Integrated Reporting

1 Introduction

In this chapter we will explain what is meant by Integrated Reporting and briefly outline the three fundamental concepts of Integrated Reporting, and the principles and content elements of an integrated report.

YouTube videoLoad YouTube video

2 What is Integrated Reporting

Current financial reporting looks just at past financial performance — the Statement of Profit or Loss reporting the profit for the past year, and the Statement of Financial Position reporting the assets and liabilities at the end of the year.

Integrated reporting will certainly include financial reports, but includes other features which attempt to benefit all stakeholders interested in the ability of the organisation to create value in the future.

The IR Framework defines an integrated report as 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. It is aimed mainly at the providers of financial capital (shareholders and lenders), but is useful to all stakeholders — employees, customers, suppliers, local communities and others.

Why is it needed? Financial statements:

• look back at the past year, while users are more interested in how the business will do in the future;

• report only financial amounts, and leave out many things that drive future value, such as the skills of the workforce, relationships with customers and the effect on the environment; and

• do not explain the strategy, the risks and how the parts of the business fit together.

Preparing an integrated report also encourages integrated thinking: managers consider the connections between the organisation’s activities and all the capitals it uses and affects, rather than looking at profit alone.

The IR Framework was issued by the International Integrated Reporting Council (IIRC). The IIRC later merged into the Value Reporting Foundation, which became part of the IFRS Foundation in 2022, so the IR Framework is now maintained by the IFRS Foundation. The Foundation’s International Sustainability Standards Board (Chapter 22) issues sustainability disclosure standards such as IFRS S1 and IFRS S2, which build on the same ideas but are not part of BA3.

You cannot be required to prepare an Integrated Report, but you should be aware of the three fundamental concepts, and of the Guiding Principles and Content Elements in sections 6 and 7.

3 Fundamental concept: Value Creation

Traditionally the value of a business has looked at the current financial value and compared with previous years. Integrated Reporting looks at the ability of the business to use its resources to increase value in the future both for the business itself and for all stakeholders.

For example, employees are stakeholders in the company, and salary payments create value for the employees.

A company involved in drilling for oil will depend on the amount of the natural resource (i.e. oil) available in the future for future profits.

Value is created for the organisation itself (which leads to financial returns for its shareholders and lenders) and for others — employees, customers, suppliers, communities and society at large. The two are linked: a business that destroys value for others, for example by damaging the environment or losing its customers’ trust, will usually find its own value falling too.

4 Fundamental concept: The Capitals

‘Capitals’ is the term used for the resources and relationships used and affected by the organisation in its business activities.

The International Integrated Reporting Council suggested six distinct but interrelated capitals:

Only some of these appear in the statement of financial position (for example, buildings and equipment, and some patents). Many — staff skills, customer loyalty, the environment — do not, which is one reason why financial statements alone do not show the whole picture.

5 Fundamental concept: The Value Creation Process

The value creation process shows how the organisation turns the capitals into value:

Having identified the capitals that are relevant to the business and how they impact on the business, the organisation needs a strategy for achieving its objectives, needs to continuously monitor the capitals in order to maximise opportunities, needs to set up measuring systems to provide information, and needs to report on the elements to the stakeholders in the Integrated Report.

6 Guiding Principles

The IR Framework sets out seven Guiding Principles that decide how the report is prepared and presented:

7 Content Elements

An integrated report should include eight Content Elements, each answering a question:

8 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.