Integrated reporting has been gaining attention as a potential solution to widely perceived inadequacies of financial reporting. Going far beyond traditional financial reporting methods, integrated reporting brings together interrelated information about an organization's strategy, governance, performance and financial positions.
The result is a meaningful, broad-based description of an organization's value creation process. Though this more comprehensive report would mean more work for an organization, the theory is that integrated reporting will be more useful and valuable to stakeholders and the organization itself.
In April, the International Integrated Reporting Council (IIRC) issued a consultation draft of a framework for integrated reporting. IIRC Chief Executive Officer Paul Druckman calls integrated reporting "a concise communication of value over time."
Once a framework has been established, he says, "companies are likely to make the effort to produce the reports because the additional information will attract investors and satisfy lenders."
Druckman acknowledges that current financial reporting compliance is a burden on preparers but points out that the goal of integrated reporting "isn't to achieve more reporting but better reporting."
"While we can't change the trends that have led us to where we are today, we can develop a new model for reporting that helps business to communicate how they are creating value in a clear and concise way," Druckman says. "This should help to build resilience and contribute toward financial stability and sustainable development."
Why the Time for Integrated Reporting is Now
The IIRC project is in response to concerns that traditional financial reporting is becoming obsolete. Modern financial theory holds that a public company's market value is based primarily on the present value of future free cash flows. Financial reports give an only indirect indication of those flows, and they are becoming less useful as indicators.
The radical changes that business has undergone with developments in information technology, globalized business, economic instability and social pressures have left information gaps that ultimately result in increased risk, economic instability and investment volatility.
According to IIRC, 83 percent of a company's market value in 1975 could be determined by the financial and physical assets on its balance sheet. In 2009, those assets accounted for only 19 percent of a company's value. Investors have to look elsewhere to determine the value of the other 81 percent. Unable to find objective or comprehensive information on that value in financial reports, investors face...