustainable development and financial performance. What investors now want is for companies to share information about their long-term strategies for creating value in order to better understand the company’s business model. Investors say they have more confidence in management when they gain a clear picture of the business from the quality and transparency of their corporate reporting. Boards are increasingly pursuing long-term strategies that integrate wider sources of value creation, which will incline them towards an Integrated Thinking and Reporting approach. Board members are best placed to ensure overall organisational and cultural alignment to achieve the benefits that come from effective reporting practices.
The third report in the ‘Creating Value’ series is ‘Integrated Reporting and Investor Benefits’. The report serves to highlight the increasingly compelling evidence of the value of IR for investors, exploring its benefits for them and the information they deem important. Information that investors value includes an overall explanation of the business model, how the company creates value, a well-articulated strategy and information on anticipated future opportunities and vulnerabilities. Investors are using this information in many diverse ways, including managing investment risk, evaluating industry dynamics and understanding the regulatory environment.
Other Guidance Includes:
- The joint IIRC/IFAC publication ‘Materiality – Guidance for the preparation of integrated reports’ which supports the IR Framework by explaining materiality, and the corresponding materiality determination process, in the context of IR. It also outlines expectations for materiality-related disclosures.
- Reporting on Outcomes – an analysis of IR indicates challenges in reporting on value outcomes with the paper aiming to assist preparers and company directors in understanding the term ‘outcomes’ and considerations for communicating them. Leadership needs to think through its business model and value creation process in terms of inputs, business activities, outputs and outcomes, set against the Framework’s fundamental ‘six capitals’ concept.
An interesting recent development announced by the United Nations Environment Programme Finance Initiative (UNEP FI), is a three-year programme to integrate sustainability into investors’ fiduciary duties. The primary duty is to develop an international statement on fiduciary duty and sustainable development, leading to investors systematically integrating economic, social and governance (ESG) factors into fiduciary duty and corporate reporting.
The UNEP FI has published a report that examines the reasons why investors are not systematically integrating ESG as part of their fiduciary duty and finds that inconsistency in corporate reporting, including inadequate analysis of the financial materiality of ESG issues, is making it hard to assess investment implications. ‘Fiduciary Duty in the 21st Century’ looks at fiduciary duty across eight major markets, and recommends that in order to move towards a sustainable financial and economic system, all of the players in the investment process take specific actions in order for ESG to be implemented on a truly global scale.
Integrated thinking and reporting have a lot to offer to directors who seek to demonstrate that their businesses are operating in a way in which sustainable long term value creation is possible to achieve. There is still plenty of room for improvement when it comes to the way annual reports tell the company’s story. Integrated thinking challenges and enables companies to ‘live their story’, rather than merely tell it!
A focus on the purely financial is no longer enough when entities are reporting to investors and other stakeholders. Companies need to change a key question from ‘what do we do with the money we make’ to ‘how do we make the money’, a need to change dialogue and build trust. Being able to articulate your strategy and business model, as well as link metrics to them, is critical for an organisation to build trust.
The Deloitte publication ‘A Directors' Guide to Integrated Reporting’ provides a Guide for directors on Integrated Reporting.
What's New - Monthly Reporting Pack
Irish GAAP / GAAS & Related Developments
- Irish small and micro companies: non-application of Section 1A of FRS 102 and FRS 105
- BIS consultation on the UK implementation of the EU Directive on disclosures of non-financial and diversity information
- ICAEW report into establishing materiality when providing assurance over non-financial information
- CDSB publishes review of environmental reporting by FTSE 350 companies
- Charity Commission and OSCR issue an ‘Update Bulletin’ amending the Charities SORP
- FRC comments on new IFRS requirement on debt disclosure
- Snapshot of IAASA’s financial reporting enforcement activities in 2015
- New Technical Release on Solicitors Accounts Regulations 2014
IFRS & Related Developments
- EU endorsement of IFRS 9 now expected in the second half of 2016
- IFAC report on global regulation
- IPSASB proposes revisions to the cash basis IPSAS
- Deloitte comment on the IASB’s proposed amendments to IFRS 4
- IASB updates work plan
- IASB chairman reappointed; vice-chairman to retire
- Three year programme to integrate sustainability into investors’ fiduciary duties
- FASB issues ASU on leases
Regulatory & Related Developments
- Central Bank publishes programme of themed inspections in Insurance Supervision
- Central Bank highlights consumer protection risks and key priorities for 2016
Financial Reporting Brief
- February 2016: Lease Accounting: The New Standard
- January 2016: Transparency of Reporting: Importance to Financial System
- Quarterly Financial Reporting Brief: January 2016
- December 2015: Supervisors Help Response to Reporting Challenge
- November 2015: CORE & MORE
- October 2015: Corporate Reporting – Future Expectations
- Quarterly Financial Reporting Brief: October 2015
- September 2015: Conceptual Framework – A New Foundation
- August 2015: IFRS 9 - Moving forward
- Quarterly Financial Reporting Brief: July 2015
- July 2015: Quality of Reporting – Needs to Improve!
- June 2015: Revenue - A Standard in Progress?
- May 2015: Financial Reporting in Ireland – Is It All New?
- Quarterly Financial Reporting Brief: April 2015
- April 2015: Corporate Reporting – A Broader Horizon
- March 2015: Impairment losses – Improved recognition?
- February 2015: The Challenge of Transition