Integrated reporting – should you be taking an interest?

Many of us have probably heard the term “integrated reporting” here and there without thinking much about what it specifically refers to, or trying to find out more…

Until fairly recently, I was in that group myself. But I thought it might be useful to look at the concept (or “movement,” as it sometimes refers to itself) in this space from time to time.

The broad premise behind integrated reporting – which styles itself “<IR>” can likely be intuitively deduced from the name alone, that the current form of corporate reporting is festooned with gaps and absences, with many key areas such as risk and sustainability generally addressed only in a fragmented or piecemeal manner, if at all. <IR> “has been created to enhance accountability, stewardship and trust as well as to harness the information flow and transparency of business that technology has brought to the modern world. Providing investors with the information they need to make more effective capital allocation decisions will facilitate better long-term investment returns.”

An Integrated Report is “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 in the short, medium and long term.” A framework has been developed to govern the development of an integrated report, establishing the necessary governing principles and content elements. Here are the guiding principles in summary form:

  • Strategic focus and future orientation: An integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short, medium and long term, and to its use of and effects on the capitals
  • Connectivity of information: An integrated report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organization’s ability to create value over time
  • Stakeholder relationships: 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 legitimate needs and interests
  • Materiality: An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term
  • Conciseness: An integrated report should be concise
  • Reliability and completeness: An integrated report should include all material matters, both positive and negative, in a balanced way and without material error
  • Consistency and comparability: The information in an integrated report should be presented: (a) on a basis that is consistent over time; and (b) in a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time.

And the content elements:

  • Organizational overview and external environment: What does the organization do and what are the circumstances under which it operates?
  • Governance: How does the organization’s governance structure support its ability to create value in the short, medium and long term?
  • Business model: What is the organization’s business model?
  • Risks and opportunities: What are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how is the organization dealing with them?
  • Strategy and resource allocation: Where does the organization want to go and how does it intend to get there?
  • Performance: To what extent has the organization 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 organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
  • Basis of presentation: How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?

The website contains a plethora of resources, containing a sample of reports actually prepared under these principles (I don’t think there were any Canadian examples, although I may have overlooked something). So what’s the significance of this within a blog focusing on IFRS? Well, if nothing else, practitioners are wearily accustomed to the premise that the financial statements are too long and overly technical, and that much of what they contain goes largely unread. Although <IR> doesn’t specifically set out to address that issue, it could surely only help if the IFRS financial statements were presented in the context of an overall approach to reporting that made it easier to assess how they illuminate, or don’t, the key content elements set out above. And then, I’ve commented in the past (here for instance) on areas where the distinction between what’s addressed in the financial statements versus the MD&A seems unclear or arbitrary. Although <IR> can’t do anything in itself to address that either, it at least speaks to a desire to focus on the long-standing weaknesses in our disclosure practices, and so perhaps might with time and greater acceptance contribute to regulatory fixes down the road.

More on this in future posts…

The opinions expressed are solely those of the author

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