CPA AFR: INTEGRATED REPORTING
ADVANCED FINANCIAL REPORTING AND ANALYSIS
INTEGRATED REPORTING
What is integrated reporting and what are the benefits?
Integrated Reporting brings together material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It leads to a clear and concise articulation of your value creation story which is useful and relevant to all stakeholders.
But is not only about reporting; Integrated Reporting encompasses Integrated Thinking. It is as much about how companies do business and how they create value over the short, medium and long term as it is about how this value story is reported.
Therefore IR is a concise communication of an organization’s strategy, governance and performance which demonstrates the links between its financial performance and its wider social, environmental and economic context to create value over the short, medium and long term.
There are a multitude of benefits associated with Integrated Reporting – both within an organization and from an external perspective.
- Encouraging your organization to think in an integrated way
- Clearer articulation of strategy and business model
- A single report that is easy to access, clear and concise
- Creating value for stakeholders through identification and measurement of non-financial factors
- Linking of non-financial performance more directly to the business
- Better identification of risk and opportunities
- Improved internal processes leading to a better understanding of the business and improved decision making process.
The following are the Contents and elements of integrated report.
- Organizational overview and the external environment
- Opportunities and risks
- Strategy and resource allocation
- Business model
- Performance
- Future outlook
Organizational overview and the external environment
What does the organization aim to do? Who are the major stakeholders? Where is it located? How is it structured? What external events will affect if most?
Fairly obviously the organization’s mission and objectives, stakeholder analysis, organization chart and a PEST analysis would be relevant to this section of the IR.
Opportunities and risks
These must cover both internal and external matters. The traditional SWOT analysis usually categorises opportunities and threats (risks) as external, but it is essential to also look internally. A weakness (for example arising from gaps in new product development) is a risk to future revenues.
Similarly a strong brand name creates greater opportunities for future revenue streams. Historically, the board of companies would tend to emphasise a company’s opportunities, but investors cannot make an informed decision about an investment without an appreciation of the associated risk. Some risks can be quantified (for example, by expected values and sensitivity analysis) but it is unlikely that quantified amounts would appear in an IR. A qualitative indication should be provided about both internal and external risks. The report should also mention how the risks are being managed and mitigated.
Strategy and resource allocation
Does the organisation intend to develop new products, set up new factories or expand to new
markets? This section of the IR can make extensive use of Porter’s models, BCG matrix and the value chain. It would be valuable to investors to be told how their company is going to respond to these changes in the market, how much it might cost to achieve the new strategies and how this change will be managed effectively.
Business model
An organisation’s business model is ‘its system of transforming inputs, through its business
activities, into outputs and outcomes that aims to fulfil the organisation’s strategic purposes and create value over the short, medium and long term’ (IIRC). Many of the performance management models are particularly relevant here: for example, the value chain explicitly sets out inputs, processes and outputs and requires organisations to understand how value is added so that profits can be made. If a company does not understand where it adds value then the company is existing in a temporary state of good fortune. It is making profits now, but does not understand why, so chance of continued success must low.
Inputs are the major inputs such as raw material or human resources. Outputs are the key products and services. The business activities include not just the manufacturing process, but also how the company innovates, carries out its marketing, what its after-sales services are, how it delivers its goods and how it acquires, trains and retains staff.
Business process re-engineering, value-based management, activity-based management are also all methods that can influence an organisation’s business model.
Performance
This area of IR addresses how an organisation has performed against its strategy and what are its key outcomes. These outcomes can be internal or external – for example, revenue, cash flow, customer satisfaction, brand loyalty, environmental impacts, etc.
It is vital that the most appropriate performance indicators are chosen so that measurement of strategic goals is meaningful and that the value-adding activities of an organisation are identified and managed. It is also recognises the importance of reporting on non-financial, qualitative results.
Future outlook
An integrated report should answer the question: 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? (IIRC)
PEST and a five forces analysis are likely to be particularly relevant here. For example, if you were a stakeholder in a conventional television company you should want to know how the company will address challenges from internet-based companies such as Netflix.
Difference between integrated reporting and traditional financial reporting:
Integrated reporting is a new domain in accountancy that aims to enhance the scope of corporate reporting. Unlike traditional approach, integrated reporting attempts to report the value creation process of an organization. It refers that both financial as well as non-financial factors which are responsiblefor development of sustainable value addition for an organization. The framework of integrated reporting includes six capitals:
- Financial Capital
- Human Capital
- Manufactured Capital
- Intellectual Capital
- Social and Relationship Capital
- Natural Capital
Traditional financial reporting
This is the reporting of financial results and disclosures of a company to its stakeholders is known as ‘Financial Reporting’. It can be of two types; external financial reporting and internal financial reporting. External financial reporting is done by the publication of ‘financial statements’ and is governed by the international standards on accounting or generally accepted accounting principles. Internal financial reporting can be formulated in the way that best suits the management to make well-informed decisions.
The key difference between integrated reporting and traditional financial reporting are
- Relevant governing body:
Traditional financial reporting is governed by IFRS’s (International Financial Reporting Standards) which are issued by IASB (International Accounting Standards Board). These standards provide detailed guidelines about the recording, summarizing and presentation of financial results of an entity. Integrated reporting has been developed by the International Integrated Reporting Council (IIRC). IIRC is an international coalition of regulators, investors, firms and non-governmental organizations.
- Objective:
The main objective of ‘traditional financial reporting’ is to provide reports on structured information about the financial position and financial viability of an organization to the relevant stakeholders especially shareholders. These reports must be prepared in compliance with the relevant standards. However, the main focus of integrated reporting is to report on all aspects of an organization including financial reporting, sustainable reporting, management commentary and corporate governance in a single report. Additionally, integrated reporting emphasizes upon increased efficiency in corporate reporting by improving the standard of information available to investors of financial capital.
- Application and comparability:
Financial reporting is currently adopted by almost all industrialized countries. As these reports are prepared according to the international accounting standards, the results of these reports are comparable among organizations. This is because implementation of these standards promote common business language which could be interpreted and understood even in different jurisdictions. Integrated reporting is not being adopted on a global scale yet, especially in developing economies. One major reason for this is that organizations do not want to indulge their capital in such sectors of reporting which do not derive direct and tangible financial inflow.
- Organizational involvement:
Traditional financial reporting engages only those stakeholders that are important. The focus of traditional financial reporting is on the communication of financial matters of an organization. I ntegrated reporting aims to involve more stakeholders for greater collaboration amongst different facets of an organization.
This makes it viable for the organizational members of different departments to collude and achieve congruent strategic objective. Integrated Reporting prevails a sense of corporate social responsibility, because if the organization will engage society at large into its operation, not only society will be benefited but positive effects will reciprocate in terms of good reputation for the organization.
- Information:
The information gathered while traditional reporting of business transactions and for preparing financial statements of a company is mostly of financial nature. Therefore, the management of a company keeps an outdated approach and pay heed only to financial results of the company. These reports can only provide an orthodox analysis of financial dealings of the company while integrated reporting indulges other aspects like the environment in which the company is operating, the available resources a company etc.
Additionally, integrated reporting compels managers to not just rely on past data but to gather additional information about the business processes and future prospects of the organization. This incremental knowledge can enhance ways to exploit these resources or capitals in best possible manner to meet organizational goals.
Summary
A tabular comparison of integrated reporting and traditional financial reporting is given below:
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| Relevant Governing Body | ||||
| Is promoted by International Integrated Reporting Council. | Is governed by the International Accounting Standards Board. | |||
| Objective | ||||
| To improve the quality of information available to users of financial data and enable proactiveness in organizational cultures around the world. | To report the financial results of the company’s by preparing and publishing financial statements. | |||
| Application and Comparability | ||||
| Is increasingly being adopted worldwide by businesses. | Is practiced in almost all industrialized jurisdiction with common reporting standards. | |||
| Organizational Involvement | ||||
| Aims to engage all relevant stakeholders. | Is beneficial for shareholders and other interested | |||
| Information | ||||
| Focus on financial and non-financial information gathering. | ||||
