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Integrated Reporting Framework Proposed

Integrated reporting holds the prospect of removing “clutter” that obscures important information in company reports, according to a discussion paper released by the International Integrated Reporting Committee.

The paper, Towards Integrated Reporting – Communicating Value in the 21st Century (pdf), says that corporate reports are long and in many cases getting longer, raising the likelihood that excessive detail will obscure critical information. But, the paper says, “An Integrated Report provides a clear reference point for other communications, including any specific compliance information, such as investor presentations, detailed financial information, operational data and sustainability information.

“Much of this information might move to an online environment, reducing clutter in the primary report, which will focus only on the matters that the organization considers most material to long-term success,” the paper adds.

Integrated reporting aims to combine the most material elements of information currently reported in separate reporting strands (financial, management commentary, governance and remuneration, and sustainability) in a coherent whole. Most importantly, the IIRC says, integrated reporting shows the connectivity between these elements, and explaisn how they affect the ability of an organization to create and sustain value in the short, medium and long term.

“The main output of Integrated Reporting is an Integrated Report: a single report that the IIRC anticipates will become an organization’s primary report, replacing rather than adding to existing requirements,” the IIRC says. “Such a report enables evolving reporting requirements, both market-driven and regulatory, to be organized into a coherent narrative.”

The paper lays out a proposed integrating reporting framework, which focuses on a company’s business model. With this in mind, IIRC says, integrated reporting should provide insights about significant external factors that affect an organization, the resources and relationships used and affected by the organization, and how the business model interacts with both of these to create and sustain value over time.

“By describing, and measuring where it is practicable, the material components of value creation and, importantly, the relationships between them, Integrated Reporting results in a broader explanation of performance than traditional reporting. In particular, it makes visible all the relevant capitals on which performance (past, present and future) depends, how the organization sues those capitals, and its impact on them, as illustrated by the diagram below,” the IIRC says.

The committee argues that five guiding principles underpin the preparation of an integrated report: strategic focus, connectivity of information, future orientation, responsiveness and stakeholder inclusiveness, and conciseness, reliability and materiality.

The content of an integrated report should include six key elements, the IIRC says (see diagram): organizational overview and business model; operating context, including risks and opportunities; strategic objectives and strategies to achieve these objectives; governance and remuneration; performance; and future outlook. These content elements are fundamentally linked to each other and should be presented in a way that makes the interconnection between them apparent, rather than as isolated, stand-alone sections, the paper said.

The paper said that that many organizations are taking innovative approaches to “aspects of reporting that are often consistent with the concept of Integrated Reporting.” These include the 2010 annual report by AkzoNobel, Annual Review and Summarized Financial Information by Sasol, 2010 Annual Report by BHP Billiton and 2010 annual report by Anglo American. But, the paper said, “few organizations, if any, however, could claim to have achieved the ideal of Integrated Reporting.”

The paper notes that companies may follow a variety of routes towards the ultimate aim of integrated reporting. These include combining the sustainability report with the management commentary or full annual report. A combined report is not an Integrated Report, the paper says, but a combined report can be a logical first step for organizations as they explore opportunities to integrate content into a more concise form, and build understanding of how performance in one area drives value in another.

Other routes include: publishing a concise, stand-alone, integrated report as the only addition to the required annual report or regulatory filing (this option may be attractive to organizations not currently producing a separate sustainability report); modifying the sustainability report or the management commentary by tailoring it in accordance with IR Guiding Principles and Content Elements; and adopting IR internally to underpin management information.

The IIRC is holding a consultation on the discussion paper. Comments should be submitted to dpresponses@theiirc.org or www.theiirc.org by December 14.

The IIRC was formed by Prince of Wales’ Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) in April 2010.

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