Deloitte UK national head of accounting Veronica Poole shares her views on the current state of corporate reporting.
Annual reports are getting longer, running to hundreds of pages with significant time and effort invested in the front half of reports. But, the story of an organisation’s value proposition can often be lost in all that information. As a result, investor demands for more succinct, but comprehensive information, have grown significantly, leading to a number of initiatives to transform corporate reporting as it is known today.
One such initiative, at an international level, is the emergence of the integrated reporting framework, as established by the International Integrated Reporting Council. This framework has been hailed by some as the next step in the evolution of corporate reporting to ensure it is fit for purpose in the 21st century.
As defined in that framework, an integrated report is a concise communication about how an organisation’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. These factors may not be purely financial or manufactured capital, but could include information about a company’s human, intellectual, natural, or relationship capitals.
There are two main building blocks of an integrated report: guiding principles and content elements. The guiding principles underpin the preparation of an integrated report, informing the content and how the information is presented. The content elements are the key categories of information required to be included in an integrated report under the framework. Here, the framework asks companies to consider the answers to questions about the content elements to determine what to include in their integrated reports, rather than set out a prescriptive list of disclosures for companies to provide.
Looking specifically at the guiding principles, there are seven different aspects to consider:
- Strategic focus and future orientation: insight is provided into the organisation’s strategy.
- Connectivity of information: showing a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation’s ability to create value over time.
- Stakeholder relationships: detail about the nature and quality of the organisation’s relationships with its key stakeholders.
- Materiality: disclosing information about matters that substantively affect the organisation’s ability to create value over the short, medium and long-term.
- Conciseness: sufficient context to understand the organisation’s strategy, governance and prospects without being burdened by less relevant information.
- Reliability and completeness: including all material matters, both positive and negative, in a balanced way and without material error.
- Consistency and comparability: ensuring consistency over time and enabling comparisons with other organisations.
From a content perspective, there are eight questions for companies to answer in their integrated report:
- Organisational overview and external environment: what does the organisation do and what are the circumstances under which it operates?
- Governance: how does an organisation’s governance structure support its ability to create value in the short, medium and long term?
- Business model: what is the organisation’s model?
- Risks and opportunities: what are the specific risks and opportunities that affect the organisation’s ability to create value over the short, medium and long term, and how is the organisation dealing with them?
- Strategy and resource allocation: where does the organisation want to go and how does it intend to get there?
- Performance: to what extent has the organisation achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
- Outlook: what challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
- Basis of preparation and presentation: how does the organisation determine what matters to include in the integrated report and how are such matters qualified or evaluated
The framework also emphasises that integrated reporting should be a process founded on integrated thinking. It encourages an entity to break down thinking in silos and to review its internal data set and processes. Here, they should consider whether its business incorporates the broader spectrum of factors, human, natural and social that affect its long-term value proposition into its decision-making. Ideally, an integrated report would simply be a point in time output of an ongoing, dynamic, internal integrated reporting process. And an integrated report would be the entity’s primary means of regular, timely dialogue with its providers of financial capital and other stakeholders, enabling them to look at the company through the door of an integrated strategy.
Clearly flexibility for management to tell the story of their business, as they see it, is important. In addition, no two companies are the same and will, of course, have different factors affecting their performance. The framework is principles-based hence provides flexibility for businesses to evaluate and discuss all aspects of their value creation story and prospects.
In turn, investors and other users of financial statements will have access to a full and strategic picture of the organisation, including an assessment of its future prospects. This is a positive step change for corporate reporting. Companies should view these changes not as an additional compliance burden, but an opportunity for building and maintaining trust with investors and the wider capital markets.
This is an initiative that is gaining traction in different parts of the world. Here is a flavour of take-up and interest around the world:
- Companies listed on the Johannesburg Stock Exchange (JSE) are in their fourth year of Integrated Reporting, following the principles of the King Code of Governance of 2009 (King III) that recommend Integrated Reporting. The Integrated Reporting Committee (IRC) of South Africa recently endorsed the IIRC’s December 2013 international <IR> Framework which will now become the integrated reporting guide for JSE-listed companies.
- In the UK, the Companies Act Strategic Report and Directors’ report regulations 2013 introduced a requirement for companies to prepare a strategic report, the contents of which, for a quoted company, overlap significantly with the requirements for an integrated report. The UK’s Financial Reporting Council’s draft guidance on preparation of the strategic report references the IIRC’s framework, noting that it and the Framework share similar qualitative characteristics and content.
- In India, the Confederation of Indian Industry (CII) and the IIRC are establishing a partnership that will see the introduction of an Indian ‘<IR> Lab’, an inclusive, market-led network of stakeholders aimed at accelerating the evolution of corporate reporting in India.
- In Singapore, the Singapore Accountancy Commission (SAC) and the Institute of Singapore Chartered Accountants (ISCA) have included Integrated Reporting as one of their key work plans.
- More than 100 businesses are participating in the IIRC’s pilot programme for integrated reporting and trialling its concepts. The <IR> pilot programme operates in over 25 countries, 16 of which are members of the G20, the group of nations focused on strengthening the global economy. It is hoped that the framework will be used to accelerate the adoption of IR across the world.
- Businesses participating in the <IR> Pilot Programme include Deutsche Bank, HSBC, Hyundai Engineering and Construction, Microsoft, National Australia Bank, PepsiCo, Tata Steel and Unilever. Investor Pilot Programme participants include AMP, Blackrock, Government Employees Pension Fund of South Africa, Goldman Sachs, Groupama, ING, Natixis, Norges Bank, Nissay (of Nippon) and State Street Global Advisors.