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Integrated Financial Reporting?  Exactly, What Is That?

“Make as much money as possible, while conforming to the basic rules of society, both those embodied in law, and those embodied in ethical custom”. Milton Friedman.

What is Integrated Reporting (IR)?

Today’s businesses are a very different animal from days past when the value of a business could be measured by the value of its financial and manufactured assets. Nowadays, some businesses would consider these assets to comprise only 20% of their market value, and in this scenario, it is important to consider how value is created, and consequently how to account and report this value. This entails considering the other capitals besides Financial that are involved in the creation of value.

The graphic below shows the evolution of the new business model from the 1970’s through to the current multi-capital environment.

Financial modelling from spring to string

*Graphic used with permission of International Integrated Reporting Council (IIRC)

Integrated reporting is all about creating a culture of cooperation between the different organisational sectors of a business and integrating them into the business model, and thus not just about the reporting outputs.  IR identifies 6 “capitals” in the IR Framework that are used to record and monitor the resources consumed to create value in a business, and as with the organisation sectors of the business, these cannot be viewed in isolation.

The 6 capitals: 

6 Capitals graphic

As an example – is training your workforce just a financial cost in the short-term? A short-sighted view would say yes – but in the medium and long term, this investment should increase motivation and productivity and positively affect financial metrics.

By considering and measuring the impact of each of these capitals on the business, we are able to determine what is involved in the creation of value, and manage this process.  Further, IR, by taking an holistic approach to the business, will identify and allow a company to manage risks more effectively, which translates into better corporate governance.

The International Integrated Reporting Council (IIRC) encourages us to think about the 6 capitals more as a spring than a string (see graphic below). A string approach only views the Financial capital as important and does not consider the other capitals that affect how we add value to the business. Financial capital flows through the business model as a single string and does not touch the other capitals in the process. However, the other 5 capitals have both an effect on the value creation capabilities of the business, and on each other. A spring approach sees the capitals converging to interact with each other, allowing a flexible and more responsive view of the business, and promoting a long-term sustainable model (part 2 of graphic).

ESMA string blog graphic

*Graphic used with permission of International Integrated Reporting Council (IIRC)

ESMA Blog Spring graphic

*Graphic used with permission of International Integrated Reporting Council (IIRC)

The IR approach plays nicely with the greater focus on sustainability and ESG reporting that is becoming increasingly important and will have a greater focus in Financial reporting in the future.

There are however some barriers to the adoption of IR by a business as follows:

Strategic: Leadership and lack of understanding

Organisational: Inertia/Silos Complexity          

Analytical: Data and systems to support IR do not exist/are not integrated

Let’s concentrate on the data and systems issues. First, we may need to develop new KPI’s to measure non-financial factors necessary for IR, since these are equally as important as the traditional financial measures. We then need to present these in a comprehensive, easily understandable manner to management, so a comprehensive dashboard may be required.

Secondly, data for non-financial factors may also be more difficult to obtain, but also the frequency of measurement required may not align with that of financial information. Thus, we may need to work on more frequent reporting as well as presentation.

Lastly, we need to integrate financial and non-financial systems to provide comprehensive and timely information, and possibly develop/upgrade existing systems

What is evident from the above, is that organisations need a reporting tool that allows them to combine both financial and non-financial information from multiple data sources efficiently, to collect that data frequently in a dynamic manner, but also to provide context around information that may be alien to many readers. Context is provided by combining this quantitative data with commentary (qualitative data) from around the business, so an effective, controlled process for collecting this qualitative data is paramount. This is where having a proper Disclosure Management reporting tool becomes important to a business, both for IR, and to add value to the narrative reporting processes in other parts of the business.

For information on the Certent Disclosure Management reporting tool, please visit our page Narrative Performance Resource Page.

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