Question Tag: Integrated Reporting

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  • 10 Marks

CR – May 2018 – L3 – Q5a – Beyond financial reporting

Explain how integrated reporting merges sustainability reporting and financial reporting.

“Integrated reporting advances the proposition that sustainability reporting and financial reporting are inherently linked and thus would benefit from merging.” – Bob Massie, co-founder of the Global Reporting Initiative.

Required:
Explain how integrated reporting merges sustainability reporting and financial reporting.

Explanation of Integrated Reporting:
Integrated reporting combines sustainability reporting and financial reporting into a single, cohesive framework. This allows companies to provide a comprehensive picture of how they create value over time, considering both financial and non-financial factors. Here are the key ways in which integrated reporting merges sustainability and financial reporting:

  1. Linking Financial Performance with Sustainability:
    Traditional financial reporting focuses on profitability, revenues, and expenses, while sustainability reporting looks at environmental, social, and governance (ESG) issues. Integrated reporting brings these together, showing how sustainability initiatives (e.g., reducing carbon emissions or improving labor practices) directly impact the company’s financial performance and long-term value creation. For example, cost savings from energy efficiency improvements can enhance profitability.
  2. Capitals in Integrated Reporting:
    The integrated reporting framework focuses on multiple “capitals,” which are resources and relationships that organizations use to create value. These include:

    • Financial Capital: Traditional financial resources such as equity and debt.
    • Manufactured Capital: Physical assets like plants and machinery.
    • Intellectual Capital: Knowledge-based assets such as patents and proprietary technology.
    • Human Capital: Employee skills, well-being, and motivation.
    • Social and Relationship Capital: Relationships with stakeholders, including customers and communities.
    • Natural Capital: Environmental resources, including water, air, and biodiversity.

    The inclusion of non-financial capitals (e.g., social and environmental factors) alongside financial capital helps to demonstrate the full range of factors that contribute to the company’s success.

  3. Holistic View of Performance:
    Integrated reporting provides a holistic view of a company’s performance by combining both financial and non-financial information. This approach ensures that stakeholders understand how the company’s operations, strategy, and governance are aligned with its sustainability goals and financial objectives.
  4. Future-Oriented Reporting:
    Integrated reporting emphasizes the future, focusing on how a company’s strategy and sustainability practices will impact its ability to create value over the long term. This is in contrast to traditional financial reports, which tend to focus on historical financial performance. Integrated reporting allows companies to communicate their long-term sustainability initiatives and how these initiatives will enhance future profitability and resilience.
  5. Guiding Principles:
    Integrated reporting is based on guiding principles such as materiality, stakeholder inclusiveness, and reliability. This ensures that both financial and non-financial data are relevant and meaningful to stakeholders, promoting transparency and accountability. Stakeholder relationships, risks, and opportunities are reported in a way that links sustainability with financial outcomes.
  6. Strategic Alignment:
    Integrated reporting encourages companies to align their business strategy with sustainability objectives, leading to better decision-making. This alignment helps companies manage risks and capitalize on opportunities related to ESG factors, ultimately improving financial performance.
  7. Improved Communication with Stakeholders:
    By merging sustainability and financial reporting, integrated reports provide a more comprehensive view for stakeholders, including investors, customers, employees, and regulators. It allows stakeholders to understand not only the company’s financial performance but also its broader social, environmental, and governance impacts, helping them make informed decisions.

Conclusion:
Integrated reporting merges sustainability and financial reporting by providing a more complete, future-oriented, and stakeholder-inclusive view of how a company creates value. It emphasizes the interconnectedness of financial performance and sustainability initiatives, demonstrating that long-term success depends on both.

  • 10 Marks

CR – May 2016 – L3 – Q3a – Beyond financial reporting

Discuss principles and key components of the IIRC's Framework for integrated reporting, and concerns about its suitability for assessing entity prospects.

At a recently concluded Annual General Meeting (AGM) of a company, one of the shareholders remarked; “historical financial statements are essential in corporate reporting, particularly for compliance purposes, but it can be argued that they do not provide meaningful information. After having issued a series of environmental and then sustainability reports, it is apparent that although the numbers were allowing a true and fair review of the company’s performance, operations and management they were not necessarily relevant to stakeholders. The International Integrated Reporting Council (IIRC) is calling for a shift in thinking more to the long term, to think beyond what can be measured in quantitative terms and to think about how the entity creates value for its owners” the statement concluded.

Required: Discuss the principles and key components of the IIRC’s Framework, and any concerns which could impede the Framework’s suitability for assessing the prospects of an entity.

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.

  • 5 Marks

CR – Nov 2016 – L3 – Q5e – Other information in the annual report

Discuss the development of integrated reporting from social and environmental reporting.

Integrated reporting advances the proposition that sustainability reporting and financial
reporting are inherently linked and thus would benefit from merging.
Required:
Discuss how integrated reporting has developed from social and environmental reporting.

Integrated reporting has evolved from the earlier practices of social and environmental reporting. These reporting frameworks have developed over time as companies have increasingly recognized the importance of disclosing the impact of their operations beyond just financial results.

  1. Social and Environmental Reporting:
    • This type of reporting first emerged as companies started to disclose information about their impact on the community and the environment. Social reporting includes disclosures related to community support, charitable programs, and employee-related social initiatives. Environmental reporting includes disclosures about pollution controls, recycling efforts, and energy consumption.
  2. Sustainability Reporting:
    • As the concepts of corporate responsibility matured, social and environmental reporting expanded into sustainability reporting. Sustainability reporting goes beyond disclosing current impacts by assessing whether the operations of an organization are sustainable into the future. It covers economic, environmental, social, and governance (ESG) aspects, focusing on a company’s ability to operate long-term without depleting resources or negatively impacting its stakeholders.
  3. Integrated Reporting:
    • Integrated reporting has taken sustainability reporting a step further by linking sustainability directly with financial performance. Integrated reporting, often referred to as “triple bottom line” reporting (Profit, Planet, and People), combines financial results with information on environmental and social impacts, showing how these areas contribute to a company’s long-term value creation. Integrated reporting reflects the idea that a company’s financial health is intertwined with its social and environmental performance.

Conclusion:

Integrated reporting has evolved from basic social and environmental reporting to encompass a broader perspective that ties sustainability directly to a company’s financial strategies and long-term success.

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