The Integrated Reporting Framework, which is used to accelerate the adoption of integrated reporting across the world, was a topic of major importance during the International Sustainability Standards Board’s inaugural symposium in Quebec.
International Accounting Standards Board chairman Andreas Barckow encouraged companies to follow the principles and concepts of the framework to help companies achieve a comprehensive corporate reporting system worldwide and reflect the individual nature of organizations. Participating in the conference last Friday as a panelist, Barckow said the framework offers the opportunity to measure dependency and impact by connecting financial information with other data.
“I think it is widely acknowledged that integrated reporting is a step forward from traditional accounting and, obviously, the more we can keep that family close to us, the more inspirational this entire journey becomes,” said Barckow. “I think you only get part of the story just by looking at the financials, and integrated reporting tells you much more, such as how an entity creates value short term, medium term and long term.”
When the Internal Financial Reporting Standards Foundation merged the Value Reporting Foundation and the Climate Disclosure Standards Board into the ISSB last year, the organization not only inherited the Integrated Reporting Framework, but also the Integrated Thinking Principles, which help plant sustainable business practices within companies. According to Barckow, the framework offers a guide for the IASB and the ISSB in terms of connectivity of how the boards’ literatures are bound to one another.
When the framework was created, the big debate was whether it should be called “integrated reporting” or “integrated thinking,” since reporting flows from the latter. AICPA president and CEO Barry Melancon said that entities were trying to figure out a way to rationalize changes in the reporting landscape in the corporate reporting perspectives. Integrated reporting is about six different capitals — natural, financial, manufacturing, human, intellectual and relationship — all wrapped into a multi-stakeholder approach, he noted.
“What governments required [of] a business was essentially two things: they required them to pay their taxes and to provide certain financial information to the government,” said Melancon. “But today the government, multi-stakeholders, investors and others are requiring a much broader set of information. What is the strategy? How does it connect? What are the weaknesses? What are the positives? Where is the connectivity? And that’s really what the framework of integrated reporting is all about.”
CPA Canada president and CEO Pamela Steer said the perspective of what represents a company’s value has been through profound and fast-paced changes over the last few years. One of the most noticeable changes is a transition from one she calls an “alphabet soup” to unified boards that rely on dialogue and overcome conceptual disagreements to provide opportunities for preparers and providers of capital to engage in a more meaningful way.
According to Steer, governments should fulfill their duties to the voters and stakeholders in their communities and economies to ensure businesses are following protocols. For companies to become more adept, they need to provide better information to answer the changing needs of investors who no longer look for traditional information in financial statements. With more data available each day, it’s the accountants’ responsibility within their organizations to provide more information that’s “decision useful.”
“CFOs are the storytellers of the corporate information and they’re now going to provide a much better integrated story for the capital markets and other stakeholders,” said Steer. “It can provide a much fuller picture of an enterprise, not just its finances, but the six capitals, and how the flows of each of those work to impact what that enterprise does, as well as the value that creates or destroys along the way.”
When it comes to the integrated reporting framework and connectivity, Barckow said that integrated reporting principles will be used to develop a corporate reporting framework. Such an enterprise has procedural and content challenges, but the idea is to combine the literature of the IASB and the ISSB. However, Burckow said that the boards’ literature are at a different stage, noting that the IASB has more literature and a mandatory basis for adoption, except for its management commentary. The latter is a report prepared for a company’s investors to present factors that have affected the entity’s financial performance, position and prospects.
Barckow said there are debates on whether the management commentary should remain voluntary or become mandatory, and while the answer won’t differ between the ISSB and the IASB, he said that jurisdictions adopting the standards may do so between the two sides. But given the conceptual similarities between the framework and management commentary, the IFRS Foundation wondered whether it really makes sense to have two pieces of literature. Consequently, an alternative could be to think of the Integrated Reporting Framework as an all-embracing foundation while management commentary would operationalize the framework’s most generic ideas.
“I should mention that we do have an IASB-only project at this stage, which many stakeholders have commented they wanted us to proceed with, but they urged us to work collectively with the ISSB, which we obviously take very seriously,” said Barckow. “But even more so many commentators said there’s a huge overlap between management commentary and the principles that are in integrated reporting […] and this is another thing that Emmanuel [Faber, chair of the ISSB] and I are committed to doing.”
Regarding challenges for corporate and accounting professionals to apply integrated reporting, Melancon said that organizations sometimes need to take a step back to understand which strategies and opportunities are going to be relevant in the future. It takes a high level discussion and a strategic understanding of how the world is changing to make a smooth transition, especially when adoption rates for sustainability reporting drastically differ between countries.
Additionally, Melancon said that all the entities of the world should have a chief financial officer. The AICPA, which has over 700,000 members around the globe, aims to promote greater awareness at companies’ top levels and narrow down multi-stakeholder expectations. With that perspective, the AICPA announced a new partnership with Oxford University to provide mid to senior level professionals, as well as CEOs and CFOs, with the tools and knowledge to make businesses more sustainable.
“I think people don’t really understand the power of telling that comprehensive, integrated story about a company and how that can affect capital-raising shareholders, employees and the like,” said Melancon. “It really conveys what this company is all about compared to its employees, its investors, the society it operates in, all its customers, its suppliers, etc.”
According to Hiroshi Komori, a member of the IFRS Foundation who moderated the panel, more than 2,500 businesses in over 70 countries have implemented integrated reporting. In a sample of 1,700 of these organizations, 43% of reports come from Asia Pacific and 23% come from the Middle East and Africa, with the Johannesburg Stock Exchange representing a significant portion.
Looking at the future of sustainability, Steer noted that it’s important not to underestimate the challenge of the work that is ahead for preparers, regulators and professional services providers. Unlike accounting, which enjoyed a fairly unchanged system and framework for over a century, implementing standardized reporting standards around the world is going to be a “heavy lift.”
“This is the Wild West, and there has to be some break in time,” said Steer. “We are going to make mistakes. It’s going to be roughly right and we will pick up momentum. And then as we go, we will develop economies of scale such that it is easier for smaller companies to adopt this kind of level of reporting.”