The International Integrated Reporting Framework (IIRC) released its Framework in December 2013. The Framework is primarily geared to the private sector, but it can be applied by not-for-profit and public sector organisations. The Framework incorporates the public comments submitted to the IIRC on the draft Framework of April 2013. The Framework is available on www.sustainabilitysa.org or www.theiirc.org.
Here’s what you should know about the Framework
1 The Framework carries 18 requirements that, if not met, preclude an integrated report from stating it has been prepared in accordance with the Framework. There are three allowed exceptions relating to disclosed information (1F).
2 Responsibility for the report lies with those charged with the governance of the organisation (the board, in most cases) and a statement acknowledging such responsibility is to be included in the report. There is, however, a ‘scaredy cat’ exception, but this can be applied no later than the organisation’s third report referencing the Framework (1G).
3 The Framework allows for flexibility in the form of the report. It must always be “a designated, identifiable communication”, but it can be part of a report that is prepared in response to existing compliance requirements provided that other required information “does not obscure the concise information required by the Framework” (1E). This clever move allows existing reports such as Management Commentary and Statutory Report (UK) becoming home for the integrated report without detracting from the Framework’s requirement for a concise report.
4 The definition of an integrated report is: “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term” (1A). The broader term of integrated reporting refers to the process, founded on integrated thinking, that results in a periodic integrated report and related communications regarding aspects of value creation. Integrated thinking refers to the active consideration by an organisation of the relationships between its various operating and functional units and the capitals it uses or affects (Glossary).
5 The primary purpose of a report is “to explain to providers of financial capital how an organization creates value over time. It therefore contains relevant information, both financial and other. An integrated report benefits all stakeholders interested in an organization’s ability to create value over time …” So, the report is primarily written to get providers of financial capital (as money owners with the power to allocate immense resources) to truly understand the material financial and non-financial factors that come together to create value for the company. An organisation can include in its report information aimed at other stakeholders, but this should “not obscure the concise information required by the Framework” (1C and refer to 3 above).
6 The Framework is principles-based. The intention is to balance flexibility and prescription recognising the wide variation in the individual circumstances of organisations while still enabling some comparability between reports (1D).
7 The Framework does not prescribe specific key performance indicators (KPIs), measurement methods, or the disclosure of individual matters. This is the remit of those responsible for the preparation and presentation of the report who must exercise judgement (1D).
8 The report tells about the organisation’s value creation process – that is, how it creates value for itself (which enables financial returns to the providers of financial capital) and for others. Others? The Framework acknowledges that value is not created by or within an organisation alone; rather it is influenced by the external environment, created through relationships with stakeholders and society at large, and dependent on various resources. The report explains these factors – to the extent that they are material to the organisation’s ability to create value for itself in the short, medium and long term. This acknowledges that the value the organisation creates for itself is linked to the value it creates for others. After all, happy stakeholders make for a happy company! (2B, 2D.) While the Framework neatly describes the value creation process, there is no definition of the term ‘value’. This is because value is accepted as being subjective (just like beauty). A report, therefore, explains the value creation process allowing users to make their own decision on the ability of the organisation to create value in the future. (Figure 2 and its explanatory paragraphs nicely cover the value creation process).
9 The Framework categorises the spread of relationships and resources that are generally used or affected by organisations in their value creation process into six different forms of capital, namely financial, manufactured, intellectual, human, social and relationship, and natural. An organisation is not obliged to use these exact categories (nor does it have to structure its report around the capitals), rather their purpose is as a guideline for an organisation to ensure it does not overlook a capital that it uses or affects.
10 When the Framework refers to value creation it is also referring to value diminution. The value created by an organisation’s business activities can be positive or negative. Value is diminished when there is resulting harm to the capitals used or affected by the organisation (which can affect their future availability and cost). Value is created when there is appreciation in the capitals.
11 The Framework is structured in two parts. Part I covers using the Framework and the two fundamental concepts (value creation and the capitals). Part II covers the content of the report listing seven guiding principles and eight content elements. A summary of the 18 requirements of the Framework is in the Appendix.
12 The guiding principles are applied in preparing the content of the report and in how the information is presented. They are: Strategic focus and future orientation, Connectivity of information, Stakeholder relationships, Materiality, Conciseness, Reliability and completeness, and Consistency and comparability (3).
13 The content elements (akin to information categories) are to be included in the report and are fundamentally linked to each other. They are: Organisational overview and external environment, Governance, Business model, Risks and opportunities, Strategy and resource allocation, Performance, Outlook, and Basis of preparation and presentation (4).
14 Materiality is a big determinant of what ends up in the report. It is defined thus: “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.” The Framework sets out a four-step materiality determination process. The reach of material matters covers those within the financial reporting boundary and those beyond it – that is, the matters affecting the organisation’s ability to create value stemming from other entities or stakeholders (for example the poor labour practice of a major supplier) (3D, 4H).
15 The Framework uses the terms outputs and outcomes. Outputs are the products and services, by-products and waste coming out of the organisation. Outcomes are the effects (positive or negative, internal or external) on the capitals that result from the organisation’s outputs and activities (such as employee morale, customer satisfaction, negative effect on the environment) (4C, 4F).
The Integrated Reporting Committee (IRC) of South Africa is currently reviewing the Framework for its applicability in South Africa and will issue a communication in the near future.
Watch out for: a launch event on the Framework hosted by the IRC; a follow-up article in Accountancy SA on the IRC’s view of the Framework; and the new TV series on Integrated Reporting on BusinessDay TV. ❐
Author: Leigh Roberts CA(SA) is SAICA’s project director of Integrated and Sustainability Reporting.