Integrated Reporting
Table of Contents
Role of the International Integrated Reporting Council (IIRC) in sustainability accounting. 3
Reporting of intellectual capital under Integrated Reporting Framework. 4
Role of IR in supporting and communicating corporate sustainability management 6
Question 1
Role of the International Integrated Reporting Council (IIRC) in sustainable accounting
International Integrated Reporting Council (IIRC) was first founded through the collaboration of two leading organizations, that is, the Prince’s accounting for the project in Sustainability along with Global Reporting Initiative (GRI). IIRC has been set up to formulate a globally accepted framework that can be used for accounting sustainability in the financial statements. The framework is supposed to provide comprehensive and comprehensible about the performance of an organization such that it can meet a sustainable and global economic business model (Flower, 2015). According to one of the discussion papers published by IIRC, integrated reporting has been defined as the collection of material information regarding the strategy, governance, performance as well as prospects within an organization in the fields of commerce, society, and environment. The reporting also takes into account the stewardship of an organization in sustaining value to its properties.
IIRC anticipates a single report that would be treated as the primary report of an organization. This is because the council has identified many gaps in the traditional reporting methods, as followed by the organizations. The new reporting requirements that have been added to the conventional reporting frameworks have made the financial reports large and complex, and the sustainability reporting has been kept standalone. As a response to this, the IIRC has come up with a combined framework for integrated the four different financial strands, that is, financial statements, governance and remuneration reports along with sustainability reports and commentaries of management (Maas et al. 2016). IIRC aims to achieve a reporting framework that will reflect on the use of all the resources and the various kinds of capitals such as human, natural, social, financial, manufactured, and intellectual capital. Through this technique, there will be interdependence between the organizational value created for investors, employees, customers, and the other communities.
The first paragraph of the IIRC framework talks about a concise communication between the organization and its external environment in which the organization would reveal its strategy, governance, performance, and prospects leading to the proposition of value in the short, medium and long run. However, from the study of the framework, it is evident that it has not been successful in developing a universal principle for all the organizations and has not served its purpose of a primary report (Schaltegger and Wagner, 2017). Insteadhttps://sharksavewriters.com/the-short-term-fund-long-term-fund-funding-strategy/, it has also become a simple another report getting added to the bundle of reports already used by the organizations. In the context of sustainability, the framework only mentions a single reference in one of its paragraphs that belong to a separate sustainability report (Baboukardos and Rimmel, 2016). The integrated report does not highlight anything regarding sustainability. This individual sustainability report is set up according to the guidelines provided by GRI.
The founding bodies of the IIRC have suggested that the reporting framework will increase the values of the different categories of capital, which would further enhance the reporting of sustainability by the organizations. It has been detected that the framework has left many questions regarding the accounting and reporting of sustainability by the organizations. Firstly, the definition of value has not been interpreted widely, which has not described how societal value would be created or enhanced (Li et al. 2017). All the categories of capital are not detailed comprehensively. The framework defines the overall decrease or increase of the six capital structures for affirming the achievement of sustainability by the organization. However, the trade-off between capitals is not narrated meaningfully in the framework.
Despite all these disadvantages, the framework clarifies certain functions of value in its integrated reporting framework. One of the paragraphs states that an integrated report should be able to project a clear information to the financial funding authorities regarding the creation of value of the organization. The framework utilizes a balance sheet method for measuring an organization (Ibrahim et al. 2018). Further, the framework suggests alignment of value created by the organization for itself with values created for external members such as investors, stakeholders, and the communities. This can take place through various kinds of activities, interactions, as well as relationships. Through this method, the organizations can take account of their externalization of the capitals and note the change accordingly.
Question 3
Reporting of intellectual capital under the Integrated Reporting Framework
Today’s complex business environment prioritizes the value of the non-tangible assets in accounting and reporting in the financial statements. Several forms and frameworks of reporting have been developed over time, which included reporting of intellectual capital and social and environmental accounting (De Villiers and Sharma, 2017). However, IIRC came up with a new norm of corporate reporting through its Integrated Reporting Framework. This framework has been set up for integrating the reporting of financial and non-financial statements such that they can be a part of the future value creation plans of the organization (Camilleri, 2018). Integrated reporting is intended to enhance the quality of the information displayed to the providers of financial capital so that capital can be allocated optimally. The business funding authorities could be shareholders or a broad range of stakeholders.
Intellectual capital has been regarded as a resource that can create value and aid in achieving organizational objectives. Intellectual capital can be referred to as the sum of intellectual material, knowledge, property, expertise, and information. This can collectively create value in an organization for achieving a competitive edge in the business environment. Further, intellectual capital can include three significant components in its definition, that is, human, structural, and relational capitals (Rafiei and Ricardez-Sandoval, 2020). One of the ways by which Intellectual capital can be reported is by providing sufficient information about the intellectual assets that would improve decision making and bring out positive economic consequences to the board of directors. Intellectual capital can be used by the management for fixing the organizational strategy in the long term and for providing valuable information to the stakeholders. This way, the social, ethical, and environmental impacts can be taken into consideration by the organizations.
Intellectual capital has been reported differently under the Integrated Reporting framework. This is because the Integrated Reporting Framework incorporates six capitals, which are intangible. Some of these capitals are human capital, social capital, capital based on relations and structures. The research literature concerning intellectual capital has been widely studied by many researchers to discover the development of its reporting and other accounting practices. According to Guthrie et al. (2012), two stages of the intellectual capital has been formed in the research field, where the first stage focussed on raising awareness regarding the importance of intellectual capital in the competitive market and the second stage built up a legitimate undertaking towards gathering evidences of supporting the research. Therefore, it has been witnessed that there is significant commonality between IC reporting and Integrated Reporting, and IR is observed to have included some elements of IC reporting in its framework.
According to the IR framework, intellectual capital has been recognized as an organizational, knowledge-based intangibles, which consists of elements such as patents, rights regarding software, and other kinds of licenses. In this context, corporate capital is tacit knowledge, systems, and other protocols. In this, human capital includes the competencies, potentials, and expertise of people within the organization. Similarly, social and inter-linkage capital describes the relationship between the communities, group of stakeholders, and other different networks. This also includes the exchange of information between these groups for enhancing individual and collective well-being (Kianto et al. 2017). Natural capital can relate to all the environmental resources and activities that support the growth and prosperity of the organization. Other essential elements of natural capital include air, water, land, forest, biodiversity, and minerals. All these capitals form integral parts of the intellectual capital within an organization and are covered under the integrated reporting framework.
Along with all these elements, an integrated reporting framework also constitutes of eight essential elements that can be suitably attributed to intellectual capital. Some of these elements are a description of the organization and its outside environment surrounding the organization, governance persisting within the organization, the business model followed in the organization and risks and opportunities within the business (Rodrigues et al. 2019). Other elements of this framework are business strategy and resource allocation, business performance in the market, the outlook of the organization and the method used for the preparation and presentation of the integrated report. The key outcomes of the report include the internal outcomes as well as external outcomes that are experienced by the organization. Customer satisfaction, brand loyalty, socio-environmental effects can come under external outcomes, while employee morale, revenue, profit, and cash flows can be parts of the internal outcomes.
Question 6
Role of IR in supporting and communicating corporate sustainability management
Sustainability is an integral element of an organization, and in the complex business environment, the firms face intense pressures for remaining sustainable to their outside environment. All the organizations are also expected to remain transparent about their sustainability practices and publish their action plans regarding the economic, societal and environmental development (Stacchezzini et al. 2016). Firms can adopt many kinds of techniques for measuring, managing and reporting their sustainability practices conveniently. Sustainability management accounting can play a major role in communicating information regarding the sustainability efforts of the organisations. Sustainability reporting has been perceived as a process, which displays this communicated information to the external members of the organisations (Sukhari and De Villiers, 2019). Therefore, it has been realised that sustainability reporting should be strictly linked to sustainability management accounting for enabling the outside stakeholders to realise the original achievements and potentials of the organisations in the area of sustainability.
In this context, the role of integrated reporting comes into play, which can promote an integration between all the data and information systems that support internal and external reporting of sustainability. According to the guidelines published by IIRC, the firms are required to disclose the information that has been deliberately used for the decision making purposes. The firms should describe various ways by which they deal with sustainability and actions committed for attaining sustainability in the business (Gogan et al. 2016). The companies should reveal information about the leading determinants of sustainability and the extent of their influences on achieving the key strategic objectives of the organisations. Due to lack of research, the effectiveness of IR is still very unclear to the researchers. Through evidences it has been observed that the IR adopted incorporate information about sustainability actions and performances of the organisations in various disclosures, which relate to economic, social and environmental domains.
IR has not been published as a sustainability report, however, it stresses on the sustainability issues and integration of the various accounting and reporting measures of sustainability. Integrated reporting framework promotes a cohesive and efficient form of corporate reporting, which is a combination of all reporting strands from the perspective of sustainability. The prime focus of integrated reporting is to judge the financial performance of the company through inclusion of resources and interdependencies in the fields of social, economic and environmental issues (Forte et al. 2017). International integrated reporting framework fosters integration of information across all domains for supporting internal and external reporting of the organisations. Communication is a very important segment, which is also taken into account by the integrated reporting framework as it establishes interaction and interdependencies of the organisations with their external environment. IR has gained massive popularity in the current days and more than 75 firms participated in the IIRC pilot program to publish samples of their sustainability reports.
Along with all these advantages, an IIRF is also required to promote a forward looking focus through targets, forecasts and projections and also furnish a quantitative information through key performance indicators and other monetary metrics. According to the guidelines, the firms should encourage and support sustainability practices in their strategic planning procedures, decision-making activities and other operations. The various disclosures provided by IR must incorporate communication across various departments within the organisation and also with the external environment (Roos and Pike, 2018). The communications should be related to sustainability indicators with a broad understanding of the corporate engagement within the different dimensions of sustainability. Through this understanding, IR has always been investigated by the researchers as a vehicle of sustainability actions and performance favouring integration of strategic management with reporting.
There has been many studies conducted regarding of the ability of sustainability accounting in the determination of corporate strategic management. This has been an increasingly relevant concern for all the businesses. Two schools of thought have been observed among the researchers in the context. In one side there is management oriented path of sustainability accounting, which recognises a set of tools and techniques for managing SM and SR in an integrated manner (Terblanche and De Villiers, 2019). On another side, there is critical path of sustainability accounting development which highlights the limitations of presenting sustainability activities. However, from distinctive studies, it can be concluded that the first school of thought has been relevant in the practical orientation.
References
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