Definition & explanation of IR
The integrated reporting model is an alternative to the traditional model of financial reporting which is mainly based on historical costs, economic events and focusses in the short term. The purpose of this alternative is to provide information of the business from an integrated and provide a view of the company as a whole, commonly called “the big picture”, and focusses on the ability of the business or organization to create value in the long term.
The IIRC defines Integrated reporting as “a concise communication about how an organization’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 creation of value does not depend on one company or organization, this reporting model explains how the business is affected by the external environment, the relationship with stakeholders and its alternatives resources (such as financial, manufactured, intellectual, human, social and relationship, and natural).
Justification & drivers of IR & problems with traditional reporting
Traditionally, the set of a financial and annual report have been considered as traditional corporative reporting. One report contained financial information and the other non-financial information, which affects the performance of the company. (Jensen and Berg, 2012).
However, although these reports were supposed to provide with a complete and reliable understanding of the activity of a business, the reality was different. The information disclosed was insufficient, disorganized and it is just provided for shareholders, when it is relevant for the stakeholders in general.
In 2015 the ACCA carried out a studio and concluded that investors state that;
1) “A link is missing between current reporting, business strategy and risk, and we do not believe that sufficient information is provided to assess financial health”
2) “Current non-financial reporting is not sufficiently relevant, and non-financial information should be better integrated with financial information.”
3) “Qualitative policy statements are important to assess financial materiality, but quantitative key performance indicators (KPIs) are viewed as essential.”
4) “Accountability mechanisms should be part of non-financial reporting, either through new board oversight mechanisms, third-party assurance and/or shareholder approval at annual general meetings.”
In other words, stakeholders consider that they are not provided with high quality information about the risks, strategies, and the situation of the company. The non-financial information which affects directly to the performance of the company, it is not provided with the financial one, which is essential to take managerial decisions or to be fully aware of the strategy of the company and its potential and present risks for the business.
Stakeholders are interested to know about the performance of the company and how it is affecting the community in social and sustainable terms. IR also considers how environmental factors will impact the financial position of the company.
In general, the level of complexity in the business world has been increasing over decades and it is represented in financial reporting. We have as example the structure of the financial balance of companies. Nowadays Intangible assets are the main assets of a balance, as the exercise says, around 80% of the value of a company is typically in intangible assets. Financial corporative reporting is ambiguous and does not fit the purpose of inform about the performance of a business anymore. Traditional metrics for measuring value and economic progress no longer provide a complete picture. (Mark Vaessen and Oliver Tant, 2012)
“… Finally, the traditional model, rooted in financial information, is shown to be incomplete and partial when set against the broad range of financial and nonfinancial performance measures now widely accepted as useful indicators of corporate success.” (Beattie, 2000)
Integrated reporting brings solutions for stakeholders, it consists in a single report which includes financial and nonfinancial information, also explains the relationship between them in a coordinated, sustainable, and transparent way. (Mohammad Enamul Hoque, 2016) This model of reporting will give stakeholders a first impression of the company and its activities, giving reputation, trust, and also financial benefits for all the parties involved. (Serafeim, 2015)
According to this, in 2010, the “International Integrating Reporting Council” creates a framework for the integrating reporting with the aim of helping businesses to have a format to follow. It is a format of one report, which gives a concise indication of the concerns and performance indicators for stakeholders. (IRRC, 2015).
Integrated reporting can bring many benefits for a company, but specifically can integrate report for sustainability and corporate social responsibility reporting, it also improves the participation of stakeholders in the process and integrated thinking may lead to changes in corporate behaviour as well as for improving reputation and efficiency. (no me acuerdo)
Thus, Eccles & Krzus stated that there are two reasons of adopting one reporting style which includes financial and non-financial information; (Eccles & Krzus, 2010, p. 146)
1) When a company creates a sustainable strategy is when takes sustainability seriously. By doing this, there is a need for ensuring sustainability society as companies are responding to risks and opportunities.
2) Easier method of reporting for stakeholders and considered as essential to enhancing corporate disclosure and transparency.
IR EFFECTIVE REPORTING ITEMS.
The IIRC, 2011 stats It makes visible an organization’s use of and dependence on different resources and relationships or ‘capitals’ (financial, manufactured, human, intellectual, natural and social), and the organization’s access to and impact on them. Reporting this information is critical to: • a meaningful assessment of the long-term viability of the organization’s business model and strategy; • meeting the information needs of investors and other stakeholders; and • ultimately, the effective allocation of scarce resources.”
The IRRC defines capital as “any store of value that an organization can use in the production of goods or services” (IRRC). So, to report in an effective way, there should be a linked analysis of all the capitals that are being used in a company. As it was said before, to get a proper knowledge of the company and its potential for future success there is a need for understanding the sources that the business has and how they are planned to be combined in the future, so they can be used to achieve corporate goals.
There are seven types of capitals that an integrated reported should count with.
Financial capital expresses the financial resources available in an organization. This information should give details of the availability of the capital that the company has indeed but also, how the organisation uses it in the production and the provision for the future.
Manufactured capital is essentially manufactured physical objects, which are different from natural physical objects. The utilization of these objects allows the company to operate, creates goods and delivering services. Some examples of these objects are equipment, buildings, technology machinery or infrastructures (ports, plants, roads, bridges, etc).
Social and relationship capitals are resources which refers to the relationships between a corporation and the stakeholders. These relations cover commercial relations with customers, suppliers, supply partners, public organizations or corporative partners. All these interest groups might affect a corporate activity and the capacity of sharing the information of the relations with them will help the performance of the company and the pluralist well-being. Some examples of these capitals are
Human capitals can be described as the abilities, compromise, and motivation of the professional members that are collaborating on an organization. The well-going of a company is linked to the performance of the management team and how managers lead. Depending on how well the management team treats the subordinates and care about the motivations of the professionals the better the performance, efficiency, and reputation of the company will be.
Natural capitals; these resources are the base and connection for the financial and social system. They are consumables, limited and they cannot be replaced. Also, they are divided into renewables and non-renewables, and some examples are; minerals, air, land, minerals, forests, and water together with biodiversity and ecosystem health. In an integrated report there should be information of how an organization depends on these natural resources and how its actions impact on them and in the environment in general.
Intelligent capitals; this type of capital has the purpose of giving value to the organization and nowadays there are no standards to measure them. However, very often they are not part of a balance sheet and as there is no proof of its real value. They are determined as intangible assets and comprise the assets relating to the brand and the reputation.
Intelligent capitals; this type of capital has the purpose of giving value to the organization and nowadays there are no standards to measure them. However, often they are not part of a balance sheet as it is very difficult to value them and demonstrate its real value. They are determined as intangible assets and comprise the assets relating to the brand and the reputation. Specifically, some of them are organizational capital (protocols, knowledge of procedures or systems) and intellectual property assets (software, licenses, patents, copyrights, rights, etc). In those case, where they are not reflected, the accounting could be considered not complete and nonreal. As the exercise said before, nowadays the intangibles assets make around 80% of the value of an organization. It those cases, when these assets are not reflected, there would be a big gap between the financial data and the real market value.
MAIN POINTS OF THE FRAMEWORK
The framework provided by the IRRC does not specify how this model report should be realized. This specification could be relevant, as a global structure would be very useful to compare and determinate the performance of a company. The framework will identify the information needed to be included in the Integrated Report. This information will be necessary in order to measure the ability to create value in the organization. Furthermore, the framework establishes that although is more focused on the private sector (organizations of any size with lucrative purposes) it can be usefully applied to non-lucrative organizations and public organisms.
Therefore, there are indications about what should be included in the content and the principles that organizations should follow.
The Framework establishes that the Integrated Report must include information about;
Organizational Overview and External Environment; this part of the report mentions the circumstances and conditions in which the organization is performing its activity. Moreover, the organization provides and expresses its values, culture, market positioning, ethics, ownership, principal activities, operating structure, etc. In other words, the organization expresses its vision and mission. Additionally, it must include factors which affect the organization from the external environment, such as regulatory and economic circumstances, advances in technologic, environments factors, or social issues.
Governance refers to the information provided by the organization about how it is organized, the variety of diversity and capabilities that it counts with, salaries and remunerations, the behavior while facing a risk and the monitoring of its activities. The question that this governance section should answer is; How does the structure of the organization support its ability to create value in the present and future?
Business Model; It considers the performance of an organization, providing information in details of how the inputs are transformed into outputs. It also includes the goals of the organization for strategic purposes and how it influences the value creation of the company.
Risks and Opportunities; the Integrated Reporting also identifies the risk and the opportunities for an organization, how their performance could avoid those risk, or how mitigate the impact they could have in the business and how could take advantage of the opportunities.
Strategy and resource allocation; it includes all the information regarding the actual position of the business in the market, how organizes its resources and the most important where it wants to be in the future. It informs about the resources that the business will use and its strategic objectives (for the short, medium, and long-term) which help the organization to achieve its goals.
Performance; it includes qualitative and quantitative figures which help to an organization to control the performance of the company with the aim of review the progress.
Outlook; he company informs also about the external environment, how the current and possible conditions can present risks and opportunities.
That debate creates an understanding of the sector to the stakeholders. Then, as they have the necessary information, they are able to evaluate the situation and position to mitigate or avoid risks, and also to manage expectations.
The framework also gives the bases of preparation, saying that some elements should be included; the first one is a summary of the materiality determination process, this one assesses how the capitals are prioritized, identified and reviewed; the second one it is a summary of methods, theories, and frameworks of how the material matters have been quantified of assessed; and the third one should reflect the limitation of the information presented.
To sum, the framework tries to explain that an integrated report must explain the entity’s interrelated social, financial, environmental, and corporate governance information. The resulting document of the integrated reporting needs to be consistent, clear, and concise, giving a real perspective on the market and fitting stakeholders needs.
As it has been said before, the IIRC does not provide in the Integrated Reporting Framework the structure of the resulting document, but gives information about what content should be detailed and a set of guiding principles which must been considered in the elaboration of the report.
The principles to consider are; strategic focus and future orientation (the company has to provide to insight of its strategy )