Inevitable integration: one step closer to an integrated reporting framework.
Integrated reporting has been referred to as the next stage in the evolution of corporate reporting and is not intended to make companies disclose more about their organizations. Rather, it's intended to help companies disclose meaningful, relevant and material information to investors, analysts, regulators, local communities, non-governmental organizations, staff; supply-chain partners and more.
Information disclosed in an integrated report gets to the heart of a company's strategies to be a sustainable, viable organization that seeks to build future value.
Related, but Different
This is not about stapling an annual report to a corporate social responsibility report or a sustainability report and calling them "integrated." Yes, each of these reports serves important purposes, and companies already recognize some value in producing and sharing these reports.
However, sustainability reports and their closely related brethren are not the same animal as an integrated report. Don't simply take my word for it; look to the IIRC and the work it is undertaking to define integrated reporting and educate the world about its benefits, value and differences from traditional corporate reporting.
The IIRC goes on to say, 'An integrated report should be a single report which is the organization's primary report--in most jurisdictions the Annual Report or equivalent. Central to integrated reporting is the challenge facing organizations to create and sustain value in the short, medium and longer term. Each element of an integrated report should provide insights into an organization's current and future performance."
Integrated reporting takes a broader view one that is not yet well understood by much of the marketplace. All one need do is poll a small group of business executives, investors, legislators and regulators about integrated reporting and you're likely to receive responses that talk about sustainability reporting, environmental reporting, Global Reporting Initiative or Carbon Disclosure Project reports, corporate social responsibility reports--and even environmental, social and governance reports. In some ways, we've become casual--dare I say sloppy in how we lump these concepts into one group, using their monikers interchangeably ... yet incorrectly.
One Step at a Time ...
The IIRC's efforts to define integrated reporting and educate companies, investors and other stakeholders about what it is--and isn't--will certainly be a challenge. Sure, there will be objections, roadblocks and obstacles to overcome along the way by those who see these efforts as simply increased burdens on company executives to disclose even more information than they previously had (SOX 10.1 and XBRL come to mind when thinking about efforts designed to enhance corporate disclosure that were met with significant resistance in the boardroom or C-suite).
However, I anticipate that, out of the results of the IIRC pilot program, there will be evidence that integrated reporting is achievable, effective and valuable to companies and their stakeholders.
... But Quick Steps
I applauded the formation of the IIRC at a time when we had a patchwork of overlapping, competing reporting guidance and frameworks (Global Reporting Initiative, Carbon Disclosure Project, for example) that touched on some of the information that might find its way into an integrated report. In a global, flat world, we cannot settle for country-focused or otherwise narrow reporting frameworks to solve evolving global reporting needs.
The IIRC is working toward a globally accepted framework for integrated reporting and has established an aggressive timeline for doing so.
In September 2011, the IIRC issued "Toward Integrated Reporting," a discussion paper seeking public input on concepts surrounding integrated reporting (www.calcpa.org/IRdiscussionpaper). Feedback on the paper was compiled and published online, www.calcpa.org/IRdiscussionpaperfeedback. Recently the IIRC issued a new document, "Draft Framework Outline," in which it lays out the high level outline of the content for its anticipated IR framework. This document is available at www.calcpa.org/IRDralthameworkOutline.
The IIRC Draft Outline is the latest step to inform integrated reporting stakeholders about the likely structure and content of the integrated reporting framework.
The outline takes into account. Feedback received on the discussion paper, the experiences and collective learnings of the 11 RC Pilot Program participants as well as the IIFC Pilot Program's Investor Network group of primary audience members from the investor community to provide feedback and insight into the shortfalls of current reporting and research being conducted by the IIRC Secretariat and its various working groups and technical task forces.
Although the Draft Outline is not a formal part of the IIRC's due process for developing the Integrated Reporting Framework, its accepting feedback at firstname.lastname@example.org.
The IIRC has indicated that an outline with more detail of the technica.1 content is expected to be released later this year. This would be Followed by a draft Integrated Reporting Framework to be released for public consultation in early or mid 2013, and the eventual release of version 1.0 of the Framework ill fate 2013.
A Closer Look
The Integrated Reporting Framework Draft Outline focuses on two areas:
1. An overview of integrated reporting, including discussion of what it is, a description of how the framework will be used and the key conceptual liquidations of the framework as discussed in the Discussion Document originally: and
2. How to prepare an integrated report, including guiding principles and definition of important content elements.
An Overview of Integrated Reporting
This section of the outline includes:
2. Purpose and use of the Framework
3. Key definitions
4. Conceptual Foundations
a. The objectives of integrated reporting
b. Creating and preserving value
c. Business model
d. Capitals (resources and relationships)
e. External factors
f. Reporting boundaries
Perhaps most interesting in this part of the outline is that IIRC indicates the framework is intended to take a principles-based approach rather than focusing on specific key performance indicators, rules for measurement or disclosure of individual matters.
Here's where it gets interesting: A principles-based approach requires senior management (and perhaps the board) to apply considerable judgment to determine which flatters are material, and to ensure they are adequately disclosed in the integrated report. They will have to consider the application of generally accepted measurement and disclosure methods in that process of determining material risk factors.
As is often the case, the intent of a principles-based approach is to find some I balance between flexibility and IWCSCript.1011 ill a seemingly conflicting world one that "recognizes the wide variation in individual circumstances of different organizations but enables a sufficient degree of comparability across organizations to meet relevant information needs," as the II RC indicates.
The Draft Outline also indicates that the framework does not establish benchmarks for assessing an organization's strategy, governance, performance or prospects and thin responsibility for such assessments falls on the users investors, analysts) of' the report. Probably no big change there from how they do things.
In terms of how the framework is intended to be used: The Draft Outline indicates that it is primarily targeted at companies of an size. Nut it also can be adapted for use by public sector and nonprofit organizations. However, the framework is also intended to be "applied regardless of local legal requirements or cultural mores and does not include any, jurisdiction-specific guidance."
The Draft Outline also indicates that if a company is going to hold out its report as an integrated report that references the framework, it "should" rather than "must"; apply all of the Guiding Principles and address each of the Content Elements identified in the framework. Without a requirement to do this, do we do ourselves a disservice when seeking comparability and benchmarking across integrated reports?
The Conceptual Foundation section covers concepts underlying integrated reporting and serves as a foundation to the framework's Guiding Principles and Content Elements. A key theme covered in this section is the ability of an organization to create and preserve value over time, which is central to integrated reporting. The framework also will look at value from the perspective of other stakeholders.
The other fundamental area of this section explores the concepts of various "capitals" as first introduced in the Discussion Paper. These capitals include financial, manufactured, human, intellectual, natural and social capital and the company's ability to both access and impact them. Companies are probably more familiar with human, intellectual, manufactured and financial capitals (social and natural capitals are perhaps newer concepts for many). Nevertheless. tangible or intangible, collectively these capitals play a central role in building longer-term economic value for the company.
How to Prepare an Integrated Report
This section of the outline includes:
2. Guiding principles
a. Strategic focus
b. Connectivity of information
c. Future orientation
d. Responsiveness and stakeholder inclusiveness
e. Conciseness, reliability and materiality
3. Content Elements
a. Organizational overview and business model
b. Operating context, including risks and opportunities
c. Strategic objectives and strategies to achieve those objectives
d. Governance and remuneration
f. Future outlook
The Draft Outline indicates that this section will identify the Integrated Reporting Guiding Principles and Content Elements, and provide guidance on their application in an integrated report.
In addition, guidance will be provided on other topics, including:
* Use of technology: HOW technology, e.g., the internet, XBRI., social media's: can be leveraged to link information or data within an integrated report.
* Reporting frequency: Whether a consistent, periodic cycle is needed for an integrated report, and whether this cycle needs to be coordinated with the company's business or reporting cycles.
* Time horizon: The different timeframes to be considered in integrated reporting (short, medium and long term).
* Governance: The role of effective leadership and decision-making regarding integrated reporting.
* Degree of data aggregation The determination of the level at which information in an integrated report is disclosed particularly with respect to segmentation of information for large, complex companies.
* Potential constraints: Includes cost-benefit considerations, concerns about disclosure of commercially-sensitive information and potential legal risks for directors and disclosure of forward-looking information. The Guiding Principles of integrated reporting will be featured in this section:
* Strategic focus: An integrated report provides insight. into a company's strategic objectives and how those objectives relate to its ability to create and sustain value over time, as well as the resources and relationships on which the organization depends.
* Connectivity of information: An integrated report shows the connections between the different components of the company's business model, external factors that affect the company and the various resources and relationships on which the company and its performance depend.
* Future orientation: An integrated report includes management's expectations about the future, as well as other information to help report users understand and assess the company's prospects and its uncertainties.
* Responsiveness and stakeholder inclusiveness: An integrated report provides insight into the company's relationships with its key stakeholders and howl to what extent the company understands, considers and responds to their needs.
* Conciseness, reliability, and materiality: An integrated report provides concise, reliable information that is material to assessing the company's ability to create and sustain value in the short, medium and long term.
Finally, there is a key section that studies the Content Elements of an integrated report. A typical integrated report should include sufficient information on each Content Element to answer the questions posed for each. The Content Elements are fundamentally linked to each other and are presented in a way that makes their interconnections readily apparent. In other words, the thread linking them will be obvious and avoids isolated, standalone sections.
The Content Elements shown in the Draft Outline include:
* Organizational overview and business model: What does the company do and how does it create and sustain value in the short, medium and long term? This is absolutely essential for users or the report to understand.
* Operating context, including risks and opportunities: What are the circumstances under which the company operates, including the key resources and relationships on which it depends and the key risks and opportunities that it Ewes? This is where materiality comes into play.
* Strategic objectives and strategies to achieve those objectives: Where does the company want to go and how is it going to get there? This is forward looking (perhaps uncomfortable for the attorneys, but. nevertheless insightful for an investor trying to determine future direction of the company).
* Governance and remuneration: What is the company's governance structure, and how does governance support the strategic objectives of the company and relate to the company's approach to remuneration?
* Performance: How has the company performed against its strategic objectives and related strategies? Past performance is still a strong indicator, just not the only one on which to base a decision,
* Future outlook: What opportunities, challenges and uncertainties is the company likely to encounter in achieving its strategic objectives, and what are the resulting implications for its strategies and future performance. Again, a risky topic for some on the management team or in the general counsel's office, but this is the kind of information investors want to know.
It would be worth your while to review the Draft Outline and submit your comments to the IIRC. It is not a question of if such a framework will be developed but, rather, wizen will it become meaningful to your organization and what role you will play as a CPA in using that framework to guide your own integrated report.
Although the buzz is around the use of the framework (Or listed companies or larger organizations, there is no limit--large or small--on the size or type of organization for which it can be used.
Brad J. Monterio is managing director of Colcomgroup, Inc. and a global board member of the Institute of Management Accountants. You can reach him at
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|Date:||Nov 1, 2012|
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