Towards Integrated Reporting

By Nick Topazio

Integrated Reporting is a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates.  It is being championed by the International Integrated Reporting Council who is now in the process of reading through over 200 responses to a discussion paper it issued last year.  CIMA strongly supports this initiative and I thought I would take the opportunity to outline the main points from our response.

CIMA has played an active part in the development of corporate reporting through our involvement with the Report Leadership initiative, the history of the Operating and Financial Review in the UK, the IASB’s Management Commentary guidance, the UK FRC’s Cut the Clutter project, the Tomorrow’s Corporate Reporting project and the latest proposals from the UK Government’s Department for Business Innovation and Skills. 

We believe that the main benefits of more integrated forms of reporting are:

  • Better information for markets
  • More comparable information for international regulators and policy makers
  • Better information to boards leading to more informed decision-making

Many participants in the corporate reporting system believe it fails to produce reports that adequately portray the sustainable value-creating potential of many organisations.  Too many reports fail to satisfactorily describe the organisation's business model, contain insufficient forward-looking information and lack clarity.

One of the key issues that the board should tackle in its Integrated Report is the difference between Net Asset Value and Market Value.  As the discussion paper points out ‘The world has changed due to globalisation and resulting interdependencies in economies and supply chains, advances in technology, rapid population growth and increasing global consumption’.  Businesses are reacting to these changes through innovation that requires a broader information set. 

Research reported in the CGMA launch report ‘Rebooting Business: Valuing the Human Dimension’ indicates that nearly 70% of business value is now represented by non-financial factors such as customer relationships, knowledge and human capital, technology, intellectual property and supplier relationships.  The identification of these key intangible value drivers not recognised on the balance sheet is clearly now part of the critical information set required to thoroughly understand a business.

In our opinion, the business model and the organisation's ability to create and sustain value in the form of positive cash flows are fundamental to its long term sustainability.  Corporate reports that contain a clear articulation of the business model demonstrate the board's understanding of its value drivers and help to illustrate the resilience of the company's strategy to the impact of future developments.

We believe that value creation will increasingly depend on social and environmental issues as much as economic ones and so it is important that corporate reports reflect this ‘triple context’.  Reports that contain this type of information along with the more usual financial information will provide international regulators with the evidence they need to make better decisions.

We do not pretend that the production of a good integrated report will be easy; it will be a challenge and one that can only be successfully completed by well-run organisations with good internal information flows and integrated decision-making processes.  External corporate reports should represent the top slice of the information regularly reported to boards and the integrated report will be an important element of the overall culture of the organisation set by the board.  Concise, transparent and complete external reporting content reflects similar presentation of information internally, a prerequisite for the type of well-managed business that will generate positive cash flows that are resilient and sustainable. 

We believe that the IIRC has to do even more to promote the concept of integrated reporting especially to the preparer community.  The discussion paper states that the integrated report should replace rather than add to existing reporting requirements, however, this view is not universally held especially by preparers.  To alleviate the concerns of preparers that integrated reporting will be additive to existing disclosure requirements, the IIRC should explain how they anticipate that their requirements will not add to the reporting burden. 

CIMA is pleased to have been accepted as one of the organisations following the IIRC pilot programme and looks forward to fully participating in the process to unearth implementation issues and generate practical solutions.  As the IIRC moves forward with the pilot programme and more widely with its reporting agenda, it should seek and promote evidence that links good integrated reporting with better managed businesses and subsequent value for society.  An important point about the pilot programme is that it will operate outside of the regulatory system and allow innovative ideas to be explored without fear of liability

We, as CGMAs, should be doing all that we can to help drive forward improvements in corporate reporting.  Integrated reporting represents such an opportunity and there is much work to be done especially providing the tools, techniques and processes required to develop more integrated thinking, planning and decision-making in organisations.

Integrated reporting is quickly gaining momentum around the world but is it yet on your radar?  I'd be interested to hear whether it is and whether you see it as an added reporting burden or an opportunity to drive corporate reporting towards a better place.