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Question:

Discuss about the Integrated Reporting Framework.
 
 

Answer:

Introduction

Integrated reporting is the need of the hour as it is an innovative approach that has provided a paramount advantage to the corporate reporting process.  With the due passage of time, the concept has gained paramount importance and it is a precise communication that is done considering the external environment and leads to the development of the value creation which is the major objective of the organization. The value creation pertains to the long-term as well as short-term. The creation of IR goes in favor of the process of accountability, trust and stewardship that harness the flow of information and transparency of business that is influenced by the presence of technology (Carol et. al, 2016). The investors need information so that the decision-making process goes in favor and enables them to create greater returns. The report lists the benefit associated with the process of integrated reporting and the benefits that can be accrued out of it.

Disadvantages of traditional corporate reporting

In relation to traditional reporting, it pursues several disadvantages that have played a key role in deteriorating its significance in the current scenario. Furthermore, these disadvantages can be assembled in various types namely complications, the absence of connectivity, and lack of progressive information.

Traditional corporate reporting with the due passage of time has become many problematic and longer. Complexity is involved and takes a lot of time that leads to a negative course of action. The reason behind this can be attributed towards an increase in business complications, thereby necessitating substantial and innovative reporting requirements. Moreover, this has made it more complicated for the users of financial statements to extricate relevant information that they need. This is the reason why such users have become incapable in making effective decisions, thereby resulting in operational inefficiency (Melville, 2013). Furthermore, traditional corporate reporting also suffers from the absence of proper non-financial details, or many times such non-financial information prevails but is not effectively related with that of the financial information. Besides, actually, it has been observed that such non-financial data assist in developing the understanding of users on matters related to performance and intangible company value. In addition, the level of sustainability reports is minimal in traditional corporate reporting as opposed to modern reporting that offers an enhanced viewpoint of the company’s operations, and emphasizing interconnection of every trait that affects the ability of a company to create value with the due passage of time (Oates, 2009). On a whole, the disadvantages of traditional corporate fail to provide an anticipation of the long-term position of a company. Besides, since it cannot overpass past-concentrated financial details, it also fails to disclose proper strategic goals to enhance the future and measures to procure them, the future viewpoint of the company’s performance, and relationship betwixt such past and future performance as a whole.

 

Integrated reporting

Integrated reporting aims to offer a holistic viewpoint of the company by putting its measures and performance in relation to it's significant environmental and social concerns. Moreover, in relation to corporate communication, it refers to a procedure that results in communication on matters regarding generation of value with the due passage of time. In simple words, it is a kind of communication, which aims to offer relevant information about how the company’s measures, governance, and performance can result in the creation of value over time. Besides, such representation of company performance relates to the prevalence of both financial as well as non-financial information.

In order to address the disparities in traditional corporate reporting, the introduction of integrated reporting has been made. Furthermore, according to the International Integrated Reporting Council (IIRC), such reporting format does not incorporate mass complications that can hamper its significant value. This is because it can play a key role in establishing a proper report comprising of information that is significant in nature. Therefore, because of the absence of high complications in such reporting process, it becomes very beneficial to the users of financial statements as now they can withdraw relevant data in order to make effective decisions. In addition, such reporting does not incorporate sufficient non-financial information unlike in the case of traditional corporate reporting. Integrated reporting, in reality, incorporates both non-financial and financial data that also comprise of sustainability reports in order to offer an enhanced viewpoint on the performance of the company. It offers enhanced information by clarifying how such information can align with the functions and activities of the company, thereby assisting them in making proper decisions (Lapsley, 2012). Lastly, in association with progressive details, such reporting surpasses past-oriented information in order to provide several measures that are beneficial to the company stakeholders and company as a whole. Moreover, in order to shed light on the proper relationship betwixt the past and future performance of a company, an integrated report helps in the completion of both sustainability and financial reports. Nevertheless, such reporting is also related to Global Reporting Initiative (GRI) that are very beneficial to the current companies after taking into account the prevalent scenarios, as such initiative emphasizes upon the fact that the stakeholders of a company possess a right to procure every significant information on its performance.

 

Difference betwixt integrated and non-financial reporting

 Even though an integrated report accommodates sustainability reporting in order to facilitate enhanced understanding regarding the company’s performance to its users, there is a necessity to address the concerns betwixt the two. In relation to sustainability reporting, it primarily focuses on communication of the strategy of a company in order to sustain its key social and environmental issues. In other words, it is mainly about communicating to the public on matters related to how the company assesses its environmental and social issues that are more significant to it, or how the management of these concerns can be done, or how the company is operating in opposition to such prime concerns, etc. Moreover, many companies consider such concerns as business risks and opportunities as a whole. For example, climate change, employee diversification, attraction, and retention of talent, etc, that cannot only pose threats but also opportunities for the company (Mark & Michael, 2016). Hence, sustainability reporting primarily deals with communicating how an organization can manage or identify these risks and opportunities for better performance.

On the other hand, integrated reporting is a progressive strategy in comparison to sustainability reporting, as it deals with how companies can manage their generation of long-term value through the introduction of an integrated measure to both traditional and sustainability risks. Hence, in contrast to reporting on the company’s financial performance and sustainability performance, such reporting assists in shedding light on how the company can accommodate both environmental and social concerns into their activities. In other words, an integrated report surpasses environmental and social information, financial data, etc, in order to shed light on how it can accommodate these broader threats and opportunities into their long-term vision and other plans and policies as a whole (Samaha & Dahaway, 2010). Moreover, this depicts that an integrated report pulls together crucial information in order to describe how a generation of value is facilitated through the activities of the company.

Therefore, sustainability reporting sheds light on one relevant segment of the company’s performance, without which an integrated report cannot deliver to its fullest value. On a whole, it is the responsibility of a company to put sustainability elements in proper place, and it must not give due consideration towards the publishing of sustainability reports. Besides, when such sustainability elements are in place, an integrated report can provide clear guidance to the users.

 

Advantages and disadvantages of integrated reporting

An integrated report assists in offering a more efficient allocation of capital by providing enhanced transparency on the measures and perspectives to the analysis so that they can re-align their framework with that of the model of business (IR, 2016). Therefore, the result will be enhanced goodwill and confidence in the award and organizational risk and appropriate sizing of their cost of capital. In addition, the internal and external factors that are related to the business strategy and framework can develop the concentration throughout the company on concerns that are very significant in highlighting the procurement of organizational goals. Besides, although an integrated report plays a key role in developing preciseness and minimizing complications in financial information, a new and complete set of non-financial details can only play a part in maximizing the complications and length of such information (KMPG, 2016). Nevertheless, these issues badly influence the perspectives on the scale to which an integrated report must procure its goals.

In relation to separation of control and ownership within companies, an agency theory is more promising, as it can assist in creating a contractual agency relationship betwixt the shareholder (principal) and the management (agent). Moreover, information asymmetry magnified with a presumption that both parties are developers of utility, implies that the principals are focused to align the interest of an agent closer with that of them, by monitoring or bonding expenses in order to minimize the residual losses (Eccles & Krzus, 2010). Therefore, an integrated report refers to a kind of monitoring cost that assists in lessening the information asymmetry. Moreover, this perspective also aligns with that of the goal of integrated reporting model that is to enhance financial allocation of capital by having a company disclose its procedure on how it intends to generate long-term value (Spiceland, 2011).

Furthermore, positive accounting theory (PAT) also plays a role in describing firms as interlink of contracts in order to minimize agency expenses. Therefore, as these contracts require monitoring and proper enforcement, there is high demand for accounting and auditing procedures primarily on aspects like debt contracts, regulation of government, etc. The discretion of the management over such accounting and auditing plans and policies by allowing these to optimize their option of policies play a key role in minimizing the cost of contracts and restrict costly regulation (Druckman, 2013). Nonetheless, an integrated report can be implemented as an option of such policy, thereby facilitating in a better advantage to the companies.

 

Significance of integrated reporting

In relation to the current business scenario, the impact of every group of stakeholder on business value cannot be disregarded. Furthermore, according to studies, an integrated report aims in offering a broader outcome of performance in opposition to traditional corporate reporting. Besides, the development of IIRF (International Integrated Reporting Framework) by the IIRC assists in offering guidance to companies by providing relevant details that are necessary for investors and stakeholders to assess the long-term influence of the company effectively and precisely (IR, 2016). Furthermore, integrated reporting is beneficial to stakeholders regarding matters on the environment, social, and governance issues, thereby offering more transparency to them in association with the influence of these factors on the company. It also sheds light on the relationship of the company with its key stakeholders. Nevertheless, both financial and non-financial information addresses the disparities in traditional corporate reporting.

Conclusion

Integrated reporting assist in enhancing transparency and accountability of financial information that is beneficial for building trust with major stakeholders such as suppliers, government, customers, etc. In other words, an integrated report is advantageous to every group of stakeholder. It not only offers immense effectiveness to the company but is also an edge for other kinds of reporting. This implies that it has an edge over traditional corporate reporting, as it can enable enhanced presentation by offering extreme power to the company in relation to its reporting and compliance as a whole.

 

References

Carol, A.A, Brad, P , Prakash J. S& Jodi Y 2016, ‘Exploring the implications of integrated reporting for social investment (disclosures)’, The British Accounting Review, vol. 48, no. 3, pp.  283–296

Druckman, P 2013, Integrate reporting framework aims to promote lasting sustainable change, viewed 18 April 2016, https://www.theguardian.com/sustainable-business/blog/integrated-reporting-framework-sustainable-change

Eccles, R.G. & Krzus, M. 2010, One Report: Integrated Reporting for a Sustainable Strategy, Wiley, New Jersey, USA.

Integrated reporting (IR) 2016,  What? The tool for better reporting, viewed 18 April 2016, https://integratedreporting.org/what-the-tool-for-better-reporting/

KMPG 2016, Performance insight through Better Business Reporting, viewed 18 April 2016, https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/road-to-integrated-reporting.pdf

Lapsley, I. 2012, ‘Commentary: Financial Accountability & Management’, Qualitative            Research in Accounting & Management, vol. 9, no. 3, pp. 291-292.

Mark A. C & Michael J. P 2016, ‘The timeliness of UK private company financial reporting: Regulatory and economic influences’, The British Accounting Review, vol. 48, no. 3, pp. 297–315

Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK

Oates, T. 2009, Jigsaw must be complete,  Sustainable Business, Sydney.

Samaha, K. & Dahaway, K 2010, ‘Factory influencing corporate disclosure transparency, in the active share trading firms: An Explanatory study’, Research in Emerging Economies, vol.  10, pp. 87-118.

Spiceland, J., Thomas, W. & Herrmann, D 2011,  Financial accounting, New York: McGraw-Hill/Irwin,University Press.

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