In this report, the scope covers the six capital approach, role of accounting profession in value creation demonstration based on the six capital approach, critically evaluated IR produced by the organization on the basis of the six capitals approach and offering a way forward solution calling on organizations to adopt the six capitals approach.
Six Capitals Approach
The primary goal of the integrated report is to explicate to the providers of the financial capital how the organization creates the value over a period. The proven best means to achieve this is via a merger of both qualitative and quantitative information, and this is where the six capitals approach is ushered (Bengoa, Martínez-San Román & Pérez, 2017). These capitals describe the value of stocks which are affected as well as transformed by the activities alongside outputs of the organization. This framework classifies these capital as financial, intellectual, manufactured, human, natural as well as social and relationship. Crossways the stated six categories, each form of capital used by the organization or affects the organization is taken into careful consideration. A business model of an organization draws on several capital inputs and indicates how its particular activities transform them into the desired outputs (Garanina et al., 2017).
The business’ perceived value no longer lies only in its assets. The globe is altering, and the understanding of value has extended to include diverse capitals, vastly categorized as above. Efficiently management and reporting of such capital is the investment in the in the reputation of the business as well as the long-run sustainability (Chen & Plotnikova, 2017). Reporting on the diverse capitals is comparatively novel, and the metrics as well as narrative which permit meaningful reporting on such manifold capitals are fast developing. Both natural and social capitals are not as understood comprehensively as the financial and human capitals, for instance, and they are more probably to remain managed ineffectively (Fasan & Mio, 2017).
Setting Strategy: A shared value approach undertakes the assessment of both negative and positive impacts of the decisions of the business, outside of merely generating a profit. The business must set a strategy to report on the shared value crossways such novel capitals. This strategy will speaks to all the six capitals. The business will further need to set initiatives for the implementation of such a strategy. It will also monitor the results of individual initiative crossways the six capitals. The business will only achieve these with a management system in place (Suh, 2017).
The social as well as natural capital values of the business remain increasingly challenging to quantify than the financial value, and, hence, more hard to manage. The impacts of such capitals alongside their values never instantly precise and have long-run consequences, that directly affect the reputation as well as long-run sustainability of the organization. The social as well as natural capitals, characteristically, are unhealthily managed. This is due to their inability to have efficient system of management in place such the Human Resource and ERP (Zhou, Simnett & Green, 2017).
Return on Investment: The leaders of the business have usually known that short-run profits do not translate into the long-run value. This is further more appropriate with the inclusion of the other 5 capitals. The implementation of the contextual management systems that consider the six capitals model increasingly make sense from the capital spending viewpoint. The healthier the business manages all the six capitals, the healthier investors shall entrust their capital with the business (Krasilnikov et al., 2017). More investment in the business implies greater long-run sustainability.
The implementation of decent systems of management for these six capitals enhances the reputation of the business and culminates to greater investment. This will enhance the market value of the business as well as the long-run sustainability, establishing a positive feedback loop. The healthier one manages the six capitals; the healthier investors shall entrust the business with their respective capital. More investment in the business implies the greater long-run sustainability. By comprehending the substantial risks inherent in each of the six capital, one can initiate enhancement, and report on the business progress (Papadopoulos et al., 2018).
Management Systems: An efficient systems of management must be connected to all areas which contribute to the sustainability into the material risks of the business. Via the examination of the business material risks from the six-capital viewpoint, the leadership can effortlessly recognize these previously intangible risk, allowing the management team to undertake plan, implement as well as monitor the enhancement of the initiatives. The leadership shall be able to measure performance of such initiatives as well as their respective impact on such business (Ingold, 2017).
The six-capital model as well as the integrated reporting remain not novel but the inclusion of such in GRC systems of management is newfangled. The business requires a real-time reporting for the management of diverse capital indicators. At the point such an information manifests in the annual report, it becomes dated as well as effective. The business is unable to measure multiple capital outcomes as well as shared value from these conventional ERP as well as HR systems of management. Further, the business require the agile GRC management solution for the management of these processes, otherwise the organization value outdoor of the financial indicator merely implies theoretical.
Accounting Profession Role
This section details the role of accounting profession in the provision of the demonstration of value creation (or diminution) on the basis of the six capitals. The GRI has augmented the role of accounting profession by pioneering a form of the triple bottom line reporting that emphasizes on the disclosures on the social, environmental alongside economic performance as well as more lately, on the process and governance disclosures (Sinnewe, 2017). The GRI’s work has ensured that accountants provide both tools including a robust set of the indicators developed via the extensive international stockholders engagement course alongside the impetus for the augmented corporate accountability for the undesirable influences, previously invisible.
The accountants are currently shifting emphasis to the value created by subsequently identifying five types of sustainable capital from where the commodities are drawn and to improve the quality of the people’s lives. The Sigma Projects in 2003 saw the five capitals including natural, human, social, financial and manufactured as the means of improvement of the accountability in a manner that builds on the triple line mechanism (Ingold, 2017).
Accountants currently use the above five capitals model making it easily feasible to overcome certain weaknesses in triple bottom line concept, for instance, the temptation to trade off the environmental, social and economic factors where they remained equal where the environmental integrity remains really a prerequisite for the economy and society and is able to be treated in the isolation from each other when in fact they are usually interconnected (Ingold, 2017).
Through the IIRC, the accountants have drawn on as well as acknowledged this beforehand work recognizing the above six capital. The accountants have henceforth been able to understand that quantitative indicators including KPIs alongside certain monetised metrics, remains very significant in the explanation of the business’ usage of as well as effects of diverse capitals.
This is essentially true in cases KPIs remain independently “integrated” in a way that displays the relationships amidst two or additional capitals. Nonetheless, the significance of these metrics, it is never regarded necessary for the Framework to prescribe particular metrics or measurement mechanisms to be utilized in the integrated report. Instead, it is held that IIRC needs to complement, instead of duplicating, such substance developed by the created reporting standards setters alongside the industry bodies.
The accountants now have useful metrics saves to the IIRC pilot firms reports that effectively recommends the particular database of metrics to be developed, especially including the ones demonstrating the correlations between two or additional capitals. Of course telling the value creation narrative around these multiple six capitals goes beyond metrics requirements, but accountants use the GRI indicators to inform their respective approach. The accountants have used (i) stewardship of the human capitals, natural capital, and social and relationship capital alongside (ii) reporting on such capitals in terms of the IIRC’s International IR Framework to showcase the value creation (Reimsbach, Hahn & Gürtürk, 2017).
Challenges Identification In Process
The approach of the six approach is quite challenging to the corporate boards and CFOs. This is because these people have tended to: privilege information that can be easily quantified-favourably in term of money; emphasise on short-run; and, negate the influence which value creation as well depletion of certain capitals can have on the long-run success of the business. All has to change for the businesses that wish to be around in the long-run (Katsikas, Rossi & Orelli, 2017).
This is because explicit acknowledgment in the Capitals Background Paper for the IR is consented to that certain impacts on these capitals can solely be reported on the narrative basis. This is because it brings to the limelight the recognition that business rely on all the six capitals, and not merely the financial one, for success (Reimsbach, Hahn & Gürtürk, 2017). The value is also subjective and impacts on capitals is judged separately by the stakeholders. The business has to recognize the impacts of the firms on the non-renewable capital alongside their respective implication for the organizational risk, future costs as well as long-term success.
Critical Evaluation Of An Integrated Report
This looks at the critical appraisal of the Integrated Report (IR) generated by a firm in creating (or diminishing) value based on six capitals. The IR is an evolution of the corporate reporting, with the emphasis on the conciseness, strategic relevance as well as future orientation. It also focuses on the improvement of the quality of the info contained in the eventual report, (IR) makes the process of reporting process individually more productive, leading to tangible gains. The IR needs as well as brings about the integrated thinking, allowing a healthier comprehension of the variables which materially impact a business’ ability to establish value of the period. This can culminate in to behavioural alterations as well as enhancement in the performance via the organization (Pandit, Conway & Baker, 2017).
As outlined in the IR Framework, the IR remains a concise communication relating to how the business’ strategy, performance, governance and prospects, in the setting of its outdoor environment, result in the creation of the value in long-, short- and medium term. The Framework allows the business to bring such elements together via the concept of connectivity of info to best tell the value creation narrative of the organization. The IR has been established for any given business which wishes to adopt the integrated thinking as well as progress their corporate reporting.
The business have reported a breakthrough in the comprehension of value creation, greater collaboration within the teams, more informed decision making as well as positive influences on the relations of the stakeholders. For the organization or the stockholders with interests in the actual world instances and practical advice relating to the journey towards IR, networks have been created to share the learning as well as the experiences (Barasa et al., 2017).
The paper has discussed the six capitals approach that is taking a centre stage in accounting. The approach defines these six capitals as the financial-, manufacturing-, human-, social and relationship-, intellectual-, and natural capital. The report has described natural capital as that which avails the environment upon which the rest of the capital sit. The approach has extensively changed the CFOs and Corporate Boards thinking. The paper is summarized with a call to action that solely organization that agree to take the challenge and in turn alter the way they think about their respective relationship with the capitals as well as the interrelationships between them will succeed. It has been shown that by using the six capitals alongside the Integrated Reporting, organizations can positively change the way they think about their relationship with capital and interrelationships between them hence prospering. The six capital will positively change how the CFO think and hence will lead to better management of business as both non-financial and financial capitals are taken into consideration which promotes even the corporate social responsibility thereby boosting the image of the organization. The six capital approach model has been designed to unlock new opportunities consistently that is underpinned with the innovative processes as well as technologies for risk reduction.
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