IIRC finalises its Framework for integrated reporting
09 Dec 2013
The International Integrated Reporting Council (IIRC) has released its ‘International Integrated Reporting <IR> Framework’ (<IR> Framework). The <IR> Framework seeks to explain the fundamental concepts, principles and content requirements underlying an 'integrated report', which is considered the next step in the evolution of corporate reporting.
The International Integrated Reporting Council (IIRC) was formed in August 2010 with the objective of creating a globally accepted framework for a process that results in communication by an organisation above value creation over time. The initial formation of the IIRC involved HRH The Prince of Wales bringing together The Prince’s Accounting for Sustainability Project (A4S), the Global Reporting Initiative (GRI), and a cross section of representatives from civil society, corporate entities, accounting firms and organisations, regulators, non-government organisations and standard-setters.
Since its initial formation, the IIRC has rapidly pursued its objectives, including:
- Publishing a Discussion Paper Towards Integrated Reporting in September 2011
- Formation of a IIRC Pilot Programme in October 2011 for organisations to pilot <IR>
- Releasing a prototype <IR> Framework in November 2012
- Publishing a Consultation Draft of the <IR> Framework in April 2013, together with number of background papers on key <IR> concepts that led into the development of the Consultation Draft.
The release of the finalised <IR> Framework follows additional consultation and consideration by the IIRC and its working groups of feedback obtained through these due process steps.
Overview of <IR>
Integrated reporting (stylised by the IIRC as '<IR>') is seen by the IIRC as the basis for a fundamental change in the way in which organisations are managed and report to stakeholders. A stated aim of <IR> is to support integrated thinking and decision-making. Integrated thinking is described in the <IR> Framework as "the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects".
The <IR> Framework expresses the IIRC's vision in the following way:
The IIRC's long term vision is a world in which integrated thinking is embedded within mainstream business practice in the public and private sectors, facilitated by Integrated Reporting (<IR>) as the corporate reporting norm. The cycle of integrated thinking and reporting, resulting in efficient and productive capital allocation, will act as a force for financial stability and sustainability.
There are three fundamental concepts underpinning <IR>:
- Value creation for the organisation and for others. An organisation’s activities, its interactions and relationships, its outputs and the outcomes for the various capitals it uses and affects influence its ability to continue to draw on these capitals in a continuous cycle.
- The capitals. The capitals are the resources and the relationships used and affected by the organisation, which are identified in the <IR> Framework as financial, manufactured, intellectual, human, social and relationship, and natural capital. However, these categories of capital are not required to be adopted in preparing an entity’s integrated report , and an integrated report may not cover all capitals – the focus is on capitals that are relevant to the entity
- The value creation process. At the core of the value creation process is an entity’s business model, which draws on various capitals and inputs, and by using the entity’s business activities, creates outputs (products, services, by-products, waste) and outcomes (internal and external consequences for the capitals).
The <IR> Framework sets out the purpose of an integrated report as follows:
The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates value over time. An integrated report benefits all stakeholders interested in an organization’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators, and policy-makers.
The ‘building blocks’ of an integrated report are:
- Guiding principles – these underpin the preparation of an integrated report, informing the content of the report and how information is presented
- Content elements – the key categories of information required to be included in an integrated report under the Framework, presented as a series of questions rather than a prescriptive list of disclosures.
The table below summarises each of these building blocks, together with the other key requirements for an integrated report:
|High-level summary of the requirements for an integrated report|
Changes made in finalising the Framework
The <IR> Framework incorporates the IIRC’s responses to feedback received in the consultation process, and input from participants in the IIRC’s Pilot Programme. Some of the changes made in finalising the Framework include:
- Better explaining the relationship between an integrated report and other reports and communications, such as financial reports and sustainability reports – the Framework notes an integrated report is “intended to be more than a summary of information in other communications… rather, it makes explicit the connectivity of information to communicate how value is created over time”
- Changing the primary objective of an integrated report from a focus on the audience (providers of financial capital) to a purpose (explaining how an organisation creates value over time), so as to reflect the broader constituent interest in <IR>
- Further elucidating the concept of ‘value’ and ‘value creation’, explaining that value arises from increases, decreases or transformations of capitals, and has two linked aspects: value for the organisation (which enables financial returns to providers of financial capital) and for others (stakeholders and society at large). The Framework also explains that value and value creation need not be quantified in an integrated report
- Clarifying terminology used, including the relationship between ‘integrated thinking’ and <IR>
- Including an additional Content Element in the <IR> Framework on ‘Basis of preparation and presentation’, requiring an entity to describe its basis of preparation and presentation of the integrated report, including the significant frameworks and methods used to quantity or evaluate material matters. Greater emphasis has also been given to using existing measurement guidance, including accounting standards, to ensure consistency in measurements across various reports and communications
- Addressing concerns around the involvement of those charged with governance in an integrated report – whilst the requirement for a statement acknowledging responsibility for the integrated report has been retained, a two-report grace period has been included to allow organisations to take responsibility for an integrated report, at least on a comply or explain basis.
|The question of whether those charged with governance should provide a statement acknowledging their responsibility for the integrated report was the single most contentious issue arising from the IIRC’s consultation process with only just over 50% of respondents in support. Investor representatives in general felt such a statement is necessary to add credibility to the integrated report and prevent it being seen as a marketing document. The principal argument against such a statement came from respondents in countries like Japan where there is currently no requirement for such a statement in relation to financial statements and there is no evidence that this has caused investors to look less favourably on Japanese stocks. By holding integrating reporting to a higher standard, the IIRC risks discouraging take up in such markets. Time will tell whether this proves to be the case.|
The <IR> Framework is accompanied by a Basis for Conclusions and another document identifying at a more detailed level how various issues raised by respondents to the April 2013 Consultation Draft were treated, as well as mapping significant changes in structure and movements of text from the Consultation Draft to the <IR> Framework.