What is integrated reporting, and why is it important?

Definition

Integrated reporting is concise communication of an entity’s governance strategies, performance, and prospects relevant to the external environment that leads to developing criteria for financial and non-financial value over the period.

It provides us with an understanding of how a business is affected by its external environment and gives insights into how capital creates value for a business over short-, medium- and long-term time.

Further, these reports are based not only on the financial performance but competence of the business to perform value-adding services and lead to an overall enhancement of the business activities. So, these reports provide more comprehensive business details that help potential shareholders in decision-making about the business.

On the other hand, corporate reporting is all about presenting and disclosing annual reports of listed companies to the general public. The audience of corporate reports are banks, shareholders, and investing communities. Although the main focus of corporate reporting is on financials, it also incorporates integrated reporting to a limited extent.

An integrated reporting was introduced to allow businesses to focus more on achieving long-term goals and help stakeholders in decision-making related to longer aspects of the business.

The stakeholders of the business invest their capital within an organization. The capital represents the value of stock that either moves up, down or is transformed by the actions and outputs. Further, capital is divided into different categories, such as

  • Intellectual Capital- It includes intellectual property, software systems, knowledge, etc.
  • Human Capital- People’s competency, skills, capabilities, and experience come under the category of human capital.
  • Financial Capital- It involves the details of how the company’s projects are financed. Finances can be raised by utilizing equity, debt, or generation of cash by business operations.
  • Natural Capital incorporates all the environmental resources, either renewable or non-renewable such as water, air, land, forests, minerals, etc.
  • Social and Relationship capital- It is a capital that includes a relationship with stakeholders, suppliers, and other communities.

Integrated Reporting (IR) involves the practice of critical thinking and its application through the connectivity of information between operations and functional units of the business organization. The focus of integrated reporting is enhancing the culture of accountability, trust, and stewardship. IR connects the flow of information and business transparency brought by technology in the modern-day business world. It is an extension of corporate reporting and key focus areas are conciseness, governance strategies, performance, and prospects.

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Importance of Integrated Reporting

An integrated reporting framework is used for corporate reporting, the sustainability report. And corporate financials are merged to form single integrated report. As we discussed earlier, an integrated report gives comprehensive information about a company’s strategies, governance practices, and performance.

A senior sustainability analyst Iris Lether has shed light on the importance of sustainability reporting. According to him, integrated reporting is used to understand how business organizations are addressing the present and upcoming challenges and how the resources are used to create value for a business over the long term. It not only helps the organizations but also makes it easy for investors and other stakeholders to assess an entity’s performance. Iris Lether believed that integrated reports reveal the extent to which sustainability is built into a business’s vision, mission, and day-to-day business operations.

Benefits of Integrated Reporting

Integrated reporting has been introduced in the business world to bring information about a company’s strategies, governance policies, and performance to depict the environmental and social impact.

A business cannot indulge in integrated reporting practices without encompassing integrated thinking.

Further, integrated reporting is all about how a business runs and how the value of a business is being created over the short, medium, or long term.

Following are some of the internal and external benefits associated with integrated reporting.

  • The clarity in understanding the organization’s strategy and business goals.
  • Promoting the culture of an integrated way of thinking.
  • Integrated reporting establishes a link between non-financial performance and business’s growth.
  • A concise report to be issued is easily accessible and gives a clear understanding of the business operations.  
  • Establishment of a linkage between financial and non-financial performance matrices.
  • Value creation for stakeholders as a result of analyzing and measurement of non-financial performance factors.
  • Development of business strategies and how to allocate resources.
  • Enhanced analysis of risks, opportunities, and threats.
  • Improvement in the process of decision-making and a better understanding of the business organization.

Integrated Reporting-(IR) Framework

IR framework is established to set guiding principles to prepare an integrated report for a business. It may also include detailed information about content elements and underlying fundamental principles that regulates the overall integrated report.

The integrated report is prepared by using guidelines of the International IR framework. Integrated reporting framework guides us on how to present information in a report. The seven important principles listed in the International integrated reporting framework are listed below:

  1. Concise report
  2. Connectivity of information in report format
  3. The Relationship of stakeholders
  4. Materiality principle and consistency of information
  5. Reliability and completeness of the information
  6. Presentation of information in a way so that it’s comparable
  7. Future-focused and strategic orientation
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The framework has also discussed the content elements that should be included in the integrated report. These content elements are correlated to each other fundamentally and aren’t mutually exclusive. The content elements are:

  1. Overview of organization
  2. Governance of a business
  3. The business model
  4. Opportunities and risks of a business
  5. Resource allocation strategies
  6. Performance of a business
  7. Presentation of the integrated report
  8. Outlook and external environment

These principles and content elements used for the preparation of integrated reports are helpful to assess the performance of private or public sector profit-oriented or non-profit organizations.

The purpose of integrated reporting is to explain how a company creates value, preservation or erosion of this value over the long term. As discussed earlier, an integrated report provides both financial and non-financial information and describes how both are linked. This report is beneficial for those interested in knowing a company’s position and its ability to generate value for capital invested by the shareholder.

Performance reporting in the integrated reporting

It’s one of the most important areas of integrated reporting and helps detailed analysis of the business performance. This section is mostly focused on how well the business has performed well in its strategies or business plans.

Further, these business outcomes can be external or internal depending on the set strategies and business planning. Further, performance indicators can also be discussed that indicate business performance.

Conclusion

Integrated reporting aims to provide concise and clear information about the business strategies, governance, and other matter related to the business reporting. This sort of reporting was introduced to provide value-based information to the business stakeholders. So, they can decide based on comprehensive and more value-adding information about the business processes.

Further, the integrated reporting realizes that stakeholders not only invest financial resources but non-financial resources as well. So, they should be provided with information regarding intellectual capital, natural capital, social capital, human capital, etc.

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This type of reporting enhances an element of critical thinking as benefits of the integrated report include business strategy, promoting a culture of integrity, process of value creation for shareholders, and developing the policies and procedures.      

In addition to this, the framework has been developed for integrated reporting that provides certain principles/content guidelines for integrated reporting. This content includes an overview, governance, business model, opportunities, resource allocation, performance measurement, presentation, and impact of the external economic environment.

Frequently asked questions

What’s the difference between financial reporting and integrated reporting?

Financial reporting is about reporting finance-related facts and figures, and it’s more focused on preparing balance sheets, income statements, cash flow, equity statements, notes, etc. On the other hand, integrated reporting is about the value creation of the processes and strategies.

What is IIRC?

An IIRC is International Integrated Reporting Council; the council comprises international leaders from the investment, corporate, regulatory, and civil society.

The council works on developing the framework to promote integrated reporting for the enhanced business understanding of the stakeholders.

What is integrated thinking within an organization?

Integrated thinking is the active consideration of linking business financial resources with the operational activities that add value to the business processes. It leads to a culture of decision-making after considering related effects on the overall business processes and activities.

Is an integrated reporting framework designed to replace International Financial Reporting Standard?

The integrated reporting framework does not aim to replace the International Financial Reporting Standard. However, it aims to include additional value-adding information that helps report users to make an informed decision about the business.

What’s the difference between sustainability reporting and integrated reporting?

Sustainability reporting is about economic, governance, social, and environmental aspects. On the other hand, integrated reporting focuses on the organizational overview, governance, risk, opportunities, resource allocation, strategy formation, the basis of presentation, etc.

Although, both the reporting frameworks focus on providing additional details/information about the business processes and activities. However, the purpose and way of value creation are different.

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