About Value Creation - Assignment Example

1. Describe and differentiate from current reporting practice the types of information that will need to be captured from now on in order to sufficiently meet the needs of integrated reporting: IIRC paragraph 1.2 defines integrated reporting as a process that results in communication, most visibly a periodic “integrated report about value creation over time. It is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term. In this regard, an integrated report is more than the traditional reporting that mainly deals with financial matters or a sustainability report which is mainly concerned with environmental matters. The following types of information will need to be captured from now on in order to sufficiently meet the needs of integrated reporting; i) Information about the capitals the organization uses and affects and the critical interdependences which include trade-offs between them ii) Information about the capacity of the organization’s governance structure in assessing resilience against short term disruptions and respond to stakeholders legitimate needs interests and expectations in a bid to secure long-term returns. iii) Information regarding how the organization tailors its business model and strategy in responding to the opportunities and risks it faces including major changes in its external context iv) Information on other organizational value drivers, activities, results (financial and others) and outcomes in terms of the capitals- past, future and present. The above information can be summarized as capitals, governance, including opportunities and risks, strategy and resource allocation, business model, performance and future outlook. 2. The IR process is intended to be applied continuously to all relevant reports and communications, in addition to the preparation of and integrated report. The integrated report may include links to other reports and communications e.g. financial statements and sustainability reports. The IIRC aims to complement material developed by established reporting standard setters and others, and does not intend to develop duplicate content (Para 1.18- 1.20). I agree with how paragraphs 1.18-120 characterize the interaction with other reports and communications. It should be noted that integrated reports are aimed at providers of financial capital and as such does not aim at doing away with other statements but rather it seeks to provide information that is useful to capital providers. This information could be financial in nature and hence the reason why integrated reports may borrow from the traditional financial reports. Similarly, thecapital providers’ funds in a bid to create value may be used in sustainability activities and also in corporate social responsibility activities. As such it may borrow from such reports. However, as stated above, integrated reports do not seek to duplicate the works of the above traditional reports. Neither is it a combinationof such reports. As such, though the integrated reports are distinct from other reports, they may borrow heavily from them including having links to such reports and communication such as financial and sustainability reports. However, the reports must recognize that value does not only arise from the information contained in such reports but it is also created from factors that are external to the organization. In this regard, I do agree with the provisions of paragraph 1.18- 1.20. 3. The Framework describes six categories of capital (Para 2.17). An organization is to use these categories as a benchmark when preparing an integrated report (Para 2.19-2.21), and should disclose the reason if it considers any of the capitals as not material (Para 4.5). Such a ‘capitals framework’ means that centrally to popular beliefs, organizations do not only rely on financial capital to create value. Organizationsdepend on a variety of forms of capital for their success. These may include financial, intellectual, manufactured, human, social and relationship and natural capital. The framework implies that the above capitals store value in one form or the other and become a valuable input to the organization’s business model. Such capitals are increased, decreased or transformed through the activities and outputs of the organization since they are enhanced consumed, modified, destroyed or affected by the activities and outputs. I agree with such classification of capital since for an organization to succeed, it must combine a number of the capitals mentioned above. For instance, a service organization needs to make a profit in a bid to improve its financial capital. However, it will be hard for the organization’s financial capital to increase through increased profitability if its quality of human capital is not improved. This justifies justification of capital into various categories in that to create value; the organization needs more components of the capitals framework than just finance. 4. Given this information differentiation, outline initiatives currently being undertaken at a global level by regulators, international bodies, accounting profession and academics to achieve integrated reporting; Since its inception, Integrated Reporting has generated a lot of interest especially form investors seeking information not found on their balance sheet in a bid to better understand how their companies intend to create value over time. There has been increased recognition of the fact that more value is to be found outside the balance sheet. A survey carried out in 2010 by Ocean Tomo focusing on components of S&P 500 market value in 2009 indicated that only 19% of the value was reflected in the physical and financial assets of the company with 81% being found elsewhere. Nowadays, more than 80% of a company’s value is reflected in its environment, social and governance practices and disclosures. It is this realization that has sparked a lot of interest among the various groups of stakeholders as outlined above. They include The Global Reporting Initiative who together with IIRC signed a memorandum of understanding in 2013 to increase cooperation and hence transform the future of corporate reporting. This was informed by the belief that reporting on sustainability will be better addressed should integrated reporting be adopted. Professional bodies such as the ACCA and CPA have also voiced their support for integrated reporting and arrangements are in top gear to ensure that integrated reporting is adopted in their various curriculums. Various regulatory bodies have also shown interest in the adoption of integrated reporting. For instance, the IIRC has been involved in joint projects with the financial reporting council and the Australian accounting standards board (AASB) regarding integrated reporting. For instance, the FRC views integrated reporting as being complementary to rather than a replacement for financial reporting. Accounting and auditing bodies such as the price water house coopers (PWC) have also been in the fore front in encouraging companies to adopt integrated reporting. For instance, PWC has produced various reports indicating the extent to which various companies have adopted integrated reporting. Companies have also not been left behind in the adoption of integrated reporting. Notable companies that are taking initiatives towards integrated reporting include some of the biggest companies globally such as the Coca-Cola. This shows that various stakeholders are taking broad initiatives towards the adoption of integrated reporting. 5. three reasons why Integrated Reporting may not be achievable Integrated reporting has been hailed as being about a company telling its own story on its intentions to create value over short, medium and long-term. It is concerned with building better relationships with stakeholders while managing the company’s reputation. In involves creation of meaningful disclosures, effective communication and participation in the multilogue with the company’s stakeholders. It is concerned with improvement of transparency, increased access to capital and simplification of the process of traditional complex report development. However, despite its good aspects, integrated reporting may not be achievable for a number of reasons; i) Things have moved too fast –sustainability reporting which is the concept of reporting on the organization’s social and environmental impact publicly while working to improve it is very much young. The latest version of GRI’sguidelines has some drastic changes to the best practices showing that the movement has rapidly evolved. According to Bruno Sadra who is the director global sustainability operations at Dell, sustainable reporting is still young and pretty new while many of its metrics are not as mature as in financial data. If it has to be audited alongside financial data as in integrated reporting, then fewer sustainability issues will be reported. ii) There is no data –as stated above, integration is more than just combining sustainability report and annual report. If this be the case, then reporters will not adoptintegration as it will imply the story that is the heart of sustainability will be dropped for information with hard numbers behind it while there is still no data. In other words, how will you quantify the sustainability efforts of a company to produce a single integrated report without data? iii) Integrated reports are likely to lose some of the story- while truly integrated reporting incorporating social and environmental issues alongside financial information is a big win for sustainability reporting, the relevant metrics are not there yet for every company. What this implies is that we are likely to change some of the sustainability story if we by changing to integrated reporting. It is for the above reason that I am convinced that sustainability reporting may not work after all. References: Theiirc.og, 2015, Integrated reporting, Retrieved on 5th January 2015, from; http://www.theiirc.org/wp-content/uploads/Consultation-Draft/Consultation-Draft-of-the-InternationalIRFramework.pdf Read More