Integrated Reporting
1 Introduction
Integrated reporting (IR) has been developed and promoted by the International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard setters, the accounting profession and non-governmental organisations. IR has been introduced to many ACCA professional level syllabuses.
Note that the IR framework is principles-based with the aim of achieving a balance between flexibility and prescribing strict headings and contents.
2 Relevance to the SBL paper
You will see that IR has many elements which easily relate to SBL
The definitions of IR is:
A concise communication of an organisation’s strategy, governance and performance.
Demonstrates the links between its financial performance and its wider social, environmental and economic context.
Show how organisations create value over the short, medium and long term,
Its aim is to:
Enable more effective decision-making at board level.
Improve the information available to investors.
Encourage more integrated thinking and business practices.
It is useful to imagine yourself investigating a company about which you know nothing to decide whether or not you want to invest in it. Going to the latest annual report and financial statements would probably be your starting point, but you will be left with many unanswered questions – certainly if the company shows the minimum information required by law and the accounting and financial reporting standards. You will learn relatively little about the company’s business activities (though segmental reporting helps), their competitors, their future plans or how they intend to achieve sustainable competitive advantage. IR aims to fill the gaps so that existing or prospective investors better understand the company.
The following IR Content Elements are particularly relevant to SBL:
Organisational overview and the external environment. What does the organisation do and what is the environment in which it operates?
Opportunities and risks. What are the key opportunities and risks and how do they affect the organisation’s ability to create long-term value?
Strategy and resource allocation. Where is the organisation headed and how will it get there?
Business model. What is the business model (how does it make money) and is this resilient?
Future outlook. What are the challenges and uncertainties that are likely and how could these impact on strategy?
Performance. How is this measured and how has the organisation performed?
Governance. What is the governance structure? Is it effective and fair to stakeholders?
Basis of preparation. How have items been measured and on what basis are they included in the integrated report?
3 The six capitals
Integrated reporting makes use of the concept of the ‘six capitals’. In other words, not just money is important. It says that an organisation can only build and sustain value if it manages the full range of capital. The capitals are:
Where a requirement asks for the six capitals, or for how an integrated report would show a proposal creating value, use all six of the capitals below as headings and say for each one what the value actually is — naming the capital and repeating the facts of the proposal underneath it is not an evaluation. Do not overlook manufactured capital: it is human-created production equipment and tools, so a service business that makes no product can still have it. Where an item does not sit neatly under one of the six, explain the value it creates and place it under the closest capital rather than leaving it out.
Financial
Financial capital is the pool of funds available to an organisation. Not only is it the cash it has but also potential borrowings or other sources of funds.
Manufactured
Manufactured capital is human-created, production-oriented equipment and tools.
Intellectual
Intellectual capital is of key importance to an organisation’s future earning potential. It is linked with investment in R&D, innovation, human resources and external relationships, which can determine the organisation’s competitive advantage. Also included here are brand and reputation.
Human
The knowledge, skills and experience of the company’s employees and managers, as they are relevant to the operations of the business. It includes competencies, tacit and implicit knowledge and attitudes.
Social and relationship
This is the collection of resources created by the relationships between an organisation and all its stakeholders such as customers, suppliers and government. A common feature of social and relationship capital is the trust upon which it is built
Natural capital
Natural capital includes resources, such as metal, water, minerals and oil, which can be used to provide a return. Also included is the capacity of the world’s carbon sinks – i.e., the air, forests and oceans – to neutralise or absorb the waste generated by economic activity.
Of course, just like conventional financial statements, integrated reports gain credibility if they are audited. However, whereas in financial statements the measurement and presentation of amounts are closely regulated and defined by accounting and reporting standards, many elements of integrated reporting have no equivalent standardisation.
For example, how can organisations reliably and consistently measure items such as social and relationship capital, human capital and intellectual capital? The haziness of measurement reduces the value of such reports and sets considerable challenges for the auditing process.
4 Environmental and sustainability accounting
4.1 Eco-Management and Audit Scheme (EMAS)
This is a management instrument developed by the European Commission for organisations to:
Evaluate
Report, and
Improve
their environmental performance.
The steps are:
Contact your local competent body (these are bodies set up or given responsibilities by local governments for EMAS implementation).
Conduct an initial environmental review of your organisation. This allows an initial assessment of environmental performance (for benchmarking) and the identification of direct and indirect environmental impacts. There are six core performance indicators in EMAS:
Energy efficiency
Material efficiency
Water
Waste
Biodiversity
Emissions
Define an environmental policy and environmental program. This can be in terms of SMART objectives (specific, measurable, achievable, realistic, time-bound).
Implement the environmental management system.
Check the effectiveness of the system through measurement and audit.
Aim for continuous improvement [steps 3,4,5,6 form a cycle].
Prepare the environmental report for stakeholders. This summarises the organisation’s achievements and progress towards best practice.
Have the EMS and the report verified. This is done by an independent accredited verifier.
Register for inclusion on the EMAS register by applying through competent body.
Use the EMAS registration to demonstrate to customer, suppliers and investors your commitment to environmental care and improvement
4.2 ISO 14000
ISO 14000 is a series of international standards on environmental management. The series provides:
Guidance on the development of environmental management systems.
General principles and specific guidance on environmental auditing.
Guidance for qualification criteria for environmental auditors.
Guidance on audit program review and assessment material.
Guidance on performance targets
Coverage of life-cycle issues.
ISO14000 are an integral part of EMAS. However, EMAS includes additional elements to support organisations to achieve continuous improvement in their environmental performance.
4.3 Triple bottom line accounting (3Ps)
This approach is an attempt to extend traditional accounting and reporting to incorporate information on social and environmental matters. It is often referred to as the “3P approach”: Profit, Planet and People.
Profit: nothing new here as this is the traditional reporting of financial performance.
Planet: deals with environmental and sustainability issues, sometimes known as the organisation’s environmental footprint. Metrics can include energy use, use of renewable energy, raw material and product kilometres (ie transportation), release of CO2, recycling, replacement of trees, release of effluent into rivers. Non-quantitative information can also be included, such as proclaiming ambitions to ensure production is sustainable and non-detrimental to the areas from which resources are obtained.
People: deals with social issues. Metrics can include reporting on the ethnic and gender composition of the work force, comparisons of the wages between different groups, health and safety, training, job security.