It could be the next most significant reporting innovation for firms since IFRS was created
INTEGRATED Reporting (IR) is the new buzz word in Singapore; both the Singapore Accountancy Commission (SAC) and the Institute of Singapore Chartered Accountants (ISCA) have included IR as one of their key work plans. Will IR be a permanent institution in Singapore, especially when the Singapore Exchange (SGX) is encouraging listed companies to produce Sustainability Reports (SRs)? How is an integrated report related to a SR and to annual reports (ARs)? Do the benefits warrant the costs?
In this article we briefly outline what IR is, and argue why Singapore companies should consider it.
A recap
IR is a framework developed by the International Integrated Reporting Council (IIRC). The vision was for IR to be adopted as the global corporate reporting norm so that organisations, investors and society can benefit from sound and well-informed decision-making regarding business and capital allocation.
According to the IR framework published in December 2013, the purpose of IR is to explain how a company creates value over time to providers of financial capital. Firms that seek a deeper understanding of IR can look out for the upcoming IR forum that will be part of the Singapore Accountancy Convention 2014, organised by the Institute of Singapore Chartered Accountants, in the middle of this year.
An integrated report is arguably broader in scope than the traditional AR or the SGX's proposed SR.
The financial statements in the AR limit the measurement of performance to financial impact that can be recognised by prescribed financial reporting standards. IR aims to measure performance more broadly and accepts that some performance and value creation metrics, such as customer loyalty and market advantages, have yet to be reflected in financial performance. These value creations are reported as non-financial indicators in an integrated report.
Many ARs report governance, risk, sustainability, financial performance and other drivers of value creation in an ad hoc manner without an obvious link to a framework. In contrast, an integrated report provides insight on how a company uses its capital (that is, the company's resources and relationships) and how the capital assets affect the company.
The integrated report explains the company's strategy execution, risk creation and governance that ultimately transform into performance and value creation. Simply put, it shows how value is created through a company's sustained and systematic efforts.
The focus of an integrated report and a SR is different - which in turn impacts what gets reported. The SR focuses on environment, social and governance issues which are of interest to various external stakeholders and especially to NGOs.
The primary recipients of the integrated report are financial investors and hence it focuses more broadly on strategy and answers the question why the company is of relevance and value in the long term. This of course is also of relevance to other stakeholders such as employees and investors. An integrated report will only provide information on environmental matters that materially affect value creation.
An integrated report has eight connected content elements.
An explicit 'Business Model' articulates value creation in the context of the company's 'External Environment' and internal 'Governance'. The company makes strategic choices, and the integrated report explains how 'Risks and Opportunities' both influence and is influenced by the company's 'Strategy and Resource Allocation'. The results of strategy execution are reported as the company's current 'Performance' and future 'Outlook' using a clear 'Basis of Presentation'.
Relevance for Singapore firms
Currently, only one listed company in Singapore - DBS Group, a member of the IIRC Pilot Programme Business Network - has adopted IR. Singapore is generally conservative in adopting innovation in corporate reporting.
For example, a key finding of a 2011 study by KPMG on corporate responsibility reporting suggests that the adoption rate in Singapore is relatively low internationally, especially when compared with European countries. Some reasons why Singapore companies should consider adopting IR include the need for foreign capital.
Singapore companies and brands are relatively less well-known than many global brand names. Funding for Singapore's growth potential may not be fully satisfied by the local debt and stock markets. Hence, Singapore companies need to continue to attract foreign investment and capital.
An integrated report that clearly outlines the company's strategy, execution and long-term viability is an advantage in competing for scarce global capital. IR may reduce the cost of capital because a firm that can clearly articulate its value creation in a consistent format reduces the uncertainty and transaction costs facing financial capital providers. An integrated report may well expedite funding decisions and ultimately lead to increased liquidity and share value.
Investors' growing interest
There are early signs that investors are becoming more interested in IR. ISCA and NUS are conducting a survey to establish if the anecdotal interest is prevalent. DBS Group's IR experience indicates that IR is not yet at the top of analysts' minds, but analysts find the clearer articulation of strategy valuable.
A recent study by George Serafeim of Harvard Business School provides some evidence that companies that practise IR attracts a long-term-oriented investor base with fewer transient investors. That could be attractive to many companies operating in volatile capital markets. Going by the anecdotal interest in IR from capital providers in Singapore, a few large listed-companies in Singapore are considering the adoption of IR.
'Official' support
The chief executive of SAC recently announced plans for Singapore to become the hub for IR in South-East Asia. ISCA has set up an Integrated Reporting Steering Committee to formulate plans for IR adoption and implementation in Singapore. These are signs of the importance of IR to key stakeholders in Singapore.
In summary, IR may be the next most significant reporting innovation for companies since the creation of the International Financial Reporting Standards (IFRS) in the 1970s. Currently, there is a gap in the corporate reporting framework to articulate the essence of value creation for companies. IIRC seeks to be the organisation to fill this gap with IR as a principle-based framework for corporate disclosure.
DBS Group's experience on IR to date suggests that preparing an integrated report is a significant undertaking. However, with investment in education on IR by regulators, professional accounting bodies and forward-looking companies, each new IR adopter will find that it becomes less costly to come on board. At the same time, the benefits of "membership" will grow. It is indeed opportune for Singapore companies to start thinking about adopting IR.
Authors:
Ho Yew Kee, Head, Department of Accounting, NUS;
Mikkel Larsen, Managing Director, DBS Group;
Tan Boon Seng, Assistant Director, Technical Research, Institute of Singapore Chartered Accountants
