Integrated reporting is a new domain in accountancy that aims to enhance the scope of corporate reporting. Unlike traditional approach, integrated reporting attempts to report the value creation process of an organization. It refers that both financial as well as non-financial factors are responsible for development of sustainable value addition for an organization. The framework of integrated reporting includes six capitals:
- Financial Capital
- Human Capital
- Manufactured Capital
- Intellectual Capital
- Social and Relationship Capital
- Natural Capital
Traditional financial reporting:
The reporting of financial results and disclosures of a company to its stakeholders is known as ‘Financial Reporting’. It can be of two types; external financial reporting and internal financial reporting. External financial reporting is done by the publication of ‘financial statements’ and is governed by the international standards on accounting or generally accepted accounting principles. Internal financial reporting can be formulated in the way that best suits the management to make well-informed decisions.
Integrated Reporting , it is a vehicle for long-term value creation for and by the business itself. It helps them think, plan and report the story of their business.
Integrated Reporting is achieved by connecting different functions to form a holistic view of the business, recognising the value, risks and opportunities represented in a long-term and wider view of the ‘capitals’ with which it operates and applying the reporting to the core business model and strategy of the organisation.
The <IR> Framework categorises these wider resources and relationships an organisation uses as the ‘six capitals’: natural, human, manufactured, social and relationship, intellectual as well as financial. Businesses are not asked to report against all six, but to ask themselves the questions of which and how might each be material to them? The integrated report helps businesses think holistically about their strategy and plans, make informed decisions and manage key risks and opportunities to build investor and stakeholder confidence and improve future performance. Stakeholders – especially investors – can then use the information to make more informed decisions about capital allocation and investing in the long term.
The International Integrated Reporting Council (IIRC) is a coalition of major global businesses, investors, accountancy and other like-minded organisations that came together with the clear objective of making integrated reporting the global norm.
Integrated Reporting must be seen not as additional reporting but as changing existing corporate reporting. Many companies produce integrated reports in their Directors’ Report and financial filing. We recognise ‘reporting fatigue’ in business and Integrated Reporting is seeking to make reports more concise and material to business success.
Therefore, Integrated Reporting does not seek to prescribe detailed performance metrics for each of the capitals but recognises that for natural capital, in particular, many companies have chosen to do sustainability reports, to better understand and manage their impact on environmental sustainability and to provide information to wider stakeholders. What Integrated Reporting does is turns this focus around, so businesses can understand and manage the environment’s impact on their business model and strategy.
The vision of Integrated Reporting moves to the next stage which harnesses the way business is conducted to maximise opportunities and minimise risks in this broader context.
Traditional financial reporting is an important facet of modern markets globally because economies of countries stand upon their stock markets therefore reporting financial results for large listed companies is mandatory. Recent trends among investors has increased an urge for more transparency and scrutiny in relation to operations of businesses because traditional financial reporting has failed to answer questions of investors about non-financial aspects of businesses especially the long term direction and the ability of an organization to sustain in its competitive environment. Integrated reporting aims to answer these question by increasing the level of knowledge an investor has about the company he or she has invested in. In this way, investors can become aware about any other risks or externalities other than financial risks that could impact their investment decisions and help them avoid possible or probable future losses.
Integrated Reporting is about better communication between companies and the capital markets.
As Michael Bray explains, by ‘…convincingly telling their organization’s story to the markets….they can obtain capital at a
reasonable cost, enhance their corporate reputations and maintain their licences to operate. …a clear opportunity for companies to experiment and innovate and to explore the potential benefits…