Integrated Reporting
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Integrated Reporting

A New Accounting Disclosure

Chiara Mio, Chiara Mio

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eBook - ePub

Integrated Reporting

A New Accounting Disclosure

Chiara Mio, Chiara Mio

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About This Book

This book is a timely addition to the fast-growing international debate on Integrated Reporting, which offers a holistic view of the evolution and practice of Integrated Reporting. The book covers the determinants and consequences of Integrated Reporting, as well as examining some of the most relevant issues (particularly in the context of the United States) in the debate about Integrated Reporting.

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© The Author(s) 2016
Chiara Mio (ed.)Integrated Reporting10.1057/978-1-137-55149-8_1
Begin Abstract

1. Integrated Reporting: The IIRC Framework

Chiara Mio1
Department of Management, Ca’ Foscari University of Venice, Venice, Italy
The International Integrated Reporting Council (IIRC) Framework is arguably the most important guide for companies willing to implement Integrated Reporting (IR). This chapter offers a review and discussion of the most important guiding principles and content elements that are the backbone of the IIRC Framework. It also compares the Framework with the main sustainability reporting standard, the Global Reporting Initiative (GRI) Guidelines. Following such a comparison, we argue that IR can be seen as an evolution of financial reporting rather than as sustainability reporting. Finally, the chapter discusses some of the most critical aspects of the IIRC Framework, such as its approach towards materiality and capitals.
End Abstract


The International Integrated Reporting Council (IIRC) was formed in 2010 and it contributed significantly to the development and advancement of Integrated Reporting (IR). Before 2010, some innovative reporting organizations had individually pioneered such practices (for instance, Novo Nordisk in Denmark) and in South Africa the King commission on corporate governance fostered IR, which is now a listing requirement.
This chapter provides a comprehensive overview of the IIRC Framework, published in its final version in late 2013. It focuses in particular on the most relevant guiding principles and content elements, and on their current and prospective role in IR development. It also reorganizes such content elements and guiding principles following an IR implementation perspective. The chapter also compares the IIRC Framework with the GRI Guidelines, highlighting similarities and differences.
The process that ultimately led to the current version of the IIRC Framework started in September 2011, with the issuance of the first IIRC publication: the Discussion Paper. The paper presented the rationale for IR, offering initial proposals for the development of the Framework. The next month, the IIRC Pilot Program was launched and this represented an important step towards IR, as the pilot program companies provided useful indications on how the Framework would have to develop. In June 2012, the IIRC published the summary of the responses to the Discussion Paper, and the following month the draft outline of the Framework. Later on, in November 2012, the IIRC released the Prototype of the International IR Framework, which marked a significant further step towards the eventual publication of the Framework in 2013. Between March and July 2013, the background papers were released. Such papers dealt with specific issues of the IR Framework and in particular: how organizations articulate their business model; how they use or affect the six forms of capital; how they apply the concept of materiality; how they communicate the value creation process; and how the connectivity of information must present a holistic view of an organization’s strategy, governance, performance and prospects.
In April 2013, a Consultation Draft of the Framework was released, which led to the publication of responses to the draft and, eventually to the publication of the current version of the IIRC Framework on the 9th of December 2013. The Framework establishes guiding principles for organizations adopting IR, helping to ensure consistency across sectors and national boundaries. It also explains the key content elements that might be expected of an integrated report, and the fundamental concepts that underpin them. The Framework was released alongside two documents—the Basis for Conclusions and the Summary of Significant Issues—to provide further explanations about the development of the final version of the Framework.
The IIRC Framework has been attracting a great deal of attention not only among practitioners but also among scholars. In a recent article, Flower criticizes the current version of the Framework because (among other things) IR “is not to cover in a comprehensive fashion the impact of the firm’s activity on stakeholders” (see Flower 2015, p. 15), rather, it gives priority to serving the information needs of the providers of financial capital.
The author refers to one of the most important and controversial IIRC Principles: materiality, which we discuss below. Paragraph 3.11 of the Framework states that “it does not mean that an integrated report should attempt to satisfy the information needs of all stakeholders” (IIRC 2013a) and, in defining materiality, the IIRC states: “a matter is material if it is of such relevance and importance that it could substantively influence the assessments of providers of financial capital with regard to the organization’s ability to create value over the short, medium and long term” (IIRC 2013b).
We believe that the IIRC approach should not be judged from a “static” perspective but from a “dynamic” one.
Following the static perspective, companies, in order to define material issues, consider whether each issue impacts on the assessment of providers of financial capital. If the company believes that a certain issue is not going to have any effect on such assessment, it will exclude the issue from the IR. This would in turn damage those stakeholders having an interest connected to the issue that has been excluded, because they would not be able to rely on any information provided by the company. The static perspective does not go further and does not consider possible subsequent actions by stakeholders and the relative responses of companies. Most scholars (including Flower 2015) seem to rely on this perspective, which is ultimately only connected to the assessment of providers of financial capital.
Conversely, the dynamic perspective also takes into consideration the subsequent possible actions of stakeholders and of the company. Stakeholders believing that the company should not have excluded a certain issue from the IR can actively intervene in order to make their voice heard. This requires stakeholders being “active” in the engagement process and taking responsibility. For instance, stakeholders may question companies about the exclusion or organize web or social media campaigns. The company will then have to decide how to deal with the opinion of stakeholders, through stakeholder engagement and dialogue.
After having considered the instances of stakeholders, the company may decide to amend its decision, including the issue on the IR. Alternatively, the stakeholders’ attitude may directly impact the assessment of providers of financial capital on the issue (for instance, in the case of an exclusion of an issue relevant to customers and subsequent boycott threats). Lastly, the company may confirm its decision of excluding the issue. In any case, the dialogue following the stakeholders’ stance is fundamental to the process of reaching true integration and prioritization and is made possible by the IIRC Framework approach to materiality.
We believe that the IIRC approach should be evaluated from a dynamic perspective, which is the only perspective that makes it possible to capture the opinion of stakeholders and start a dialogue. When evaluated from this perspective, the IIRC approach appears to be a necessary first step toward the real integration of information on the six capitals, through interaction between companies and stakeholders.
The IIRC chose to give priority to the providers of financial capital, but this is clearly only one of the possibilities. Other possible priorities may be explored, but they should always be evaluated under the dynamic perspective we defined above.

IIRC Guiding Principles and Content Elements

The IIRC Framework is based on the Guiding Principles and on the Content Elements, which are the backbones of IR and mirror all its main innovative aspects:
  • strategic focus and future orientation (“An integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short, medium and long term and to its use of and effects on the capitals”, IIRC (2013a));
  • connectivity of information (“An integrated report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organization’s ability to create value over time”, IIRC (2013a));
  • stakeholder relationships (“An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests”, IIRC (2013a));
  • materiality (“An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term”, IIRC (2013a));
  • conciseness;
  • reliability and completeness (“An integrated report should include all material matters, both positive and negative, in a balanced way and without material error”, IIRC (2013a));
  • consistency and comparability (“The information in an integrated report should be presented: (i) on a basis that is consistent over time; (ii) in a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time”, IIRC (2013a));
  • organizational overview and external environment (“An integrated report should answer the question: What does the organization do and what are the circumstances under which it operates?”, IIRC (2013a));
  • governance (“An integrated report should answer the question: How does the organization’s governance structure support its ability to create value in the short, medium and long term?”, IIRC (2013a));
  • business model (“An integrated report should answer the question: What is the organization’s business model?”, IIRC (2013a));
  • risks and opportunities (“An integrated report should answer the question: What are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how is the organization dealing with them?”, IIRC (2013a));
  • strategy and resource allocation (“An integrated report should answer the question: Where does the organization want to go and how does it intend to get there?”, IIRC (2013a));
  • performance (“An integrated report should answer the question: To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?”, IIRC (2013a));
  • outlook (“An integrated report should answer the question: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?”, IIRC (2013a));
  • basis of preparation and presentation (“An integrated report should answer the question: How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?”, IIRC (2013a)).
Hereafter, we will provide a comment on the four guiding principles and content elements that we believe to be the most relevant, as they are the most innovative compared to traditional financial and non-financial disclosure: business model, strategic focus and future orientation, connectivity and materiality.
Business model, strategic focus and future orientation are tightly connected to each other and they are the means through which IR introduces future performance, which is a “revolutionary” perspective compared to that of annual reports. Traditional financial disclosure is almost exclusively focused on past performance, with little possibility to predict the future ability to create value in the long run. Information on future performance in traditional financial disclosure is scant and limited to a section included in the management com...

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