By Barry Melancon CPA, CGMA
Over the past two decades, we have experienced a major shift in the business landscape, fuelled by the rise of the digital economy. Today, intangible assets, such as software, data and customer relationships, often comprise most of a company’s worth. In the past, companies often saw their greatest value tied to tangible assets, such as machinery and buildings.
Along with this rise in the significance of intangible value, we are experiencing increased calls for transparency about how a company impacts the world. Investors, governments and other stakeholders want to know if business practices are sustainable.
Companies too are signalling a changing mindset. Businesses are looking beyond shareholder profit to consider their impact on stakeholders and the environment. This August, CEOs of nearly 200 major companies — including Chase, Amazon, and Apple — issued a statement of ‘corporate purpose’, committing to deliver value to all stakeholders, not just shareholders. They called this a ‘modern standard for corporate responsibility’.
All these trends are reshaping what companies, investors and stakeholders need from corporate reporting. In this business environment, corporate reporting needs to provide a more complete story of a company’s business model, value creation and impact than is included in a traditional report.
In response to this need, the International Integrated Reporting Council (IIRC) is working to promote the next step in the evolution of corporate reporting: integrated reporting (IR). The IIRC is a global coalition of regulators, investors, companies, standard setters, accounting professionals and non-governmental organisations. It first introduced the IR Framework in 2013, after extensive testing by businesses and investors worldwide.
While traditional corporate reporting takes stock of financial performance only and offers a short-term view, IR offers a more complete rendering of an organisation’s value over time and in the context of its external environment.
To do this, IR provides both quantitative and qualitative information about six sources of capital — financial, manufactured, intellectual, human, social and relationship and natural. The report describes how an organisation’s business model transforms these six sources of capital inputs into outputs and outcomes. In other words, IR tells a story about how an organisation creates, changes or destroys value over time.
Crucially, IR also provides an opportunity for capital inputs and outputs of an organisation’s business model to filter through sustainable development goals (SDGs). SDGs are part of the UN’s ambitious agenda to end poverty and protect the planet, with specific targets designed to be met by 2030. By putting the focus on sustainable development, IR supports accountability and stewardship of resources. And it promotes understanding of their interdependencies.
Not only does IR help organisations do a better job of telling their story, it supports integrated thinking about how sources of capital come together to create value. Companies who adopt IR benefit from a greater understanding of their business model, their business environment and their ability to create value over the long term.
Research has shown that this type of understanding improves performance. In 2015, KPMG and the National University of Singapore conducted a study of 80 firms in 10 markets in the Asia Pacific to determine the relationship between IR and value creation. The researchers found that when companies started disclosing more than just financial information, they started outperforming companies that focused on financial data alone.
Why investors like IR
IR also builds investor confidence. Specifically, it gives investors a better understanding of non-financial value and risk factors, including those related to climate change, human rights and governance. And investors are noticing. According to EY’s 2018 Global Climate Change and Sustainability Services survey of investors, nearly all responders (94%) reported that integrated reports are very useful or essential sources of non-financial information.
Investor organisations around the world signed a statement of support for IR, signalling their belief that IR is important to their understanding of businesses and their allocation of capital. They also stated their view that IR leads to improved governance and stewardship of resources, helping to make businesses more stable over a longer term.
IR is in what the IIRC calls its ‘momentum phase’. More than 1,700 organisations worldwide have adopted IR, with South Africa and Japan as the top two countries embracing its framework. In fact, according to a 2018 survey by KPMG Japan, over 400 Japanese businesses have issued integrated reports.
There is also a significant concentration of IR in other countries in Asia, including Malaysia, where 100 companies have now adopted the framework, and Sri Lanka, where 25 companies have. In industries where intangibles play an important role, including banking, insurance, wholesale and retail, organisations are more likely to issue integrated reports.
How the Association of International Certified Professional Accountants supports IR
The Association of International Certified Professional Accountants, a global organisation formed by members of the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), supports adoption of IR, recognising it as a crucial tool for businesses and organisations to identify what is material to long-term value creation. The Association also provides resources to our members so they can bring <IR> to the businesses and organisations they serve as trusted advisers.
The Association too is seeing the benefits of IR. We released our first integrated report covering 2017 — our inaugural year. Adopting IR enabled us to more fully appreciate the wide range of factors that affect value and support integrated thinking and planning. It’s an important tool for us as stewards of a vital and vibrant profession.
For our complex and rapidly changing world, the focus of traditional financial reporting is too narrow. IR enables organisations to provide a more complete account of how they are creating value over time and impacting stakeholders and the environment. It’s the future of corporate reporting, and the future is now.
(Barry C. Melancon is the CEO of the Association of International Certified Professional Accountants, the most influential body of professional accountants in the world with more than 657,000 members and students. Formed in 2017, it combines the strengths of The Chartered Institute of Management Accountants (CIMA) and the American Institute of CPAs (AICPA), which Melancon leads as President and CEO. Melancon is also Global Chairman of the Board of the IIRC.)