Business relationships in difficult times
Reporting (IR) Framework
May 2022 update
Introduction: Advancing corporate reporting on value creation as a
As highlighted in the Sustainability and business — the call to action; build back better report, we started a programme of thought leadership to explore accountancy and sustainability. This is part of a series of briefs exploring the topic of sustainability, business and the finance professional’s key role. These briefs will help organisations consider the sustainability issues, how to integrate them into their long-term decision-making and incorporate these issues into internal and external reporting.
This paper is designed as a summary of a specific standard or framework. It is written from the management accounting perspective. As a finance professional, you are likely to encounter one or many of the sustainability frameworks and standards. It is a crowded and fragmented landscape, with slightly different terms, inconsistent language and various measures between the numerous methodologies. Adding to the confusion is whether adoption is voluntary or mandatory and that some organisations work with combinations of standards and frameworks at the same time. Finally, the approaches to reporting also differ. They range from annual reports, integrated reports, sections on an organisation’s website aimed at a specific audience or a stand-alone sustainability report.
Fortunately, there are several initiatives underway to address this fragmented accounting and reporting landscape. They will build a coherent global approach to corporate reporting that encompasses financial and non-financial reporting.1
A framework or a set of standards? The difference
A framework is a set of principles-based guidance for how information can be structured and prepared, and what broad topics should be covered. A set of standards are specific, replicable and detailed requirements for what should be reported for each topic. They are rules-based requirements.
The International Integrated Reporting Council (IIRC), launched in 2010, is a collaboration between Accounting For Sustainability (A4S), the Global Reporting Initiative (GRI) and the International Federation of Accountants (IFAC). It was set up as a coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. The coalition promotes communication about value creation, preservation and erosion as the next step in the corporate reporting evolution.
The International Integrated Reporting (IR) Framework was launched in 2013, and a revised edition was launched in January 2021.2
In November 2020, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced their intention to merge into a combined organisation, The Value Reporting Foundation, which was consummated in June 2021.3 The VRF has three core resources, the SASB Standards, the (IR) Framework, and a prototype for Integrated Thinking Principles published in December 2021.4
The VRF was instrumental in the formation of the International Sustainability Accounting Standards Board (ISSB) which the IFRS Foundation announced, coincident with the COP 26 meeting in November 2021. In connection with the formation of the ISSB, the IFRS Foundation also announced plans to complete the consolidation of the CDSB and the VRF into the new board by June 2022.5
As part of building on existing initiatives, the IFRS announcement addresses its plans to leverage the expertise of the CDSB and VRF in the development of reporting standards and also its intention “to use the International Integrated Reporting Council to provide advice on establishing connectivity between the work of the IASB and the ISSB via the fundamental concepts and guiding principles of integrated reporting."
What is an
An integrated report provides insight into the organsation’s activities, its ability to create value over time and provides a financial return to the providers of its financial capital. In addition, another fundamental concept of integrated reporting is how an enterprise uses other material resources or capital.
The six capitals
Defined as ‘stocks of value that are increased, decreased or transformed through the activities and outputs of the organization,’ the integrated (IR) framework capitals are:
Financial capital — The pool of funds obtained through financing or generated through operations or investments
Manufactured capital — Manufactured physical objects used in the production of goods or the provision of services — buildings, equipment and infrastructure
Intellectual capital — Knowledge-based intangibles, including intellectual property, such as patents, copyrights, software and licenses
Human capital — The competencies, capabilities, experiences and motivation of people, along with their ability to lead, management and innovate to implement the organisation strategy
Social and relationship capital — The institutional and social relationships, including shared norms, common values and behaviours — intangibles associated with brand and reputation, and an organisation’s social license to operate
Natural capital — All renewable and non-renewable resources that support the prosperity of the organisation, including air, water, land, minerals, forests, along with eco-system and biodiversity health.
While most organisations likely have some interaction with each of the capitals to some extent, not all capitals are materially significant for every organisation. They are provided as part of the framework as underpinning to the concept of value creation, preservation, or erosion — a guideline to ensure that organisations consider all forms of capital that they use or affect.
How is the (IR) framework developed?
Seven guiding principles inform the preparation, presentation and content of an integrated report:
Strategic focus and future orientation
Connectivity of information
Reliability and completeness
Consistency and comparability
Key to the principles of the (IR) framework is providing insight into the organisation strategy, its ability to create value and its use of the capitals, as described above. An integrated report should also provide a holistic view of the connectivity, interrelatedness and dependencies of the capitals and stakeholder relationships. Disclosures should present information about all matters that are material to the organisation’s ability to create value over time, in conformity with the principles of conciseness, reliability and completeness, and consistency and comparability.
The (IR) framework also identifies eight content elements that are not mutually exclusive, but fundamentally linked to each other. These content elements are posed as questions to be answered concerning an integrated report.
Organisational overview and external environment
What does the organisation do and what are the circumstances under which it operates?
How does the organisation’s governance structure support its ability to create value in the short, medium and long term?
What is the organisation’s business model?
Risks and opportunities
What are the specific risks and opportunities that affect the organisation’s ability to create value over the short, medium and long term, and how is the organisation dealing with them?
Strategy and resource allocation
Where does the organisation want to go and how does it intend to get there
To what extent has the organisation achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
Basis of preparation and presentation
How does the organisation determine what matters to include in the integrated report and how are such matters quantified or evaluated?
Why is the (IR) framework needed?
The (IR) framework provides a principles-based approach to corporate reporting that:
Improves the quality of information available to providers of financial capital
Captures the full range of factors that materially affect an organisation’s ability to create value over time
Enhances accountability and stewardship of the full range of resources that contribute to the value creation process
Supports integrated thinking and decision-making in the organisation that drives the creation of value over the short, medium and long-term6
With this focus on value creation, integrated reporting embraces the notion of integrated thinking, which takes into account the interconnectivity and interdependencies between the various operating and functional units of the business, along with the full range of organisational resources, or “capitals” that contribute to creating value. Integrated thinking encompasses the enterprise’s business model, its strategy and the risks it faces in achieving strategic objectives. It also considers the capacity of the organisation to respond to its external environment and address legitimate key stakeholder needs.
A fundamental concept of Integrated Reporting is that an organisation not only creates value not only for itself but for others (Figure 1). The activities of an organisation affect not only the well-being of customers, suppliers, employees, owners and investors, but also a potentially broad range of other stakeholders and society-at-large. Accordingly, how an organisation carries out these activities also determines any conditions imposed on the organisation’s social license to operate.
Value beyond the balance sheet
The 2020 report, The CFO and the Finance Role in Value Creation, links key value drivers to the capitals (Figure 2). It captures the essence of the broader view of value creation and reporting through three perspectives:
The balance sheet value perspective
Essentially, this captures the ‘book’ value of financial and physical capital based on GAAP accounting standards, along with profitability and returns based on current performance. In addition to providing only this backward-looking view of financial performance, this perspective does not incorporate the strategic value of intangible assets or other assets with value that has been written-off. Nor does it include contingent liabilities that may not meet accounting standards requirements, or ESG factors that may impact competitive advantage or value over a longer-term horizon.
The business value perspective
It encompasses these ‘hidden’ components to create a strategic view of expected or forecasted earnings and future cash flows that reflects the organisational intellectual, human and societal and relationship capitals, in addition to manufactured and financial capital. Bringing this broader range of very contextual value drivers into view creates a reduction in the risk profile.
The societal value perspective
This moves our thinking beyond this organisationally focused business perspective. Taking a broad approach, this perspective embraces ESG components, including the organisation’s contribution to the U.N. Sustainable Development Goals (SDGs), the net positive and negative impacts of activities on natural capital, and the social and relationship capital considerations that relate to reputation and license to operate. Doing so provides a view of the net contribution of the organisation’s value to society, along with a sense of the ability to sustain that value into the future.
Who will encounter
the (IR) framework?
The audience for integrated reporting and the (IR) framework is wide. In addition to the investor, the full range of stakeholders may also be beneficiaries, including customers, employees and suppliers, along with regulators and other parties having an interest in capital markets. Financial professionals working in both management accounting and public accounting are also likely to encounter the (IR) Framework.
As the move towards more comprehensive reporting continues, an increasing number of corporations are beginning to adopt integrated reporting. Companies are also seeking to capitalise on the benefits of integrated thinking that result from this broadening of perspective. Those at the forefront of ESG reporting are also likely to have the (IR) framework on their radar as they consider the benefits of expanding the scope of their reporting. Management accounting professionals with a broad range of accounting, reporting and business skills are well-positioned to provide leadership on this front.
Since the need for assurance is also part of the equation in both sustainability reporting and integrated reporting, public accounting professionals are also increasingly likely to encounter the (IR) framework as the demand for more comprehensive reporting continues.
If your organisation is using or contemplating the (IR) framework, the 2019 CIMA® professional qualification syllabus and CGMA competency framework (2019 edition) can help you ask the right questions to identify your potential knowledge and skills gaps.
What’s next from
the AICPA & CIMA?
We will continue to watch the sustainability space and play a central role in its development. We will ensure that the journey towards the development of global standardised comparable ESG metrics and non-financial reporting is not at the expense of closing any future sustainability debate and innovation. We aim to achieve a balance of sustainability reporting and assurance alongside data-driven insights so that resilient organisations and finance professionals can address prosperity, planet and people challenges.
'We believe that we will see profound changes in the next few years in the work of management accounting and public accounting to embed new practices and standards relating to sustainability. The Association will continue to provide education and guidance to all areas of the profession, ensuring that it is ahead of this transformation. It’s truly an exciting time to be an accounting and finance professional’.
Andrew Harding, FCMA, CGMA,
Chief Executive, Management Accounting Association of International Certified Professional Accountants
In September 2020, IIRC and four other sustainability framework and standards organisations announced their intention to work together to create a comprehensive approach to corporate reporting. The five bodies are, CDP (Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB) (Accessed 7 February 2022).
The statement of intent providing a summary of alignment between the organisations was facilitated by the Impact Management Project, World Economic Forum and Deloitte. (Accessed 7 February 2022).
In November 2021, the International Financial Reporting Standards (IFRS) Foundation Trustees announced the International Sustainability Standards Board (ISSB) consolidation with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (SASB & IICR). (Accessed 7 February 2022).
IIRC, Integrated Reporting (IR): International (IR). Framework (January 2021). (Accessed 7 February 2022).
IIRC and SASB announce intent to merge in major step towards simplifying the corporate reporting system (Accessed 7 February 2022)
VRF, Integrated Thinking Principles: Supporting Holistic Decision-Making, prototype 2021 (December 2021). (Accessed 7 February 2022)
IFRS Foundation announces International Sustainability Standards Board. (Accessed 7 February 2022).
IIRC, Integrated Reporting (IR): International (IR) Framework (January 2021). p.2.
IIRC, Integrated Reporting (IR): International (IR) Framework (January 2021). p.16.
IFAC, The CFO and the Finance Function Role in Value Creation report (2020). p. 8. (Accessed 7 February 2022).
Kenneth W. Witt
Associate Technical Director,
Association of International Certified
The American Institute of CPAs® (AICPA®)
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