Changes due to implementation of integrated reporting
The integrated report is a brief communication regarding how the performance, prospects, governance and strategies of an organization direct to the generation of value over the long-term, medium term and short-term period. The integrated reporting was promoted and developed by the “International Integrated Reporting Council (IIRC) during August 2010 and the IIRC was established by International Federation of Accountants, Prince’s Accounting for Sustainability project and the Global Reporting Initiative. The IIRC is the global coalition of investors, regulators, standard, and companies, non-governmental companies and for the accounting profession (Feng 2014).
If the investor wants to invest in a company regarding which he knows nothing to make-up his mind regarding whether to invest in that company or not, he will start looking at the financial statement of the company. However, even after thoroughly going through the financial statement, there is likelihood that he will be left with various unanswered questions related to the business activities of the company, their future plans, their competitors and how they are planning to obtain the competitive sustainable advantages over their competitors. The main objective of the integrated reporting is to fill the gaps to enable the potential investors to get better idea regarding the organization in which he is intending to invest. As per IIRC, the integrated reporting must include the following contents:
- External environment and the organizational overview
- Future outlook
- Resource allocation and strategies
- Risks and opportunities
- Business model
The listed companies under the Australian Stock Exchange are using the integrated reporting apart from the financial reporting.
The adoption of integrated reporting will enable the companies to provide the information regarding its risk management, sustainability approach, growth opportunities and the competitive advantages in a better way to the shareholders and the potential investors of the company. The details under the above mentioned heads are as follows:
- External environment and the organizational overview – it states the aim of the organization, details regarding their shareholders, the structure of the organization and the external environment to which the company is most susceptible to. Generally, the vision, mission of the organization, analysis of the shareholders, PESTEL analysis and the organizational chart will be relevant under this section.
- Future outlook – it states the details regarding the likelihood of uncertainties and challenges the company will face in achieving their goal, pursuing their strategies and the expected implications on the future performance and business model of the company. Generally, the future planning of the company, risk confrontation measures and the objectives to face the challenges are relevant for this part of integrated reporting (Klettner, Clarke and Boersma 2014).
- Resource allocation and strategies – this section gives the details regarding the intention of the organization for development of any new products, expansion to the new markets and setting-up of new factories. It will be valuable to the investors if they get the information regarding the intention of the company to respond the alterations in the market, the cost associated with that and the time-period I which they are expecting to get aligned with the strategic alterations.
- Risks and opportunities – this section covers the external as well as the internal matters. Generally the SWOT analysis categorises the threats and the opportunities as the external factors, however, it is required to look into these factors internally. The risk to the future revenues are considered as risks while the strong brand valuation is regarded as opportunities. Though some risks can be minimised, but the amounts of minimised risks are unlikely to be appeared in the integrated report. However, the qualitative signal shall be delivered in the IR regarding the external as well as the internal risks of the organization. The IR must include the details regarding how the risks will be mitigated and managed (Strong 2014).
- Business model – the business model of an organization is the system that includes the transformation of inputs through the business activities, into the outputs and the outcomes that intends to achieve the strategic purposes of the organization and create value for the organization over the long-term, medium-term and short-term period. If the company is unable to find it where to add the values then it can be said that the company is in the temporary status for the good fortune. In such circumstances, even the company is earning profit, it is unable to find out the reason behind earning profits and therefore, the chance of future success is low.
The companies which are taken into consideration for analysis of the integrated reporting are:
- Wesfarmers
- Woolworths
- Amcor
- Rio Tinto
Wesfarmers – the IR of the company includes the various aspects regarding its non-financial and financial performance. The company focuses on delivering satisfactory return to its shareholders and ensures the safe working environment for its workers. Like the competitors, Wesfarmers also have some sustainability principles to transform its values into the operations. As the company belongs to the large industry and operating in the highly concentrated market, they have considerable influence on the Australian community and the suppliers. However, it is not clear from their IR that whether the company has taken any extended approach regarding the investment decisions or not. It is clear from their IR that they have a strong environmental policy that states that they are able to face the environment risks to which the divisions of the business are susceptible (Wesfarmers.com.au 2017).
Woolworths – the company has put considerable emphasis on the non-financial matters of the company. It also gave importance to the sustainability and the corporate governance of the company and receives regular updates regarding these matters on monthly basis. The profitability recognition is associated with matters like food safety, staff safety and the turnover rates of the staff. It is clear from the IR of the company that they provide voluntary training for achieving the environmental sustainability that helps in aligning the behaviour of the staffs with sustainability strategies of the organization (Woolworths Online 2017).
Amcor – the IR of Amcor focussed on the major risks that are faced by the company and mapped them as per the nature and degree of each risk like financial risk, strategic risk, operational risk and compliance risk. They prepared their IR based on the issues raised by their shareholders and the international benchmark to prioritise and define their opportunities and risks that were managed through the enterprise risk-management approach. It is also recognized that the risk assessment approach of the company provided information regarding the procedures of operating plans. These procedures further suggested that the company has taken some positive steps for integrating the non-financial and financial management of risk (Amcor.com 2017).
Rio Tinto – in the IR of the Rio Tinto they have set some KPIs for the noise exposures, emissions of greenhouse gas, usage of fresh water, community contributions and diversity, occupational illness and injury rates. Progresses in these sectors are measured as compared to the trends and targets data. Further, the non-financial performance of the company is communicated through the sustainable developments reports and the annual reports. Targets and goals of the company and the progress level along with the dates are also mentioned in the IR of the company (Riotinto.com 2017).
Analysing the IR of the above mentioned four companies, it is identified that all the 4 companies has given much importance regarding the non-financial performance in the IR. Further, all the companies except Amcor has provided details regarding their environmental approaches and safe working environment for their employees in their IR. In case of Rio Tinto it is identified that they have not provided any links related to the interdependency between the non-financial and finance performances (Potter, Singh and York 2013).
The companies face various challenges in moving to the IR as compared to providing the annual reports and sustainability report. These are:
- Quantifying performance – required metrics for analysing the ESG (environmental, social and governance) performances and the financial performance and creation of the links are different from the traditional method of measuring the corporate performance
- Management of integrated risk – prioritising, managing and defining the ESG risks is not as simple as the conventional method of risk management.
- Reliability of information – IR requires the implementation of strong monitoring and information systems for assuring the reliability of the information, which requires professional skills (Healey 2013).
However, there are various benefits of integrated reporting. These are:
- It creates the new way to analyse the opportunities, threats and risks to the company.
- It gives the details regarding how the value for the company is generated more effectively, both externally as well as internally
- Through IR the investors get better idea regarding the sustainability of the company over the long-run (Adams et al. 2016).
References
Adams, C.A., Potter, B., Singh, P.J. and York, J., 2016. Exploring the implications of integrated reporting for social investment (disclosures). The British Accounting Review, 48(3), pp.283-296.
Amcor.com. (2017). Amcor – Home. [online] Available at: https://www.amcor.com/home [Accessed 21 May 2017].
Feng, T., 2014. Revealing integrated thinking through Integrated Reporting-An exploratory study within an Australian context (Doctoral dissertation, Macquarie University).
Healey, M., 2013. Integrated reporting-one company’s experience. Keeping good companies, 65(5), p.262.
Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.
Potter, B., Singh, P.J. and York, J., 2013, July. Corporate social investment through integrated reporting: Critical issues. In Seventh Asia Pacific Interdisciplinary Research in Accounting ConferenceAsia Pacific Interdisciplinary Research in Accounting Conference.
Riotinto.com. (2017). Australia. [online] Available at: https://www.riotinto.com/australia-9559.aspx [Accessed 21 May 2017].
Strong, P., 2014. Integrated reporting-where are we now?. Governance Directions, 66(3), p.137.
Wesfarmers.com.au. (2017). Home. [online] Available at: https://www.wesfarmers.com.au/ [Accessed 21 May 2017].
Woolworths Online. (2017). Woolworths Supermarket – Buy Groceries Online. [online] Available at: https://www.woolworths.com.au/ [Accessed 21 May 2017].
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