Question

Critically evaluate the suggestion that with the recent emergence of Integrated Reporting we can readily recognise the vanguard role that managerial accounting will play in reshaping financial reporting.

Answer 1

A number of benefits of adopting Integrated Reporting <IR> are identified including:

• More integrated thinking and management.
• Greater clarity on business issues and performance. The report highlights that “management teams are finding that <IR> provides greater insights into factors driving business performance”.
• Improved corporate reputation and stakeholder relationships.
• More efficient reporting for both users and prepares of reports.
• Employee engagement.
• Improved gross margins although it was highlighted that any financial benefits of adopting <IR> may take time to realize.

Additionally, the report identifies several areas where reporting can be improved, something it calls “common areas of weakness”. These include:

• Value creation: It is observed that, in some cases, organisations give better explanations of how the organisation creates value itself than of how it does this for others with some organisations finding it hard to distinguish between the two. This may be a “general weakness” in identifying and articulating what the organisation’s stakeholders perceive as ‘value’. The following good practice ideas for reporting on value creation:
  • Clearly identify who the organisation’s key stakeholders are, and engage with them to find out what value means for them.
  • Use the six capitals model as a reference tool for considering how the organisation’s strategy and business model will affect each of these capitals.
  • Use the understanding of what value means for key stakeholders, and the multiple capitals approach, to inform the organisation’s business model, strategy, risk management and performance measurement processes.
  • Refer to existing frameworks and sector guidance as a starting point for defining relevant performance indicators.

• Connectivity: Companies identified this as one of the biggest challenges with implementing <IR>: it required breaking down silos within the organisation and changing existing data collection processes. The report indicates that “almost half the reports reviewed could be better at showing the connectivity of information, to give a holistic picture of the combination, interrelated and dependencies between the factors that affect the organisation’s ability to create value over time”. The report identifies the following good practice ideas for connectivity:
  • Consider approaching the integrated report as an overarching, concise document that connects other more detailed reports and regulatory information.
  • Use clear signposts directing readers to connected information within the integrated report and elsewhere, including online reports.
  • Think about connections between management information, boardroom discussions and priority topics relevant for investors and other stakeholders.

• Defining performance measures: thinking and practice is still immature in articulating the value organisations derive from non-financial capitals.

• Materiality: companies found it challenging to reconcile the needs of different stakeholders. It is noted that only 46% of reports reviewed explained the materiality determination process well. Improving the materiality determination process could help drive improvements in conciseness, completeness and reliability. The report identifies the following good practice ideas for materiality:
  • Identify who the main user of the integrated report is, and determine materiality accordingly – this will help to determine what to include and what to exclude.
  • Clearly explain the process for assessing materiality, including how the organisation has evaluated and prioritised material issues.

• Conciseness: nearly half of the integrated reports reviewed ran over 150 pages. Companies found it difficult to reconcile conciseness and meaningful communication with stakeholders. The report identifies the following good practice ideas for conciseness:
  • Identify relevant matters to report by implementing robust materiality determination processes – this would also help to improve reliability and completeness.
  • Apply the robust materiality determination process to filter out matters to exclude (ie those not material to value creation) when evaluating their relative importance.
  • Use cross-references (internally and externally to other reports) and make effective use of tables and diagrams.
  • Consider how digital technology could help meet wider stakeholder information needs.

• Reliability and completeness: the reviewers felt that only 51% of the reports reviewed achieved a balance of good and bad news in equal measure. Companies need to know what ‘good reporting’ looks like, before they can implement internal control processes and consider external assurance on their integrated report. The report identifies the following good practice ideas for reliability and completeness:
  • Ensure that the board exercises oversight of reporting content.
  • Establish sound internal control processes for data to be included in integrated reports.
  • Identify the relevant standards and frameworks used, and disclose them in the report.
  • Report information used by management in running the business.
  • Clearly explain why particular KPI's are used and the reason for any changes in reported KPI's.
  • Disclose negative aspects of performance as well as positive aspects, and explain what management will do to tackle challenges.