Integrated Reporting <IR> A Change for the Better

What is Integrated Reporting?

To know the best about integrated Reporting, one must first try to understand what it is not – Integrated reporting is not just another format of reporting and for sure this is not another compliance burden. Integrated reporting is not a CSR or climate change reporting embedded into financial reporting and it does not give any standard measurement metrics for corporate strategy, governance, and performance for comparisons.

Then what is it? Integrated reporting should be understood from its intention and as a consolidation of core business with finance and non-finance partnerships within the organization. It is a mindset, it’s a shift in thinking across all levels of the organization. It is a better strategic report that attracts investors.

The why what, how and when of <IR> can be learned from International Integrated reporting council <IIRC> a global coalition of regulators, investors, companies, standard setters, accounting bodies and NGO’s that promote the awareness about <IR> as a next-level dimension in the evolution of corporate reporting.

1. Investors vs Corporates – Annual Report 101.

When was the last time you have read a corporate annual report (AR) top to bottom as a stakeholder? post digitalization era, adopting green initiatives (paperless) reduced the curiosity of taking notes, bookmarking with a dog ear, and highlighting in an annual report for the readers. There are very few exceptional readers who still rely on hard copies reading end-to-end of the AR from the chairman’s letter till proxy forms.

Some questions to ponder in this context -

1.1 As an Investor -

• Do we get all the information we need from an annual report? Does anybody read all the information given and ask questions?
• Barring fundamental stock analysts, how many common investors can link both financial and non-financial or historical and forward-looking information in the AR?
• As far as the contents in the AR is concerned, what are the rights of shareholders?

Few key aspects from SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and the brief intention of the regulations are mentioned below from a stock-exchange listed entity perspective:

1.2 As an Organization –

• Do we need to rush on the fastest quarterly and annual book closures and spend so many man-hours in compiling a quarterly and annual report (or) there needs to be a flexible real-time reporting?
• How long does it take to publish an annual report from the day the financial year ends?
• Do we need to spend time and resources on increased voluntary disclosures?

Typical listed company Annual report pages across the globe range between 150 to 300 that includes the corporate strategy, mission, vision, values, financial and non-financial KPI’s, letters, product details, photographs, sustainability reports, etc. On average, a listed company would take anywhere between 10 to 60 days including signatory rituals until the earnings are released to the public via market regulators or stock exchanges. This is a very time-sensitive journey for internal and external professionals.

The question remains open, despite these efforts, do stakeholders decipher the contents or still ask for more details in the name of transparency? Is it not a compliance distraction for the organisation?

The general understanding of the preparation of financial statements starts when books of accounts get closed in a timely workday manner under the assumption that data collection, sanitization, classification, and entity-level control review and various analytics are accurately making the numbers fit for financial and management reporting purposes. As mentioned earlier, <IR> challenges the way we work with the fundamentals of the data source from financial, non-financial, governance, sustainability areas of the organization that requires management commentaries to focus on business strategy reporting.

2. A reader’s dilemma reading financial statements combined with MD&A in an annual report –

Let us analyze a few basic questions in this perspective -

2.1 Financial Analysis

• Does financial Information tell the complete story to an investor, what it means for him/her? (example being how IFRS16 changes impact gearing ratios, deferred taxation, and dividend policies)
• Is it easy for an organization to measure the value of Key management personnel added/left the organization and its impact on stock price in the secondary market?
• What should be the level of knowledge of the users/reader of financial statements and notes to accounts in the annual reports?
• Is there a way to financially measure the non-financial data?
• Are the Financial statements confined to form rather a substance?

2.2 Non-Financial Analysis

• What has been the corporate strategy in allocating its resources?
• Is the business value chain of the organization clearly show the strategic direction differentiating between the value it generated and destroyed within the domain it operates?
• Is there a past performance comparative data available on business value chain Inputs and outcomes?
• Is there any categorization of intrinsic value generated by the company?
• Is there any Independent assurance available on future business outlook, forward-looking statements, trends, KPI evaluations made by the management in their commentary?
• What is the diversity & Inclusive behaviors shown by organizations? Is there a measurement available?

These points mentioned above neither undermine various accounting, corporate reporting standards nor the rigorous due diligence of the professionals. The message is not that if <IR> becomes mandatory, all the lacunas of existing annual reports will give blanket answers to the questions posed. The driving point is on challenging the ways that each organization presents its external reports and assess how the Integrated reporting helps fill the gap being a progressive step beyond traditional reporting. The concept of <IR> is still evolving and emphasizes on “Integrated Thinking” to begin with.

3. Corporate Governance – Change in the Mindset from “Thinking in Silos” to “Integrated Thinking”.

In a rudimentary form, the order book in a manufacturing organisation nearly drives everything back and up in the value chain for both financial and non-financial planning. However, when this gets translated to reporting, the real capital that underlies within the value chain is not visible to the readers of annual reports as on today. At the Operational level, each department within the organisation has its targets and performance measurements, the accumulation of which it does not give much room for flexibility. For example, usage of structured manufacturing approaches like TQM or JIT should never be implemented in silos under continuous Improvement initiatives rather shake-up the stagnant or change-resistant departments and the individual behaviors within the organisation.

How should this collective and connected thinking at the grassroots level be achieved? This often comes only as a top-down approach and starts from the Boardrooms. The guiding motivation is in “Integrated Thinking” that leads to “Integrated Reporting”.

All the OECD Principles of Corporate Governance reiterates the importance of governing frameworks to be robust in articulating the strategy of the organisations by relevant stakeholders.

The oversight and strategic support from the Board of Directors will be effective when the performance of the board is measured through what it primarily achieves over time, least said the individual’s success is nothing but his recent assignment and the same goes with the Board performance assessment. Bold personalities throw bold ideas, these need not be a run rate between the quarters but for an exceptionally long term. Within the Board composition, the role of independent directors and gender diversity in committees is invaluable when it comes to creating a positive lead on “Integrated thinking”.

“Integrated Thinking” is in full utilisation of the strategic leadership and operational management potential. This begins with little discomfort as it challenges the rigidity and status-quo while targets demanding unprecedented collaboration across the value chain in the organisation. Given the times of change, If the steps are not initiated by the leaders of today, will be automatically be forced by the existing generations that can soon take over the majority portions in the boardrooms of the future that is driving by the philosophy of transparency and change management.

[Source: Integrated Reporting <IR>: Focus on Integrated Thinking. A handbook for the change journey’, published by NIBR in 2016 – www.integratedthinking.it - www.nibr.it (network Italiano business reporting)]

4. The Framework – Philosophy & Structure.

Boards and the top leadership of the organisations shall start identifying the real change agents who can bring integrated thinking across departments (finance or non-finance) in the organisation and the intangible benefits to be measured accurately during the journey within a logical time frame that’s best left to the choice of the individual organisation.

Great words of our father of the nation are apt in bringing this integrated reporting to reality, “You must be the change you wish to see in the world”. There are quite a few multinational conglomerates across countries that are already in this direction gaining credibility from the investor communities.

Post Covid19 economic scenario, there’s an apparent shift in human thinking and changing expectations on life and livelihood – profitability, scalability, and sustainability of the business to became dominant along with the measurement of the ‘value’ of anything and everything that gets created, preserved and destroyed by the organisations. A clear view of the tangible and intangible value movement process to help the communities and the society at large.

4.1 International Integrated Reporting Council (IIRC)

<IR> is a process established on integrated thinking that results in a periodic integrated report by an organisation about the value creation over a period, say on an annual basis. International Integrated Reporting Council (the IIRC) is a global not-for-profit organization, incorporated in England and Wales, the coalition of which comprises various entities drawn from broad global communities, including business and other reporting entities; providers of financial capital; policymakers; regulators and exchanges; the accounting profession; reporting framework developers; and standard setters; civil society and academia. As mentioned by <IIRC>, Integrated reporting is a tool and a journey for better reporting, its an evolution of corporate reporting, with a focus on conciseness, strategic relevance, and future orientation. (Courtesy: integratedreporting.org. visit for more information including published “Integrated reports” at http://examples.integratedreporting.org/home)

<IR> defines the resources used in the value chain and its relationships as “The Capitals”. International <IR> framework defines how to use the framework and the underlying fundamental concepts. It also gives a thought leadership about <IR> guiding principles and the content elements.

4.2 A Brief On “The Capitals In The Value Chain”

• Financial Capital – A pool of funds to create goods and services along with the financial viability of various projects run by the organization (viz., Debt, Equity, Internal accruals, government subsidies, etc.)
• Manufactured Capital – Physical assets used to create goods and services and the quality of it. (viz., Property, Plant, Equipment, Public infrastructure including captive usages)
• Human Capital – people’s competency, capabilities, experience, corporate culture, motivation to innovate, and abilities of the leadership. This includes social and environmental value additions made by the organizations.
• Social & relationship Capital – The institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being. This capital expands to shared behaviors, trust, and commitments in the value chain, intangibles associated with the brand, reputation, societal license to operate, and the perception of the public about the organization.
• Natural Capital – All renewable and non-renewable environmental resources and purposes that provide goods and services that support the past, current, or future prosperity of the organization. (viz., Water, land, air, minerals, forests, biodiversity, ecosystem, and being responsible for nature.)
• Intellectual Capital – These are the competitive advantage creators namely, patents, rights, and proprietary software and documents, etc.

4.3 A Brief on “The Guiding Principles”

Integrated reporting guiding principles define ‘The how’ of the reporting structure.

• Strategic and future-oriented Integrated reporting – IR to give an insight on how it relates to the organization’s ability to create value in the short, medium and long term and to its use of and effects on the capitals – Quantitative & Qualitative information.
• Connectivity of Information – An integrated report should show a holistic picture of the combination, interrelatedness, and dependencies between the factors that affect the organization’s ability to create value over time.
• Stakeholders’ relationships – Integrated reports should provide insight into the nature and quality of the organization’s relationships with its key stakeholders while also responding to their needs and interests.
• Materiality – Any information that substantively affects the organization’s ability to create value over the short, medium, and longer-term.
• Conciseness – Integrated reports reporting in an easily understandable language in few words, ensuring a plain language, avoiding jargon or highly technical terminology while keeping the relevancy of the information to the organization.
• Reliability and Completeness – An integrated report should include all material matters, both positive and negative, in a balanced way and without material error.
• Consistency and comparability – The report to be consistent over time and comparable with other organisations.

4.4 A Brief On “The Content Elements”.

Using the guiding principles of Integrated reporting, the content elements define ‘The what’ of the integrated reporting.

• Organisational overview and external environment
• Organisational governance structure
• Business model
• Risks and opportunities
• Strategy and resource allocation
• Performance outcomes for each of ‘the capitals’
• Outlook, including challenges, uncertainties, and implications.
• Basis of preparation and presentation

The organisations’ competitive information can be published on a ‘need to know’ basis that can be used by the individual organisations and the materiality levels, limitations, and availability of data to be clearly articulated. Integrated reporting is yet evolving to the current times while it complements the applicable financial reporting frameworks, customer satisfaction measures, and industry-based frameworks to evaluate risks.

5. The Value Creation (Preservation, Diminution) Process by Businesses

The value creation process defined in the framework guides the reporting for ‘the capitals’ from its inputs > business activities > outputs > outcomes, while simultaneously focusing on the governance in the overall business model of an organization. Each of the capitals is interlinked with UN Sustainable development goals (SDG).

5.1 How does the reporting value chain help?

IR layout of a clear template of the reporting framework to identify the real value generates to destroyers in the business value chain. Any report is extremely critical in telling the story to the users of financial statements on how organizations create value. IR makes the users observe the value chain and in turn helps the organizations with better support by the investors, creditors, and regulators, etc. The benefits of early adopters were proven successful in various geographies. Few key benefits from the ones who already adopted this framework include:

• Positive relations with institutional investors, analysts, and other stakeholders.
• Organisational strategies are better understood by the financial capital providers and help evolving business models and support its long-term success.
• Increased understanding of data quality, value creation, and its benefits.
• Perceived trust and transparency by employees, customers, and vendor communities.

Concluding message

Be it from Covid-19 like pandemics or otherwise, and irrespective of the force from stakeholders or regulators, The role of Chartered Accountants is ever-evolving, there is no doubt that this hardworking fraternity is playing a vital role in furthering the culture of honesty and better corporate governance in the society while helping the ambitious economic growth and transparency in public spending while facing unprecedented challenges in front. Whilst the shift is near professionals in the industry and practice must start directing their energies towards an integrated mindset, global sustainable development ambitions (for example, UN SDG, ESG, and Sustainability reporting, etc.) to achieve integrated reporting.

Change is around the corner, boardrooms, committees, and Independent directors to discuss how to accomplish integrated thinking for integrated reporting, benchmarking us in the global comparison. To reiterate, IR is not a compliance burden but a holistic view of the business value chain and how it complements the society at large. There is a dearth of skills and resources in this area, gaps to fill leveraging financial and non-financial measures in the value chain process. SEBI’s circular (2017) was the right step in this direction making it mandatory for a few listed organizations to supplement the Annual reports with Business Responsibility Reports (BRR).

Chartered Accountants are in the bright spot to take advantage of another big opportunity. With their natural talent in the fields of financial reporting, auditing, corporate governance, etc., CA’s are in a better position to understand how the “value” in and out of the business arises. A paradigm shift in fundamental thinking, curriculum, progression, and reskilling is needed on how a chartered accountant can be a proud partner in nation-building. ■