By: C.P. y M.A. Ana Ma. Díaz Instituto Tecnológico Autónomo de México
Companies are accustomed to submitting financial reports with historical, financial and quantified information. However, these features impose limitations at the moment of understanding and making decisions in a business.
The financial crisis has accentuated the need for a new approach to the presentation of financial reports, and models have emerged for presenting non-financial reports, such as sustainability reports. But there was a need to prepare integrated company reports based on a structure that would cover everything and meet users’ needs.
Business reports are an important source of information on the company’s activities. They provide a wide range of data, which the investor requests in order to make decisions.
This information may relate to the likely growth of the sector, the characteristics of the economy in which the company operates, its competitors, changes in technology, factors affecting markets, and more specific information about the company’s performance, its administration and its plans. As circumstances change and new types of information acquire greater importance, market opportunities arise for those who generate such information.
Thus, the International Integrated Reporting Council (IIRC), together with world leaders in the areas of business, investors, regulators, academics and civil society, undertook the initiative for a new approach to integrated information that responds to current business needs.
The objective of this project was to develop a conceptual framework for the preparation of the Integrated Report. In this project, more than 350 companies participated in a global consultation. The majority expressed their support for this report. Finally, on December 9, 2013, the IIRC published the Conceptual Framework for the preparation of the Integrated Report, which offers companies a starting point for reporting, in a comprehensive manner, the different conditions that define their overall situation.
The traditional annual reports mainly focus on the past financial performance and financial risks. However, other types of reports (administrative, sustainability, etc.) may contain more information that is rarely presented as linked to the strategic objectives of the organization and to its ability to create and sustain value in the future.
The need for integrated information is due to major changes in the way of doing business, how companies create value and the context in which they operate. These changes are interdependent and reflect various trends, such as, for example, globalization and the growth of political activity around the world in response to the crises of the past 10 years, the need for greater transparency in the information of the companies and, therefore, in accountability, environmental problems, scarcity of resources, and population growth, among others.
Therefore, the type of information that is needed to assess the performance of organizations and their future ability to generate value is much broader than what has traditionally been presented.
The objective of the Integrated Report is to provide information on the company history in a clear and concise manner: what it is, what it does and how it creates value, what are its opportunities and risks, its business model, its corporate governance, its strategy and objectives. Thus, it offers users a complete overview of the company and of its future.
Integrated reports also include forward-looking information to enable interested parties to make an assessment of the ability to create and sustain value in the short, medium and long term.
In addition, the Integrated Report shows how the business model of the organization interacts with external factors that affect it, as well as resources and relationships used by the organization to create and sustain value, which leads to greater explanation of the results.
Because the information has been generated in separate and disconnected ways, the reports are becoming more extensive. To avoid this, a conceptual framework is needed that can support the development of information by gathering the various information sources in a coherent and integrated manner and, at the same time, reflect the organization’s ability to generate value.
The objective of the International Integrated Reporting Framework is to support the development of information in the coming decades, and it is focused on how an organization creates and sustains value. It also provides high-level guidance to the organizations that choose to prepare Integrated Reports, thus helping to ensure coherence in the content and an integrated approach to information.
The International Integrated Reporting Framework issued by IIRC seeks the following:
To communicate the organization’s strategy, business model, results and plans in the context in which it operates.
To provide a coherent framework within which the market and the requirements for information compliance can be integrated.
To encourage the convergence of approaches and, therefore, the rapid understanding of the information presented.
To reflect the use and effect on all the resources and relationships or “capitals” (human and social, as well as financial, production and intellectual) of which the organization and society depend on for their development.
To reflect and communicate the interdependencies between the success of the organization and the value it creates for its investors, employees, customers and for society.
According to the Conceptual Framework, the basic components that make up the preparation of an integrated report are the following:
The strategic approach. It should contain the vision of the strategic objectives of the organization, how these objectives relate to its ability to create and sustain value over time and with resources, and how it relates to other components of its business model.
Connectivity of the information. It should show the connections between the different components of the business model of the organization, the external factors that affect it and the various resources on which it and its operation depend.
Future orientation. It should include how the organization balances interests in the short and long term, the goal that it aims to reach over time, given challenges and obstacles, and an analysis of the sustainability of the business model. Similarly, the report may also include objectives, forecasts, projections, estimates and sensitivity analysis.
An Integrated Report consists of content elements that are interlinked and shown below:
Responsiveness and inclusion of stakeholders. It should submit the perception of the organization’s relations with its key stakeholders and how and to what extent it responds to their needs, in order to improve transparency and accountability.
Reliability and materiality. The information it contains should be concise, reliable, relevant and comparable between organizations, as well as coherent for the organization itself over time.
Overview of the organization and business model. It should show the organization’s mission, main activities, markets, products and services, its business model and the value indicators.
Operating context that includes risks and opportunities. It identifies the circumstances under which the organization operates, considering the key resources, relationships on which it depends and the main risks and opportunities it faces.
Strategic objectives and strategies to achieve those objectives. It describes the organization’s strategic objectives and the strategies to achieve them; identifies what makes the organization unique and capable of creating value in the future, along with considerations of sustainability.
Governance and remuneration. It presents the structure of governance of the organization, along with the capabilities of those charged with governance and the way in which it endorses the strategic objectives; describes the actions that have been made to influence the strategic direction of the organization as well as its culture, ethical values and relationships with key stakeholders, and how the compensation of executives is linked to the outcome in the short, medium and long term.
Results. It presents the performance of the organization in achieving its objectives, through a description of its vision in relation to its main external, economic, environmental and social impacts, as well as the risks of increasing or decreasing the value chain, along with the quantitative information. The past results should be clearly linked with the present results, and future prospects. The report includes both qualitative and quantitative information.
Future prospects. It provides information about the opportunities, challenges and uncertainty that the organization most likely will face and how the organization is prepared to respond to the operational context that it will confront.
Conclusion
Although the Integrated Report is a new practice, the benefits that it provides to all interested parties have been identified as far as the ability of an organization to create value over time, including for the employees, partners, customers, suppliers, regulators, among others, because it presents information that allows a better assessment of the combined impact of several factors that materially affect the long term value of the organization and its needs.
It is likely that in the future it will become the main report of all organizations, because it can be prepared in response to global information requirements.
Finally, the Integrated Report is the right path for companies that really consider sustainability as part of their business strategy, and the Conceptual Framework, which is currently being tested in 25 countries, will be used to accelerate the adoption of the Integrated Report worldwide.?
References
International Integrated Reporting Council, The International (IR) Framework, 2013. Consulted on May 29, 2014, at http://theiirc.org/international-ir-framework/
The Integrated Report
Instituto Tecnológico Autónomo de México
Companies are accustomed to submitting financial reports with historical, financial and quantified information. However, these features impose limitations at the moment of understanding and making decisions in a business.
The financial crisis has accentuated the need for a new approach to the presentation of financial reports, and models have emerged for presenting non-financial reports, such as sustainability reports. But there was a need to prepare integrated company reports based on a structure that would cover everything and meet users’ needs.
Business reports are an important source of information on the company’s activities. They provide a wide range of data, which the investor requests in order to make decisions.
This information may relate to the likely growth of the sector, the characteristics of the economy in which the company operates, its competitors, changes in technology, factors affecting markets, and more specific information about the company’s performance, its administration and its plans. As circumstances change and new types of information acquire greater importance, market opportunities arise for those who generate such information.
Thus, the International Integrated Reporting Council (IIRC), together with world leaders in the areas of business, investors, regulators, academics and civil society, undertook the initiative for a new approach to integrated information that responds to current business needs.
The objective of this project was to develop a conceptual framework for the preparation of the Integrated Report. In this project, more than 350 companies participated in a global consultation. The majority expressed their support for this report. Finally, on December 9, 2013, the IIRC published the Conceptual Framework for the preparation of the Integrated Report, which offers companies a starting point for reporting, in a comprehensive manner, the different conditions that define their overall situation.
The traditional annual reports mainly focus on the past financial performance and financial risks. However, other types of reports (administrative, sustainability, etc.) may contain more information that is rarely presented as linked to the strategic objectives of the organization and to its ability to create and sustain value in the future.
The need for integrated information is due to major changes in the way of doing business, how companies create value and the context in which they operate. These changes are interdependent and reflect various trends, such as, for example, globalization and the growth of political activity around the world in response to the crises of the past 10 years, the need for greater transparency in the information of the companies and, therefore, in accountability, environmental problems, scarcity of resources, and population growth, among others.
Therefore, the type of information that is needed to assess the performance of organizations and their future ability to generate value is much broader than what has traditionally been presented.
The objective of the Integrated Report is to provide information on the company history in a clear and concise manner: what it is, what it does and how it creates value, what are its opportunities and risks, its business model, its corporate governance, its strategy and objectives. Thus, it offers users a complete overview of the company and of its future.
Integrated reports also include forward-looking information to enable interested parties to make an assessment of the ability to create and sustain value in the short, medium and long term.
In addition, the Integrated Report shows how the business model of the organization interacts with external factors that affect it, as well as resources and relationships used by the organization to create and sustain value, which leads to greater explanation of the results.
Because the information has been generated in separate and disconnected ways, the reports are becoming more extensive. To avoid this, a conceptual framework is needed that can support the development of information by gathering the various information sources in a coherent and integrated manner and, at the same time, reflect the organization’s ability to generate value.
The objective of the International Integrated Reporting Framework is to support the development of information in the coming decades, and it is focused on how an organization creates and sustains value. It also provides high-level guidance to the organizations that choose to prepare Integrated Reports, thus helping to ensure coherence in the content and an integrated approach to information.
The International Integrated Reporting Framework issued by IIRC seeks the following:
According to the Conceptual Framework, the basic components that make up the preparation of an integrated report are the following:
An Integrated Report consists of content elements that are interlinked and shown below:
Conclusion
Although the Integrated Report is a new practice, the benefits that it provides to all interested parties have been identified as far as the ability of an organization to create value over time, including for the employees, partners, customers, suppliers, regulators, among others, because it presents information that allows a better assessment of the combined impact of several factors that materially affect the long term value of the organization and its needs.
It is likely that in the future it will become the main report of all organizations, because it can be prepared in response to global information requirements.
Finally, the Integrated Report is the right path for companies that really consider sustainability as part of their business strategy, and the Conceptual Framework, which is currently being tested in 25 countries, will be used to accelerate the adoption of the Integrated Report worldwide.?
References