Integrated reporting: the new annual report for the 21st century?

• Author: Fried, Abraham
• Position: FINANCIAL REPORTING

What if stakeholders could receive a single annual report that explains clearly how a company or organization creates value over the short, medium and long term? Such a globally accepted report would go far beyond existing financial statements prescribed by the FASB or IASB, and would expand its focus from short-term financial results to long-term changes in value. It would outline an organization's strategy, governance, performance and prospects, all framed within the context of its external environment. And its principles would apply to corporate, not-for-profit, and governmental entities alike.

The idea of developing an integrated report has moved from concept to reality in just five years. Begun in 2009 at a meeting convened by Prince Charles of Wales, this effort has led to the creation of the International Integrated Reporting Council (IIRC) and the December 2013 publication of the first framework for Integrated Reporting, dubbed "." The new framework does not mandate specific content, but instead encourages companies to design reports that satisfy proscribed guiding principles and information. This framework, based on an existing South African model, is now being piloted by an increasing number of companies issuing experimental integrated reports.

For a number of reasons, financial executives can play a critical role in the development and issuance of integrated reports. Most importantly, integrated reports include financial statements and other financial information. Furthermore, financial executives will need to help plan and vet new disclosures about strategic planning and corporate social responsibility that could be included in integrated reports.

The explicit objective of the IIRC is to establish a new norm for corporate reporting, and the IIRC has been working quickly toward this objective with active participation from the leaders of the FASB, IASB, the AICPA, the largest CPA firms, and many professional organizations of accountants in the U.S. and around the world. If the framework leads to a globally accepted set of standards, elements of the framework may ultimately become commonly reported within the U.S., or perhaps even required by U.S. standard-setters.

This article describes the key elements of the new framework and provides illustrations from current corporate reports on how these elements have been implemented to date.

Background and Benefits of Integrated Reporting

Integrated reporting is built on the concept of "integrated thinking," defined by the IIRC as "the active consideration by an organization of the relationships between its various operating and functional units and the capitals 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."

As such, integrated thinking and seek to add to corporate reporting and transparency "capitals" such as intellectual, human, manufacturing, natural resources, and social responsibility, expanding beyond traditional financial reporting standards. Furthermore, integrated thinking concerns itself with medium- and long-term performance, while existing financial accounting focuses on historic information about net income, financial position, and cash flows--all short-term performance measures.

Accounting researchers have long argued that increased transparency in financial reporting should increase share prices while making it easier for companies to raise capital. In theory, companies' voluntary reporting of and other information about corporate social responsibility increases transparency and helps investors make decisions about allocating scarce resources, thereby reducing the cost of financial capital and providing financial benefits for markets and investors. Investors who receive more information about medium- and long-term performance can use that information to make smarter investments.

The IIRC was established in 2009 to oversee the creation and implementation of an integrated reporting "framework within which more long-term decisions can be made, unlocking financial capital for investments as well as providing a more holistic picture of how value is created over time." The IIRC believes this will allow investors to assess the impact of the "organization's strategy, governance, performance and prospects" more effectively. The IIRC also believes integrated reporting will benefit the reporting organizations themselves by improving their communications with stakeholders and enhancing their internal processes.

The organizational structure of the IIRC consists of a Board that takes responsibility for approving the framework; a Council that provides guidance, strategic insights and credibility to the work of the IIRC; a Working Group that develops the framework and promotes its adoption; and a permanent...