What is Integrated Reporting Framework?

Corporate reporting is taking a whole new twist in the financial markets by companies that are listed in the stock exchange. Rezaee (2004) identifies that Integrated Reporting is gaining ground in the field of financial reporting due to the unprecedented ills of other means of conventional reporting and other financial scandals that hit the reporting systems thus culminating lack of confidence in the financial reporting systems. Robertson (2018) identifies that Integrated Reporting, in the list of most current developments of proposed reporting inventions, is the latest that tries to restore the need for corporate reporting. Further, Robertson (2018) asserts that the failure of most reporting initiatives to perform their intended purposes encouraged the International Integrated Reporting Council to come up with a better initiative, the Integrated Reporting in order to overcome the ills created by other reporting frameworks. 

What then constitutes Integrated Reporting? Adams and Simnett (2011) define Integrated Reporting system as a new reporting ideal considered to be comprehensive, decisive, conscious, substantial and more relevant in diverse timelines. The Integrated Reporting represents a transition to a more comprehensive reporting that can be contributory and conducive for most organizations which will also restore the confidence in the reporting systems (CAANZ, 2018).

Lodh (2018) find that Integrated Reporting promotes a more adhesive and tenacious yet efficient and effective approach to corporate reporting and objectively gears towards improving the attribute of information relevant and readily available to market players in order to efficiently allocate capital. To match the dreams and visions of International Integrated Reporting Council (IIRC), Integrated Reporting is designed in such a way that it is fixed within the business practices in both public and private sectors forming a harmonized reporting culture.

Integrated Reporting differentiates itself from other conventional reporting systems due to its simplicity, relevance, and ability to enable efficient communication between businesses and their investors. Conventional reporting systems are considered to be very complex, lack relevance and inefficient in ensuring communication between businesses and their investors. Moreover, conventional reporting frameworks make annual reports vaguely captured and more of skewed to the regulator other than the business (Majmudar and Rana, 2018).

So then, Integrated Reporting is a very relevant tool in the field of reporting. Its relevance is depicted in a number of ways; Majmudar and Rana (2018) note that Integrated Reporting is a vehicle that drives investors to a long-term valuation and value creation for themselves and their businesses. Integrated Reporting helps investors to ponder upon their business, plan and offer a better platform for reporting. 

To the providers of financial capital, Integrated Reporting is not only a relevant podium for this service but also a means of providing quality information about the business and its environment of operation in order for financial capital providers to determine a more feasible way of allocating financial capital which will ensure a standardized reporting through the IR framework (Lodh 2018). 

Shepherd (2018) points out that, despite the fact that the aim of Integrated Reporting is producing a report, its assessment or value lies in the process of reporting rather than the report itself. It enables the users to develop a clear and concise understanding of the model of the business in which capital is put to use. This in essence, therefore, means that Integrated Reporting puts forward a more adhesive and coherent approach to reporting by corporations that utilize and harmonizes different reporting mechanisms whilst focusing on communicating factors to put in consideration that actually affects the ability of companies to create value within set timelines.  

Impact of IR on Corporate Reporting Norms

The consumers of the financial information reported by an organization are said to be very skeptical about the figures reported and would want to know more behind the reported figures. Compared to other conventional reporting frameworks, Integrated Reporting provides a better opportunity for the managers to “tell the whole story in a better way” regarding their financials to their shareholders and even to other interested external parties who are also a likely consumers of the financial information in order to fully understand the mechanics behind the numbers reported (Shepherd, 2018). According to Lodh (2018), Integrated Reporting enhances the ability of most organizations to be accountable and responsible for their immense base of capital as a resource and to also understand the interdependence nature in these capital resources.  

Integrated Reporting also focuses on connecting the strategic goals of the organization, setting a base for assessing risk and evaluating the performance in order to determine value creation by organizations (ACCA, n.d). To elaborate on this further, organizations need to be vigilant in their financial reporting such that they report all areas of their undertakings and performance and not lightly focusing on their short-term financial outcomes.

Also, a very notable feature of Integrated Reporting is its ability to help investors and other stakeholders to classify and have a wider view of capital as a resource. Integrated Reporting classifies capital into six types; human, natural, social and relationship, manufactured, financial alongside intellectual capital (Majmudar and Rana, 2017). This classification is critical to businesses which have the mandate to not only focus on reporting against all the six types of capital but also to visualize and analyze how best each type of capital could create value for them. Therefore, Integrated Reporting helps investors and their businesses to think comprehensively about strategic plans, make valuable decisions and to carry out risk and opportunity evaluation in order to adequately build the confidence of the investors and other stakeholders while also focusing on bettering future performances.  

Adams (2013) assert that natural capital provides a base where other types of capital operate.  Natural capital seeks to create a better environment for the operation of other types of capital as categorized by Integrated Reporting. The main aim is to determine the impacts of the business on its natural environment. For instance, emission of air and gas into the environment as a consequence of a business entity. The business also depends on the environment for the provision of raw materials (Dickie et al, 2013). Natural capital, therefore, is a stock of resources such as water, air among other natural provisions that a business may require.

Financial capital, on the other hand, refers to that source of funds that is available to an organization for example credit, debt, and equity. Financial capital is the main asset for acquiring other types of capital. Pedro and Bernes, (2018) point out that financial capital is the major focus when evaluating the performance of an organization. Management accounting, therefore, needs to realize that financial capital is evaluated by its conversion to other forms of capital.

IR’s Influence on Strategy and Control in Organizations

Manufactured capital is created by humans and is oriented to production. Management accounting needs to categorically handle manufactured capital defining its critical constituents such as inventory which is termed as a short-term asset due to its liquidity nature, and plant and equipment which is broadly considered as a tangible capital (ACCA, 2013). Managerial accounting personnel should also be able to distinctly differentiate between manufactured physical objects and those that are naturally physical objects which are available to an organization to put to use in the production of goods and services. Lodh (2018) also note that manufactured capital is by extension created by other organizations but encompass assets that are created by the reporting organization for sale or can choose to retain them for their own use. 

Intellectual capital refers to the intangible part of a business encompassing human capital, the value of its relationships to other aspects of the business such as what is left when the human resources are missing, also known as structural capital. The managerial accounting should focus on evaluating intellectual capital as it clarifies means of creating competitive advantage by ensuring proper positioning of the value chain and determining a better business model for the proper creation of value. Intellectual capital in essence, therefore, is a clear and critical analysis of the human, structure, and relationships between these capitals.

Human capital refers to the summation of individual’s abilities and capabilities, skills, experience and knowledge of employees and managers that are believed to be relevant to various engagements at their disposal and which are developed over time through learning initiatives (Zhou et al, 2017). Human capital, therefore, impacts managerial accounting because it is a major determinant in the execution and commitment of other capital resources. The managerial accounting should focus on ways to harness this resource in order to align the capital and the organization’s framework in order to develop critical organizational strategies that would ensure maximum value creation.

Social and relationship capital is more concerned with the regulations and interrelations established in and between each social setting, stakeholders and other business networks in order to enhance collective and individual wellbeing. Managerial accounting should, therefore, be more concerned in building this capital as it aims to enhance the relationship of the business to its surrounding by creative a harmonized platform for understanding of each stakeholder so as to ensure collective bargaining rather than a division of ideologies and reasoning (Reports.sibanyegold.co.za, 2018). Social and relationship capital analyzes the relationship of key stakeholders, their trust and the level of their willingness to the fact that the organization they serve strives to uphold in high regards and gears towards protecting its key stakeholders.

CPA Australia is an Australian accounting company that professionally deals with administering accounting principles to their customers all over Australia and also offers financial services. The core service of CPA Australia is to offer education, access to knowledge, training its clients on different financial aspects, networking, technical support and also offering advocacy. The main source of finances for their main activities is through membership registration charges and fees levied upon their various services. The company works in line with the Generally Accepted Accounting Principles. CPA Australia embraces and utilizes the Integrated Reporting framework in its annual reporting in different aspects of its programs. It considers and holds in high regards the six capitals as described in the Integrated Reporting framework.

Impact of Six Capitals in Strategic Management Accounting

The key areas in Integrated Reporting that CPA Australia focuses on include value creation by considering their environment, social culture, governance and the six capitals with a bias to natural capital. According to CPA Australia’s annual report of 2017 annexed below, the organization is said to be professional office based which limits its interaction with natural capital thus low impact on this type of capital which thence mean that the natural capital is of limited value and material to the stakeholders of CPA Australia. Therefore, as earlier mentioned, natural capital is not considered in CPA Australia’s business model.

In its pursuit of value creation, CPA Australia integrates integrated thinking. Integrated thinking refers to the initiative of a constructive approach to rigidity caused by contradicting ideas such that instead of selecting one idea over another, an approach is devised that creates a resolution by determining a new idea that comprises blocks of each opposing ideas but higher in ranks to both (Rotman I-Think Initiative, 2018).  CPA Australia uses this strategy to align their purpose and their business model in order to determine the best marketing strategies and to evaluate their performance sustainably (Cimaglobal.com, 2018).

In the considerations of the six IR capitals, CPA Australia commits finances efficiently in order to ensure return on the value of the finances that are committed to their daily operations (financial capital). CPA Australia also gears towards promoting a conducive working environment for all its stakeholders and ensuring the efficient fulfillment of the interest of the public (social and relationship capital).   Integrated Reporting has also enabled CPA Australia to ensure efficient utilization of intellectual capital by committing to the internal management of all available resources and processes. Manufactured capital is efficiently used by CPA Australia as outlined in their annual report of 2017 through the commitment of available resources in ensuring high productivity realized which aligns with the goals of value creation.

In conclusion, therefore, CPA Australia clearly understands the need for Integrated Reporting and has a clear outline of ways to achieve top-notch reporting framework through IR which encompasses not only financial reports but also performance in other areas where capital is committed. It is focused on releasing reports that satisfy the desires of its stakeholders in relevance and timeliness. In so doing, it eases the decision-making process and helps stakeholders to evaluate the performance and outlook of CPA Australia.

References

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Adams, C., (2013). Integrated Reporting and the Six Capitals: What does it all mean? Towards sustainable business. Available at: https://drcaroladams.net/integrated-reporting-and-the-six-capitals-what-does-it-all-mean/ [Accessed September 7, 2018].

Adams, S. and Simnett, R. (2011). Integrated Reporting: An Opportunity for Australia’s Not-for-Profit Sector. Australian Accounting Review, 21(3), pp.292-301.

CAANZ. (2018). Integrated Reporting | Business Issues. [online] Available at: https://www.charteredaccountantsanz.com/member-services/technical/business-issues/integrated-reporting [Accessed 7 Sep. 2018].

Cimaglobal.com. (2018). CIMA – Integrated thinking – aligning purpose and the business model to market opportunities and sustainable performance. [online] Available at: https://www.cimaglobal.com/Members/member-benefits/insight-magazine/Insight-September-2017/Integrated-Thinking–aligning-purpose-and-the-business-model-to-market-opportunities-and-sustainable-performance/ [Accessed 8 Sep. 2018]

Dickie, I., Royle, D. & Anderson, S., (2017). https://ljournal.ru/wp-content/uploads/2017/03/a-2017-023.pdf. Integrated Reporting and Natural Capital Accounting. Available at: https://jncc.defra.gov.uk/pdf/587_web.pdf [Accessed September 7, 2018].

Lodh, S. C. (2018), Conventional accounting in determining an enterprises wealth: Sign or referent a theoretical discourse for augmentation, International Journal of Critical Accounting, Inderscience, [online]. Available at https://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf [Accessed on 7 Sep. 2018]

Majmudar, U. and Rana, N. (2017). Richard Howitt talks about the importance of Integrated Reporting for India. [online] Economic Times Blog. Available at: https://blogs.economictimes.indiatimes.com/et-commentary/richard-howitt-talks-about-the-importance-of-integrated-reporting-for-india/ [Accessed 6 Sep. 2018].

Pedro, K. and Bernes, B. (2018). Financial Goals and Metrics Help Firms Implement Strategy and Track Success. The Role of Finance in the Strategic-Planning and Decision-Making Process, [online] 13(1). Available at: https://gbr.pepperdine.edu/2010/08/the-role-of-finance-in-the-strategic-planning-and-decision-making-process/ [Accessed 7 Sep. 2018].

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Shepherd, N. (2018). The importance of Integrated Reporting for internal decision making | Integrated Reporting. [online] Integratedreporting.org. Available at: https://integratedreporting.org/news/the-importance-of-integrated-reporting-for-internal-decision-making/ [Accessed 7 Sep. 2018].

Zhou, S., Simnett, R. and Green, W. (2017). Does Integrated Reporting Matter to the Capital Market? Abacus, 53(1), pp.94-132.