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SUSTAINABILITY / MANAGEMENT ACCOUNTING

IIRC releases International Integrated Reporting Framework

 

By Neil Amato and Samantha White
December 8, 2013

The International Integrated Reporting Council (IIRC) on Sunday made public an approved framework for integrated reporting. The group intends for the framework to guide companies on how to best communicate with their stakeholders.

The release represents a key step forward for integrated reporting (IR).

The aim of IR is to enhance the relevance of information available to providers of financial capital to enable a more efficient and productive allocation of capital. “Its focus on value creation, and the ‘capitals’ used by the business to create value over time, contributes towards a more financially stable global economy and is a force for sustainability,” the IIRC said in a news release.

An integrated report is a concise communication about how an organization’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.

Among the fundamental concepts of integrated reporting are six types of capital: financial, manufactured, intellectual, human, social and relationship, and natural. The purpose of the capitals, the IIRC says, is to encourage businesses to think more broadly and to consider all potential sources of value when explaining value creation.

“We’re trying to have an evolution in corporate reporting, not another report,” Paul Druckman CEO of the IIRC, said in a previous interview with CGMA Magazine.

The framework was developed with global input – more than 350 responses globally came from businesses, accounting bodies, investors, and others after the consultation draft was made public in April. The framework is meant for private-sector businesses but can be applied to public companies as well as not-for-profit entities.

“We’re interested in IR because it supports stewardship and ownership activities along with better investment decision-making and analysis,” Colin Melvin, CEO of investment company Hermes EOS, said Wednesday at a London event focused on integrated reporting. “To do that, we need to communicate something about the company. That’s what IR is for us – the business model is a description of the company, and how longer-term factors fit into that description is key to understanding the company and its sustainability.”

The framework defines seven guiding principles of integrated reporting:

  • Strategic focus and future orientation: Reports should provide insight into the organization’s strategy and how that relates to its ability to create value over time.
  • Connectivity of information: Reports should take a holistic view of the business and should show the relationship between the organization’s value-creating factors.
  • Stakeholder relationships: Reports should offer insight into the nature and quality of the organization’s relationships with stakeholders as well as its responsiveness to stakeholders’ needs and interests.
  • Materiality: Reports should disclose information that substantively affects the organization’s ability to create value.
  • Conciseness: Reports should get to the point, eliminating duplication.
  • Reliability and completeness: Reports should include “all material matters, both positive and negative, in a balanced way and without material error.”
  • Consistency and comparability: The information in integrated reports should be presented on a basis that is consistent over time and that enables comparison with other organizations.

The blueprint for an integrated report

The contents of an organization’s integrated report will depend on individual circumstances, but the integrated report is intended to address nine key content elements, according to the framework:

  • Organizational overview and external environment: Reports should address what a company does and the circumstances under which it operates. Topics include culture and values; ownership and operating structure; main activities and markets; competitive landscape; revenue and staffing numbers; and external factors such as legal, political, and environmental aspects.
  • Governance: Reports should detail an organization’s governance structure and that structure’s effect on value creation. Topics include leadership, strategic direction, risk appetite, and how salaries and incentives are linked to value creation.
  • Business model: Reports should include the organization’s key inputs, business activities, and resulting outputs and outcomes.
  • Risks and opportunities: Reports should identify short- and long-term risks and opportunities and the sources of those events, and they should outline the company’s planned response to those risks and opportunities.
  • Strategy and resource allocation: Reports should describe the plans in place to achieve strategic objectives as well as the thinking behind a company’s resource allocation.
  • Performance: Reports should offer qualitative and quantitative overview of an organization’s ability to reach defined objectives, a look back at past performance and how current performance might be linked to the organization’s outlook. Reports also should assess an organization’s key performance indicators.
  • Outlook: Reports should address an organization’s expectations about future external events, how the events could affect the company, and how it is equipped to respond to such events.
  • Basis of preparation and presentation: Reports should offer a summary of an organization’s materiality determination, a description of its reporting boundary and how it has been determined, and a summary of the significant frameworks and methods used to quantify or evaluate material matters.
  • General reporting guidance: Reports should include disclosures about material matters and capitals; definitions for short, medium, and long term; and aggregation and disaggregation.

Pilot program offers testing

More than 100 businesses and 35 investor organizations are taking part in the IIRC’s pilot program, helping develop the framework through trials and testing. Druckman said the pilot program was vital to completion of the framework.

The program, which runs through September 2014, allows entities to test the framework during subsequent reporting cycles. Program participants “have ensured that IR is relevant to the mainstream business and investor communities, and can be incorporated as part of existing reporting requirements,” Druckman said in a news release.

One of those companies is Unilever, whose CFO, Jean-Marc Huët, called integrated reporting “a crucial development.”

The AICPA and the Chartered Institute of Management Accountants (CIMA), whose joint venture created the CGMA designation for management accountants, have shown continued support of integrated reporting. AICPA President and CEO Barry Melancon, CPA, CGMA, and CIMA Chief Executive Charles Tilley, FCMA, CGMA, are members of the IIRC Council, which advises on the IIRC’s mission and provides strategic insights on IIRC activities.

“The AICPA commends the IIRC for developing an integrated reporting framework through extensive international collaboration and the participation of key stakeholders, who approach the issue with different perspectives,” Melancon said in a news release. “The IR Framework will provide companies the foundation for enhanced business reporting and benefit investors by serving as a complement to financial reporting.” 

Neil Amato (namato@aicpa.org) and Samantha White (swhite@aicpa.org) are JofA senior editors.

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