Principles of Integrated Reporting
Integrated Reporting, commonly known as IR, plays a crucial role in the promotion of a more consistent as well as effective approach of corporate reporting; it also aims in improving the quality of available information to the users so that the organizational capital can be allocated in the more efficient and productive manner (integratedreporting.org, 2019). The primary objective behind the introduction of IR is to inform the financial capital providers of the companies that how the companies are creating value and all the stakeholders of a company such as suppliers, employees, customers, communities and other can become majorly beneficial from the IR. At the same time, it needs to be mentioned that integrated reports provide the users with both the financial and non-financial information of the companies with the aim to assist them in the process of various decision-making (integratedreporting.org, 2019).
IR improves the manner the business organizations think, plan and report the details of their businesses. In today’s business world, many of the companies use IR in order to clearly and concisely communicate an integrated story of their process of value creation. For this reason, organizations irrespective of private and public are using IR for building understanding as well as trust in their businesses.
IR is considered as an effective way to assist a private company in better understanding and managing how they create value so that they can report on their value creation process. The adoption of IR assists a private company in building a better as well as more material understanding about the aspects that ascertain the company’s ability of value creation over long, medium and short-term (integratedreporting.org, 2019). In this process, IR helps in improving the private firms’ business planning and development by taking into account a wholly corrected, holistic view on the capitals as well as resources necessary for their business models. Thus, IR provides the opportunity to the private companies in understanding six different capitals so that they can effectively manage them for long-term value creation; these capitals are financial capital, manufactured capital, intellectual capital, human capital, natural capital and social and relationship capital (integratedreporting.org, 2019). Moreover, better understanding of these capitals helps the private companies in implementing better communication channels with the key stakeholders. The IR framework provides the private companies with three guiding principles that are strategic focus, future orientation and conciseness in reporting. Overall, IR improves the corporate reporting of the private companies (integratedreporting.org, 2019).
Benefits of Integrated Reporting
Like private companies, the companies under the public sectors become majorly beneficial from the implementation of IR. It is the responsibility of many public sector companies to provide service delivery as well as governance excellence in an environmentally, socially, financially and economically way (home.kpmg, 2019). IR provides major assistance to the public sector companies in equilibrium reporting of the conflicting aspects. IR can provide the public sector organizations with an agenda so that they can focus their reporting on their major objectives. After that, the public sector organizations get major assistance from IR in explaining their strategies, governance and operating model so that they key stakeholders can assess their performance based on these key strategies (home.kpmg, 2019). It means IR assists these companies in effective stakeholder engagement that can assists these companies in showing how they have maintained the balance of the often conflicting needs of different stakeholders. Moreover, the public sector organizations can get the opportunity from IR in aligning their reporting with the organizational risks and opportunities along with management accountabilities (home.kpmg, 2019). Thus, on the basis of the above discussion, it can be said that both the private and public sector organizations can use IR for increasing their organizational effectiveness.
It needs to be mentioned that IR has eight elements and Business Model is one of them. IR has positive impact on the strategy and control of the organizational business model as the implementation of IR helps the companies in understanding their business model. An integrated report assists in describing the business model through four aspects; they are Inputs, Business activities, Outputs and Outcomes (Adams, 2015). IR positively influences the organizational strategies by showing how the major inputs are material for understanding the strength and flexibility of the business mode. After that, IR assists the organizations in developing the business strategies by describing the key business activities. In this way, the companies can ascertain how they are different from their competitors. After that, companies become able in identifying the internal outcomes, external outcomes, positive outcomes and negative outcomes with the implementation of IR and this aspects assist in the implementation of control in the business model (Cheng et al., 2014).
Value creation is considered as another crucial aspect in IR. The financial capital providers have interest in the organizations’ value that they create. At the same time, they also have interest in the organizations’ value creation for others. The ability of the firms in creating value for itself is connected with the value creation for others (Eccles & Serafeim, 2015). Companies create value through a wide range of activities like relationships and interactions. In this situation, an integrated report plays a crucial part as helps in including the interactions, activities and relationships that are material to the ability of the organizations in the value creation. IR helps the companies by providing the value creation process which includes the aspects of business model that are inputs, business activities, outputs and outcomes. In the value creation process, IR helps in considering the components of external environment that are economic conditions, technological changes, community issues and environmental hurdles. It needs to be mentioned that the providers of the financial capital wants to obtain information about the value creation process of the companies and the implementation of IR assists in providing the necessary information on this aspect (Simnett & Huggins, 2015).
Implementation of Integrated Reporting
At the same time, integrated reporting plays a crucial role in the strategic control of the companies. IR involves in identifying the short, medium and long-term strategic objectives of the business organizations. After that, it describes the connection between allocation of organizational resources and organizational strategies. This aspect helps in answering the question that how strategy and resource allocation is related with the business model of the companies (Owen, 2013). This process is majorly helpful in establishing strategic control. In addition, business organizations can identify the risks and opportunities of the businesses by assessing whether the external environmental factors have impact on the business strategies. In the presence of this information, companies can bring control over their business strategies.
The presence of six capitals can be seen in IR; they are Financial capital, Manufacturing capital, Intellectual capital, Human capital and Social and Relationship capital; and it is believed that all of these six capitals have impact on the aspect of strategic management accounting of the companies (Stubbs & Higgins, 2014). The journey of IR commences from the core of the business organizations that is the business model. The foundations of the businesses are resources, activities, outputs and outcomes. The value creation process begins in the presence of strategy development, action planning, risk management and governance. The necessitate of establish the connection across the value creation drivers puts the strategic management accountants at the front position of the value creation process. No one has better knowledge about the businesses than the strategic management accountants as they have a unique as well as holistic perspective of the strengths and weaknesses of the businesses (De Villiers, Rinaldi & Unerman, 2014). For this reason, they are at the heart of the drive to IR within the organizations.
It needs to be mentioned that IR integrates both the financial and non-financial information of the businesses for providing the comprehensive picture of the organizational value creation. For this reason, it will be necessary for the strategic management accountants to take into consideration all the six capitals of IR to report about the value creation process of the business (Churet & Eccles, 2014). Hence, they will be needed to play a more energetic role in strategic discussion with the companies’ strategic partners. When the majority portion of the company’s market value is related to intangible assets, it is needed for the strategic management accountants to understand how the other resources such as human capital, intellectual capital and others are affecting the business operations with the aim to make effective business decisions. It indicates that the six capitals of IR have impact on the decision-making process of the strategic management accountants (Dumay et al., 2016).
Conclusion
To infer, IR has major relevance in the corporate reporting of the contemporary world. As per the above discussion, the adoption of IR provides both the private as well as public companies with major advantages in creating value and thus, they can adopt IR for their corporate reporting. It can also be seen that IR has major positive influence on the business model of the companies that includes both strategic initiatives and strategic control. The above discussion also sheds light on the fact that the strategic management accountants can become majorly beneficial by considering the six capitals of IR due to the positive impact on the profession.
References
Adams, C. A. (2015). The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, 23-28.
Cheng, M., Green, W., Conradie, P., Konishi, N., & Romi, A. (2014). The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), 90-119.
Churet, C., & Eccles, R. G. (2014). Integrated reporting, quality of management, and financial performance. Journal of Applied Corporate Finance, 26(1), 56-64.
De Villiers, C., Rinaldi, L., & Unerman, J. (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), 1042-1067.
Dumay, J., Bernardi, C., Guthrie, J., & Demartini, P. (2016, September). Integrated reporting: a structured literature review. In Accounting Forum (Vol. 40, No. 3, pp. 166-185). Elsevier.
Eccles, R. G., & Serafeim, G. (2015). Corporate and integrated reporting. Corporate Stewardship: Achieving Sustainable Effectiveness, 156.
Home.kpmg .(2019). Applying Integrated Reporting principles in the public sector. Retrieved 7 February 2019, from https://home.kpmg/content/dam/kpmg/pdf/2013/04/applying-ir-principles.pdf
Integratedreporting.org. (2019). IFAC GLOBAL SMP SURVEY: 2015 RESULTS THE BENEFITS OF INTEGRATED REPORTING CREATING VALUE FOR SMEs THROUGH INTEGRATED THINKING. Retrieved 7 February 2019, from https:// https://integratedreporting.org/wp-content/uploads/2017/08/IFAC_CreatingValueforSMEs.pdf
Integratedreporting.org. (2019). THE INTERNATIONAL <IR> FRAMEWORK. Retrieved 7 February 2019, from https://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf
Owen, G. (2013). Integrated reporting: A review of developments and their implications for the accounting curriculum. Accounting Education, 22(4), 340-356.
Simnett, R., & Huggins, A. L. (2015). Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), 29-53.
Stubbs, W., & Higgins, C. (2014). Integrated reporting and internal mechanisms of change. Accounting, Auditing & Accountability Journal, 27(7), 1068-1089.
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