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Integrated framework provides capital gains for reporting

SIMULTANEOUSLY LAUNCHED in 14 countries, the publication of the IIRC’s integrated reporting framework did not lack for publicity. But does the new reporting model justify the considerable fanfare that accompanied its launch?

On the face of it, yes. If successful, the IIRC’s work could change the way financial reports are presented and has garnered the support of some heavyweight names. Over 50 institutional investors including Deutsche Bank and Goldman Sachs have been involved in shaping the framework, while businesses such as Unilever, Hyundai and HSBC have championed its cause.

In essence, the framework aims to create more concise reporting that better communicates to investors how the business creates value over time, by taking into account a host of non-financial aspects to the business.

Charles Tilley, chief executive of CIMA, says this is about better and more relevant reporting that is up to date with how the world is, rather than how the world was.
“Thirty years ago, 80% of a company’s market value sat on the balance sheet, now that figure is closer to 20%,” Tilly says. “The world has moved on. Company value is much more about people and brand; financial reporting is now just an element.”

These elements are represented through the introduction of the concept of six capitals – financial, manufactured, intellectual, human, social and relationship, and natural – that are a prism through which organisations should assess, and then report, how they are creating and destroying value over time.

Corporate reporting has long been skewed towards an emphasis on financial data, and detractors complain that the current model is dominated by boilerplate language while reports have become unwieldy, complex and opaque. Indeed, the size of annual reports has ballooned with many running to hundreds of pages, despite failing to articulate how long-term value is created. The focus has been on short-term financial performance.

“When you release so much information, it’s a barrier in itself,” Russell Picot, group chief accounting officer at HSBC, said at the London launch of the consultation, and emphasised the need to “align corporate reporting with long term investor perspective”.

A lack of knowledge of how intangible factors affect strategic decision making has been cited as a reason for the misallocation of resources and a higher cost of capital. Indeed, HSBC, along with the rest of the banking sector, have been penalised for a lack of transparency in their financial reports.

Picot recollects how, at an investor meeting, he was told that banks were trading below book value because their business models were “opaque and difficult to understand”.

“[To be told that] was quite profound,” Picot said.

The problem with annual reports is that they have become bloated by more and more disclosure. All too often it an easier decision to add disclosure rather than explain why information has been left out. Regulators – despite their talk of cutting clutter – find it impossible to resist the temptation that comes from increasing numbers of disclosure regimes.

Ostensibly, with all its talk of non-financial ‘capitals’, the IIRC’s framework could appear to add yet more disclosure and increase the reporting burden. To begin with at least, the integrated report will be published as a standalone document.

Organisations will continue to submit filings to their securities regulators, publish annual reports and a whole host of other financial, environmental and social disclosures.

Picot says not to expect annual reports to shrink in the immediate future, while Tilley also concedes “there will be more reporting in the short term”. But, as organisations get to grips with the model and integrated reporting becomes embedded into annual reports, he expects to see “a serious change”.

Nor are report preparers expected to disclose every piece of information that relates to the six capitals. The framework is not overly prescriptive in this regard, and only requires companies to disclose information that is “material to assessing the organisation’s ability to create value”.

“This not about providing another 100 pages, it’s about better information, not just more,” said Picot.

Much of the value of integrated reporting will be in how the story of the company is communicated. But this raises the spectre of information being “spun” to show the company in the best light. That is why, says Richard Martin, head of corporate reporting at ACCA, it is important that the information is accompanied by KPIs.

“Good reporting is already going in that direction. There are already quite a lot of legal requirements to put in your KPIs. KPIs are going to be an important part of integrated reporting,” he says.

Clearly these KPIs – which could be around a company’s oil reserves, through to the value of intellectual property such as patents – will require assurance. Auditors already sign off on more than the financial statement alone, but there are doubts about whether the profession will find work looking over companies’ integrated reports.

“Some form of assurance will be really important, but whether that is provided by a member of the Big Four, or audit firms generally, depends how they develop experience,” says Tilley.

“For instance, for oil companies’ non-financial information they use other experts. Assurance yes, but who does it depends on their expertise.”

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