F3 Chapter 2

Integrated Reporting
F3 Chapter 2
Financial reporting:
Financial statements provide historic financial information, but they

do not provide a full picture of how the entity is performing.
To help users make decisions, it may be helpful to provide

information relating to other aspects of an entity's performance,
such as:
1. how the business is managed;

2. its future prospects;
3. the entity's policy on the environment;
4. its attitude towards social responsibility etc.
There has been increasing pressure for entities to provide more

information in their annual reports beyond just the financial
statements since non- financial information can also be important to
users' decisions.
Non-financial reporting:
The important additional non-financial information can be reported

in a number of ways.
For example, the Global Reporting Initiative (GRI) has produced

guidelines that propose additional disclosures in addition to the
standard disclosures required in the financial statements. In
particular, the GRI guidelines suggest that entities should disclose
economic, environmental and social performance indicators.
Alternatively, the International Integrated Reporting Council (IIRC)
has produced a revolutionary framework known as the Integrated
Reporting framework (<IR> framework). The <IR> approach proposes
a fundamental change to the way that entities are managed and
report to stakeholders.
The Global Reporting Initiative (GRI):
Overall aim of the GRI:
The GRI suggests that entities report performance indicators so that

users can monitor their performance from economic, environmental
and social perspectives.
GRI guidelines:
The most accepted framework for reporting sustainability is the

Global Reporting Initiative’s (GRI's) Sustainability Reporting
Guidelines, the latest of which 'G4'.
1. The G4 Guidelines provide universal guidance for reporting on

sustainability performance. They are applicable to all entities
including SMEs and not-for-profit entities worldwide.
2. The G4 Guidelines consist of principles and disclosure items.

The principles help to define report content, quality of the
report, and give guidance on how to set the report boundary.
The disclosure items include disclosures on management of
issues, as well as performance indicators themselves.
3. Applying these guidelines is mandatory in some jurisdictions

but voluntary in others
Overview of the GRI's G4 Guidelines:
1. Sections 1 and 2:
The purpose of the Guidelines and how to use the Guidelines

These sections explain that there are two elements to the
Guidelines, namely:
a) Reporting Principles and Standard Disclosures

b) Implementation Manual
c) They then give a step-by-step guide to using the Guidelines
and preparing a sustainability report.
2. Section 3:
Criteria to be applied by an organization to prepare Its

sustainability report ‘in accordance’ with the Guidelines
3. Section 4: Reporting principles:
In this section, the key reporting principles are outlined. These

are essentially the required characteristics of the Report
Content and the Report Quality.
The Principles for Defining Report Content are given as:
1. Stakeholder Inclusiveness
2. Sustainability Context
3. Materiality
4. Completeness
The Principles for Defining Report Quality are given as:
1. Balance
2. Comparability
3. Accuracy
4. Timeliness
5. Clarity
6. Reliability
4. Section 5:
Standard Disclosures
This is the largest section of the G4 Guidelines document.
General standard Disclosures:
1. Strategy and Analysis

2. Organizational Profile
3. Identified Material Aspects and Boundaries
4. Stakeholder Engagement
5. Report Profile
6. Governance
7. Ethics and Integrity
Specific Standard Disclosures:
1. Disclosures on Management Approach:
The DMA is intended to give the entity an opportunity to

explain how the economic, environmental and social impacts
related to material Aspects are managed. The DMA also
provides context for the performance reported by indicators.
2. Indicators:
1. Economic:
The economic dimension of sustainability concerns the

entity’s impacts on the economic conditions of its
stakeholders, and on economic systems at local, national,
and global levels.
The Economic Category illustrates the flow of capital

among different stakeholders, and the main economic
impacts of the entity throughout society.
2. Environmental:
The environmental dimension of sustainability concerns

the entity’s impact on living and non-living natural
systems, including land, air, water and ecosystems.
The Environmental Category covers impacts related to

inputs (such as energy and water) and outputs (such as
emissions, effluents and waste).
3. Social
The social dimension of sustainability concerns the

impacts the entity has on the social systems within which
it operates. The Social Category includes the sub-
Categories:
a) Labour Practices and Decent Work
b) Human Rights
c) Society
d) Product Responsibility
5. Sections 6 and 7:
Quick links and definitions of key terms used.
The process of putting together a report in accordance with the GRI

Guidelines:
The GRI's 'G4' Guidelines document sets out the following four step
approach
to putting together a report.
Step 1: Identification
Step 2: Prioritisation
Step 3: Validation
Step 4: Review
International Integrated Reporting Council (IIRC)

The IIRC’s mission is to create the globally accepted International
<IR> Framework that elicits from organisations material information
about their strategy, governance, performance and prospects in a
clear, concise and comparable format.
The International <IR> Framework will underpin and accelerate the

evolution of corporate reporting, reflecting developments in
financial, governance, management commentary and sustainability
reporting.
The IIRC will seek to secure the adoption of <IR> by

report preparers and gain the recognition of standard setters and
investors.
Link between sustainability and <IR>:
Sustainability reporting is an intrinsic element of integrated

reporting. Sustainability reporting is fundamental to an
organisation’s integrated thinking and reporting process, in providing
input into the organisation’s identification of its material issues, its
strategic objectives, and the assessment of its ability to achieve
those objectives and create value over time.
The concept of integrated reporting (<IR>):
Integrated Reporting (<IR>) is seen by the IIRC as the basis for a

fundamental change in the way in which entities are managed and
report to stakeholders.
A stated aim of <IR> is to support integrated thinking and decision-

making.
Purpose and objectives of integrated reporting:
The primary purpose of an integrated report is to explain to

providers of financial capital how an entity creates value over time.
An integrated report benefits all stakeholders interested in an

entity’s ability to create value over time, including employees,
customers, suppliers, business partners, local communities,
legislators, regulators, and policy-makers."
The objectives for integrated reporting include:
1. To improve the quality of information available to providers of

financial capital to enable a more efficient and productive
allocation of capital
2. To provide a more cohesive and efficient approach to corporate

reporting that draws on different reporting strands and
communicates the full range of factors that materially affect
the ability of an organisation to create value over time
3. To enhance accountability and stewardship for the broad base

of capitals (financial, manufactured, intellectual, human, social
and relationship, and natural) and promote understanding of
their interdependencies
4. To support integrated thinking, decision-making and actions

that focus on the creation of value over the short, medium and
long term
There are three fundamental concepts underpinning integrated

reporting:
1. Value creation for the organisation and for others
2. The capitals:
The capitals are the resources and the relationships used and
affected by the organisation
3. The value creation process

The value creation process:
1. The external environment, including economic conditions,
technological change, societal issues and environmental
challenges, sets the context within which the organisation
operates.
2. The mission and vision encompass the whole organisation,

identifying its purpose and intention in clear, concise terms.
3. Those charged with governance are responsible for creating an

appropriate oversight structure to support the ability of the
organisation to create value.
4. At the core of the organisation is its business model, which

draws on various capitals as inputs and, through its business
activities, converts them to outputs
5. The organisation’s activities and its outputs lead to outcomes in

terms of effects on the capitals. The capacity of the business
model to adapt to changes (e.g., in the availability, quality and
affordability of inputs) can affect the organisation’s longer-term
viability.
6. Outcomes are the internal and external consequences (positive

and negative) for the capitals as a result of an organisation’s
business activities and outputs.
7. Continuous monitoring and analysis of the external

environment in the context of the organisation’s mission and
vision identifies risks and opportunities relevant to the
organisation, its strategy and its business model.
8. The organisation’s strategy identifies how it intends to mitigate
or manage risks and maximise opportunities. It sets out
strategic objectives and strategies to achieve them, which are
implemented through resource allocation plans.
9. The organisation needs information about its performance,

which involves setting up measurement and monitoring
systems to provide information for decision-making.
10. The value creation process is not static; regular review of

each component and its interactions with other components,
and a focus on the organisation’s outlook, lead to revision and
refinement to improve all the components.
Capitals:
The capitals are stocks of value that are increased, decreased or
transformed through the activities and outputs of the organisation.
Categories and descriptions of the capitals:
For the purpose of the <IR> Framework, the capitals are categorised
and described as follows:
1. Financial capital:
The pool of funds that is: available to an organization for use in

the production of goods or the provision of services
2. Manufactured capital:
Manufactured physical objects (as distinct from natural physical

objects) that are available to an organisation for use in the
production of goods or the provision of services,
3. Intellectual capital:
Organisational, knowledge-based intangibles,
4. Human capital:
People’s competencies, capabilities and experience, and their

motivations to innovate
5. Social and relationship capital
6. Natural capital:
All renewable and non-renewable environmental resources and

processes that provide goods or services that support the past,
current or future prosperity of an organisation.
How to prepare an integrated report:
1. Introduction:
An integrated report should be a designated, identifiable

communication.
2. Guiding principles:
These underpin the preparation of an integrated report,

informing the content of the report and how information is
presented.
1. Strategic focus and future orientation

2. Connectivity of information
3. Stakeholder relationships
4. Materiality
5. Conciseness
6. Reliability and completeness
7. Consistency and comparability
3. Content elements:
The key categories of information required to be included in an

integrated report under the Framework, presented as a series
of questions rather than a prescriptive list of disclosures.
The following eight content elements are the key categories of

information required to be included in an integrated report:
1. Organisational overview and external environment

2. Governance
3. Business model
4. Risks and opportunities
5. Strategy and resource allocation
6. Performance
7. Outlook
8. Basis of preparation and presentation
Purpose of the Management Commentary (MC):
The International Financial Reporting Standards (IFRS) Practice

Statement on Management Commentary provides a broad, non-
binding framework for the presentation of management
commentary that accompanies financial statements that have been
prepared in accordance with International Financial Reporting
Standards.
It sets out the principles, qualitative characteristics and elements

that are necessary to provide users of financial statements with
useful information.
Management are able to explain their objectives and strategies for
achieving those objectives. Users routinely use the type of
information provided in management commentary to help them
evaluate an entity’s prospects and its general risks, as well as the
success of management’s strategies for achieving
the entity's stated objectives.
Problems with the current approach to non-financial reporting:
1. Relevance:
2. Reliability:
3. Comparability:

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Integrated Reporting

Financial statements provide historic financial information, but they

To help users make decisions, it may be helpful to provide

1. how the business is managed;

There has been increasing pressure for entities to provide more

The important additional non-financial information can be reported

For example, the Global Reporting Initiative (GRI) has produced

The Global Reporting Initiative (GRI):

Overall aim of the GRI:

The GRI suggests that entities report performance indicators so that

The most accepted framework for reporting sustainability is the

1. The G4 Guidelines provide universal guidance for reporting on

2. The G4 Guidelines consist of principles and disclosure items.

3. Applying these guidelines is mandatory in some jurisdictions

The purpose of the Guidelines and how to use the Guidelines

a) Reporting Principles and Standard Disclosures

Criteria to be applied by an organization to prepare Its

3. Section 4: Reporting principles:

In this section, the key reporting principles are outlined. These

The Principles for Defining Report Content are given as:

This is the largest section of the G4 Guidelines document.

General standard Disclosures:

1. Strategy and Analysis

Specific Standard Disclosures:

1. Disclosures on Management Approach:

The DMA is intended to give the entity an opportunity to

The economic dimension of sustainability concerns the

The Economic Category illustrates the flow of capital

The environmental dimension of sustainability concerns

The Environmental Category covers impacts related to

The social dimension of sustainability concerns the

The process of putting together a report in accordance with the GRI

International Integrated Reporting Council (IIRC)

The International <IR> Framework will underpin and accelerate the

The IIRC will seek to secure the adoption of <IR> by

Sustainability reporting is an intrinsic element of integrated

The concept of integrated reporting (<IR>):

Integrated Reporting (<IR>) is seen by the IIRC as the basis for a

A stated aim of <IR> is to support integrated thinking and decision-

Purpose and objectives of integrated reporting:

The primary purpose of an integrated report is to explain to

An integrated report benefits all stakeholders interested in an

1. To improve the quality of information available to providers of

2. To provide a more cohesive and efficient approach to corporate

3. To enhance accountability and stewardship for the broad base

4. To support integrated thinking, decision-making and actions

There are three fundamental concepts underpinning integrated

1. Value creation for the organisation and for others

3. The value creation process

2. The mission and vision encompass the whole organisation,

3. Those charged with governance are responsible for creating an

4. At the core of the organisation is its business model, which

5. The organisation’s activities and its outputs lead to outcomes in

6. Outcomes are the internal and external consequences (positive

7. Continuous monitoring and analysis of the external

9. The organisation needs information about its performance,

10. The value creation process is not static; regular review of

Categories and descriptions of the capitals:

The pool of funds that is: available to an organization for use in

Manufactured physical objects (as distinct from natural physical