Question Tag: IIRC Framework

The International Integrated Reporting Council (IIRC) has released a framework for integrated reporting. The Framework establishes principles and concepts which govern the overall content of an integrated report. An integrated report sets out how the organization’s strategy, governance, performance and prospects can lead to the creation of value. The IIRC has set out a principles-based framework rather than specifying a detailed disclosure and measurement standard. This enables each company to set out its own report rather than adopting a checklist approach. The integrated report aims to provide an insight into the company’s resources and relationships, which are known as the capitals and how the company interacts with the external environment and the capitals to create value. These capitals can be financial, manufactured, intellectual, human, and social relationship, and natural capital but companies need not adopt these classifications. Integrated reporting is built around the following key components:

(i) Organizational overview and the external environment under which it operates (ii) Governance structure and how this supports its ability to create value (iii) Business model (iv) Risks and opportunities and how they are dealing with them and how they affect the company’s ability to create value (v) Strategy and resource allocation (vi) Performance and achievement of strategic objectives for the period and outcomes (vii) Outlook and challenges facing the company and their implications (viii) The basis of presentation needs to be determined including what matters are to be included in the integrated report and how the elements are quantified or evaluated.

The Framework does not require discrete sections to be compiled in the report but there should be a high level review to ensure that all relevant aspects are included. An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their needs and interests. Further, the report should be consistent over time to enable comparison with other entities. The IIRC considered the nature of value and value creation. These terms can include the total of all the capitals, the benefit captured by the company, the market value or cash flows of the organization and the successful achievement of the company’s objectives. However, the conclusion reached was that the Framework should not define value from any one particular perspective because value depends upon the individual company’s own perspective. It can be shown through movement of capital and can be defined as value created for the company or for others. An integrated report should not attempt to quantify value as assessments of value are left to those using the report. The report does not contain a statement from those ‘charged with governance’ acknowledging their responsibility for the integrated report. This may undermine the reliability and credibility of the integrated report. There has been discussion about whether the Framework constitutes suitable criteria for report preparation and for assurance. There is a degree of uncertainty as to measurement standards to be used for the information reported and how a preparer can ascertain the completeness of the report. The IIRC has stated that the prescription of specific measurement methods is beyond the scope of a principles-based framework. The Framework contains information on the principles-based approach and indicates that there is a need to include quantitative indicators whenever practicable and possible. Additionally, consistency of measurement methods across different reports is of paramount importance. There is outline guidance on the selection of suitable quantitative indicators.

There are additional concerns over the ability to assess future disclosures, and there may be a need for confidence intervals to be disclosed. The preparation of an integrated report requires judgment but there is a requirement for the report to describe its basis of preparation and presentation, including the significant frameworks and methods used to quantify or evaluate material matters. Also included is the disclosure of a summary of how the company determined the materiality limits and a description of the reporting boundaries. A company should consider how to describe the disclosures without causing a significant loss of competitive advantage. The entity will consider what advantage a competitor could actually gain from information in the integrated report, and will balance this against the need for disclosure.