Integrated Reporting

Non-Financial Information
As “corporate social responsibility” and
“sustainable development” have become
more important to more stakeholders, the
need for information that is outside the
scope of the financial statements has
become desired by many users.
ISO 26000, Guidance on Social Responsibility,
helps organizations structure, evaluate
and improve their social responsibility.
Social Responsibility
According to ISO 26000, social responsibility is an
organization’s responsibility for the impacts of its decisions
and activities on society and the environment through
transparent and ethical behavior that:
• Contributes to sustainable development, including the
health and welfare of society,
• Takes into account the expectations of stakeholders,
• Complies with applicable law and is consistent with
international norms of behavior, and
• Is integrated throughout the organization and practiced
in its relationships.
Reporting Frameworks
The earliest framework for reporting on social
responsibility and sustainable development activities
was introduced by the Global Reporting Initiative
(GRI).
The first GRI reporting guidelines, Sustainability
Reporting Guidelines on Economic, Environmental, and
Social Performance, were launched in 2000, and GRI
has updated them several times since.
Some national reporting requirements led to the
development of the International Integrated
Reporting Council (IIRC).
IIRC’s Purpose
The IIRC’s stated purpose was to create a
globally-accepted framework for a
process that results in communications
by an organization about value creation
over time.

The International <IR> Framework, was

published in December 2013.
The IIRC
• The IIRC’s mission is “to establish integrated
reporting and thinking within mainstream business
practice as the norm in the public and private
sectors.”
• The IIRC’s vision is “to align capital allocation and
corporate behavior to wider goals of financial
stability and sustainable development through the
cycle of integrated reporting and thinking.”
• The IIRC’s objective is “to change the corporate
reporting system so that integrated reporting
becomes the global norm.”
The International <IR>
Framework
The International <IR> Framework
introduces the concept of reporting non-
financial information as an integral part of
the annual report that may be read by all
stakeholders.
IIRC Stakeholders
“[Stakeholders are] Those groups or individuals that
can reasonably be expected to be significantly affected
by an organization’s business activities, outputs or
outcomes, or whose actions can reasonably be
expected to significantly affect the ability of the
organization to create value over time [emphasis
added]. Stakeholders may include providers of financial
capital, employees, customers, suppliers, business
partners, local communities, NGOs, environmental
groups, legislators, regulators, and policy-makers.”
Integrated Report Definition
“A concise communication about how an
organization’s strategy, governance,
performance and prospects, in the context of
its external environment, lead to the creation
of value over the short, medium, and long
term.”
Integrated Reporting Definition
“A process founded on integrated thinking
that results in a periodic integrated report by
an organization about value creation over
time and related communications regarding
aspects of value creation.”
Integrated Thinking Definition
“The active consideration by an organization
of the relationships between its various
operating and functional units and the
capitals [see next topic] that the organization
uses or affects. Integrated thinking leads to
integrated decision-making and actions that
consider the creation of value over the short,
medium, and long term.”
The Capitals and Value
Creation
The Six Types of Capital
“Capitals” are the resources an organization uses in
producing and providing products and services.
1. Financial capital is the pool of funds available to an
organization to use in the production of goods or the
provision of services.
2. Manufactured physical capital is manufactured
physical objects available to an organization for use
in the production of goods or the provision of
services.
3. Intellectual capital results from employees’ efforts
that generate intangible assets.
The Six Types of Capital
4. Human capital is the skills, capabilities, and
experiences of people.
5. Social and relationship capital derives from the
relationship between a company and the society
from which it secures its license to operate.
6. Natural capital is renewable and non-renewable
natural and environmental resources such as air,
water, land, forests, and minerals that provide
goods or services supporting the past, current, or
future prosperity of an organization.
Purpose of Integrated Reporting
An integrated report is a single report that
presents both financial and non-financial
information in a manner that emphasizes
the whole picture and the
interdependence of its parts.
The primary purpose of an integrated
report is to explain to providers of
financial capital how an organization
creates value over time.
Goals of Integrated Reporting
• Improve the quality of information available to providers of
financial capital to enable more efficient and productive
allocation of capital.
• Promote 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 organization to create value over time.
• Enhance accountability and stewardship for the broad base of
capitals and promote understanding of their
interdependencies.
• Support integrated thinking, decision-making, and actions that
focus on the creation of value over the short, medium, and
long term.
Value Creation
The process of creating outputs that are more
valuable than the inputs used to create them.
The value created happens from the increases,
decreases, or transformations of the capitals.
The value is created for
• The organization, enabling financial returns
to the providers of financial capital, and
• Others, including all stakeholders and
society at large.
Value Creation Activities
An organization creates value through making sales, which
creates changes in financial capital.
However, a wide range of other activities, interactions, and
relationships also create value.
• Effects of the organization’s business activities and outputs
on customer satisfaction.
• Suppliers’ willingness to trade with the organization and the
terms under which they do it.
• Initiatives the organizations’ business partners agree to
undertake with the organization.
• The imposition of supply chain conditions or legal
requirements.
Impact of Management
Decisions
Value is created, preserved, and diminished
by management decisions in all areas, from
strategy setting to daily operations.
Externalities
An externality is a positive or negative
consequence of an economic activity that is
received or paid for by unrelated third
parties that are external to the
transaction.
Positive Externalities
Have an impact on others that is positive.
Negative Externalities
Has a negative impact on others.
The Value Creation Process
The value creation process is central to
integrated reporting.
The objective of an integrated report is to
communicate how an organization
creates value over time.
The Integrated Report
Content of an Integrated Report
1. Organizational overview and external
environment. What does the
organization do, and what are the
circumstances under which it operates?
2. Governance. How does the
organization’s governance structure
support its ability to create value in the
short, medium, and long term?
Content of an Integrated Report
3. Business model. What is the organization’s
business model?
4. Risks and opportunities. What are the risks
and opportunities that affect the organization’s
ability to create value over the short, medium,
and long term, and how is the organization
dealing with them?
5. Strategy and resource allocation. Where
does the organization want to go and how
does it intend to get there?
Content of an Integrated Report
6. Performance. To what extent has the organization
achieved its strategic objectives for the period, and what
are its outcomes in terms of effects on the capitals?
7. Outlook. What challenges and uncertainties is the
organization likely to encounter in pursuing its strategy,
and what are the implications for its business model
and future performance?
8. Basis of presentation. How does the organization
determine what matters to include in the integrated
report, and how are those matters quantified or
evaluated?
Principles for Preparing and Presenting an
Integrated Report
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.
Benefits of Adopting IR
• IR can impose a form of discipline on a company’s
reporting by ensuring that the company concisely
reports material information that shows how well it is
performing in non-financial areas that affect the
company’s strategies and their execution.
• IR can help managers gain a better understanding of
the relationship between financial performance and
non-financial performance.
• Internal measurement and control systems for
producing reliable and timely non-financial
information are improved.
Benefits of Adopting IR
• Greater employee engagement may result.
• IR can lower an organization’s reputational risk.
• Customers who care about sustainability may be more
committed.
• Better communication about the organization’s
performance, position, vision, and mission in both financial
and non-financial terms.
• IR can communicate a company’s vision of the future and
how it addresses non-financial challenges and
opportunities, enhancing confidence of long-term investors
in the company’s leadership and its ability to build
sustainable value.
Challenges of Adopting IR
• Adopting IR requires support of the
board of directors and the CEO.
• Non-financial information does not have
the same established reporting
standards as financial information has.
• Understanding what is a material issue
that should be reported is very
challenging.
Challenges of Adopting IR
• In order to establish the reliability and
comparability of integrated reports, an
assurance opinion is necessary.
• Internal controls over non-financial data
are not as effective as controls over
financial data.
• Preparation of an integrated report
requires collecting and analyzing
structured and unstructured data.
Challenges of Adopting IR
• Specialists with analytical skills will need
to be brought in to make sense of the
data and incorporate it into financial
reporting.
• IR may cause disclosure of proprietary
information and revelation of
competitive information.