Integrated reporting – what does it do for IFRS?

In a recent post, I wrote a little bit about the integrated reporting (<IR>, as it styles itself) initiative, very much from the perspective of someone dipping an initial toe into the water. I mentioned that the initiative’s website contains samples of reports prepared with reference to the <IR> framework, and it’s interesting from many perspectives to look at some of these. Not least in how it emphasizes that while integrated reporting might mean a step forward for many aspects of corporate reporting, it wouldn’t necessarily transform the relative visibility and perceived necessity of the IFRS-compliant statements.

Take for example the 2015 report of Tsogo Sun Holdings Limited, apparently ranked as the “first place” report for that year by some criterion. This is “southern Africa’s premier gaming, hotel and entertainment group,” with over 90 hotels in the region. The report reflects South African regulatory requirements as well as the <IR> framework, and while the core financial information it contains has been prepared in accordance with IFRS, it doesn’t provide the IFRS statements themselves. Instead, it contains summarized consolidated financial statements, with the following commentary:

  • “The accounting policies applied in the preparation of the audited consolidated financial statements, from which the summarised consolidated financial statements were derived, are in terms of IFRS and are consistent with the accounting policies applied in the preparation of the previous audited consolidated financial statements other than as mentioned below. The summarised consolidated annual financial statements should be read in conjunction with the audited annual financial statements for the year ended 31 March 2015 which were approved by the board on 30 July 2015 and are available online or can be requested directly from the Company Secretary.
  • The summarised consolidated annual financial statements are extracted from audited information, but are not themselves audited. The unmodified audit report of PricewaterhouseCoopers Inc., the independent auditors, on the consolidated and separate company annual financial statements for the year ended 31 March 2015, dated 30 July 2015, is available for inspection at the registered office of the company and is included in the audited annual financial statements available online.”

The summarized statements come with just two pages of notes, briefly addressing the one significant accounting policy change during the period, a business acquisition, a couple of aspects of financial instruments, an explanation of segment information, and capital commitments. Otherwise they provide the basic financial statements required by IAS 1, along with supplementary information reconciling IFRS earnings to “headline earnings” and to other adjusted measures used elsewhere in the document. The report’s discussion of performance focuses solely on these other measures. So in other words, the IFRS-compliant information receives two levels of demotion here. Although the report includes the key elements of the statements, they’re given significantly less prominence than the adjusted measures (including an “EBITDAR” measure that in 2015 adds back twelve separate expense categories to the “operating profit” shown on the IFRS income statement). And while the report certainly informs a reader how he or she can access the full IFRS financial statements elsewhere, their non-inclusion surely suggests the company doesn’t think they’re fundamental to obtaining (in the words of the report) “financial, economic, social and environmental performance on matters material to our strategy, our ability to create and sustain value and of interest to our key stakeholders.” After all, the report’s already 100 pages long without them.

Other <IR> reports take different approaches. Another sample on the website, that of Pretoria Portland Cement Company, also contains summarized rather than full financial statements – in that instance though they include twenty notes rather than six, apparently deploying a somewhat less rigorous concept of summarization. Other examples, such as that of Asahi Group Holdings, Ltd., don’t even contain formal summarized statements, providing only highlights and five-year summaries. And then you have the report of Schiphol, which does include the full IFRS statements. So it looks like just about anything goes.

But that surely can’t be a satisfactory state of affairs. Even if the differences partly reflect local regulations and practices, the collective implication is that IFRS is little more than an optional extra in the world of integrated reporting, something that might help pump it up in some respects, but isn’t crucial to the assessments of many engaged investors. And the Tsogo example suggests that in a world where <IR> gains prominence and acceptance, as it surely aspires to, warnings about the limitations of non-GAAP measures might find even fewer receptive ears than they do now. Even if some additional specialized audience exists for the full financial statements, one might fairly ask on the basis of this sample whether that audience is large enough to justify the significant cost of the exercise. Of course, versions of these questions have swirled around financial statements for years, perhaps essentially for as long as they’ve existed, but it can’t be encouraging to see that the potential great leap forward of <IR> only gives them new life, rather than contributing to lay them to rest…

The opinions expressed are solely those of the author

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