What Is Integrated Reporting - Assignment Example

Integrated Reporting Name Institution Date 1) Types of information required to sufficiently meet the needs of Integrated Reporting According to the consultation draft of the international integrated reporting framework, integrated reporting is defined as a process that results in the periodic communication by an organization about value creation over time. The report is a concise communication about how the organization’s strategy, governance, performance and prospects, in the context of its external environment leading to the creation of value over the short, medium and long term. Integrated reporting was deemed necessary due to the changes taking place in the conducting of businesses and how they were creating value. In traditional accounting reports 83% of the market value of a firm comprised of physical and financial assets but with changes in technology, exponential population growth, increased consumption, scarcity of resources and climatic changes the value of physical and financial assets has dropped to about 19%. This change is also attributed to the new key drivers of corporate performance, that is, non financial and intangible assets. The new business information needs are future oriented, market driven and risk based. They also have a combined emphasis on conciseness, strategic focus, connectivity of information, the capitals, business models, ability to create value and the providers of capital. This combination of information needs ensures the business remains relevant and resilient in the specific markets (Integrated reporting, 2013). The current accounting techniques Businesses use managerial accounting reports to make decisions and these reports include; balance sheets, income statements and cash flow statements. Though these reports may be credible and useful they are not efficient as integrated reports. They have a tendency to overlook some information which it may deem irrelevant to the organization. 2) Interactions with other reports and communications I do agree with how an integrated report interacts with other reports and communication. The integrated reporting was established so that it can be applied to all other relevant reports and communications. An integrated report when prepared can stand on its own although one can provide additional reports and communications such as financial statements and sustainability reports for compliance purposes or to satisfy a range of stakeholders’ particular information needs. The international integrated reporting council intends to complement the materials developed by established reporting standard setters and not to develop duplicated contents. Since integrated reporting is an advanced way of reporting financial and other reporting it can draw inferences from methods developed by others, however, it differs form other reporting and communications in a number of ways. Unlike other reporting methods the main audience of integrated reporting who are the providers of financial capital lay emphasis on conciseness, strategic focus and future orientation, the connectivity of the information, the capitals, the business models and the ability to create value in the short, medium and long term. The international integrated reporting council (IIRC) does not prescribe any indicators or measurement methods to be used in the preparation of an integrated report; however, it may reference examples of indicators and measurement methods developed by others. From this summary we can deduce that an integrated report does provide links to other reports and communications. An integrated report considers all angles of accounting intangible and tangible assets, financial and non-financial assets. It also looks at the connectivity with other reports and communications thus providing links to other reports and communication. It is an improvement of established reporting standards; it seeks to improve those reports by complementing them (Consultation draft of the international, 2013). 3) Capitals frameworks I agree with the integrated report capital framework. Capital is very vital in the running and success of an organization. Capital can be categorized into; financial, manufactured, intellectual, human, social and relationship capital and lastly natural capital. Capital plays the function of store of value in an organization that is turned into inputs in the business. Capital can be increased, decreased or transformed according to the activities and outputs of an organization. Capital can be enhanced, consumed directly, modified or even destroyed for them to produce the desired output or influence the activities of the organization such as creation of large margins of profit. How capitals interrelate The various types of capital are interrelated, that is one capital influences the activities or performance of another capital. Improved human capital through training will increase the financial capital through increased profits. However, this may not always be the case, when you improve the human capital by increasing the employees’ training the financial capital is reduced due to the expenses incurred in the training process. The overall stock of capital is not always fixed this is because there is a constant flow between and within the capitals as they are increased, decreased or transformed. The continuous interaction of capitals by increasing, decreasing or transforming them will result in varying rates and results. It is important to note that value creation does not exclude the decrease in the overall value of the stock due to diminution or destruction of some capital resources. Sometimes not all capitals are used together depending with the project at hand. Also, individuals categorize capitals differently. Categories of capitals By putting capitals in different categories as per the integrated framework, it will bring more clarity to the users of the reports and also help the one preparing the report so as not to omit any detail and also avoid confusion. The capitals can be categorized into; Manufactured Capital: this includes readily available physical resources that are used in the production of goods and services and they can either be provided by the organization or by the hosting government. They include; roads, buildings, airstrips, equipment among others. Intellectual Capital: these are intangible properties of the organization and they are mostly knowledge based. They include; patents, copyrights, licenses, brand name and goodwill. Others include; formulas, software rights, procedures etc. Human Capital: these are the people working for the organization and it also includes their competencies, loyalty, inventions and innovations and their experiences. Social And Relationship Capital: this is the relationship between the organization and the communities, their stakeholders, employees and all other parties that the organization is concerned with. Social and relationship capital includes; shared norms, values and behaviors, trust and the organization’s social license to operate. Natural Capital: this constitutes both renewable and non-renewable environmental resources which contribute to the prosperity of the organization. They include; air, water, land, minerals and trees. The integrated reporting framework does not require the adoption of all the categories by organizations but instead the primary reasons for including the capital models. The capital framework serves as a benchmark for ensuring that organizations will consider all forms of capital used or affected. It also serves the part of a theoretical underpinning for the concept of value. Proper evaluation of organization’s capitals is important as it affects their availability, quality and affordability and eventually its ability to create value over time. The international integrated reporting council’s consultation draft approach on the use of capital framework has been justified, it is important as it helps the organization from overlooking other forms of capital used in the production of goods and services. Although it does not restrict organizations to use their categorization of capitals, it ensures they include all capitals used and affected in their reporting (Consultation draft of the international, 2013). 4. Accounting Information Diversity in the World Accounting diversity affects businesses that are operating in different countries of the world. Businesses may be forced to prepare or convert their accounts in compliance with the host country which could result in enormous costs. This factor has inhibited cross border investment for many individuals and businesses that cannot bear the extra costs. These differences have led to suggestions as to whether accounting should be standardized or harmonized. Harmonization; increasing the compatibility of accounting practices by setting bounds to their degree of variation while standardization is the imposition of a more rigid and narrow set of rules. From the definition harmonization seems more flexible than standardization Reasons for information differentiation There are many reasons that have led to the differences in international accounting, some of them include; 1. the underlying laws and political systems 2. tax systems 3. different levels of education 4. varying level of economic development 5. nature of business ownership and financing system 6. the colonial inheritance and history of a country 7. Different cultural practices and language and religious practices. There are different institutions; regulatory bodies, international bodies, academic institutions, accounting profession that have been established to try and put meaning to these differences and find a compromise for the countries that are involved in cross border trading. These include; 1. IASB (International Accounting Standards Board), 2. IFRS (International Financial Reporting Standards), 3. FASB (Financial Accounting Standards Board), 4. SEC (Securities Exchange Commission), 5. CPA (Certified Public Accountancy), 6. FRC (Financial Reporting Council) among others. The International Accounting Standards Board (IASB) is the body at the center of international standardization and it seeks to; 1. Formulate and publish accounting standards and promote their worldwide acceptance. 2. It’s also working on improvement and standardization of regulations, accounting standards and procedures. Initiatives to curb accounting information differentiation; Initiatives to curb accounting information differences include fusing of accounting standards by countries such as Australia, Canada and the United Kingdom. The United States of America are also in negotiations on joining the International Financial Reporting Standards. The Integrated Reporting can also be used to curb the differences as the countries will have a common standard of reporting financial and accounting information not forgetting value creation. 5. Positive Accounting Theory Positive accounting theory seeks to explain and predict a particular phenomenon in reality whereas normative accounting theories prescribe how a particular practice should be undertaken and the prescription may depart from existing practice (Ross,L.W and Jerold,L. 1986). Positive accounting theory is designed to explain and predict which firms will and which firms will not use a particular method but does not say which method a firm will use. It focuses on relationships between various individuals and how their relationships function with the assistance of accounting. Such relationships include those of managers and their debt providers, owners and managers etc. It is based on the assumptions that; 1. All actions of an individual are driven by self interest that is an individual will behave in an opportunistic manner if an act will increase their wealth. 2. It does not incorporate any notions of loyalty or morality. The positive accounting theory came to prominence in the mid 1960s after a paradigm shift from normative theory. It is dominated by the capital markets research and it led to the development of efficient markets hypothesis. There are three hypotheses that have been used by positive accounting theory to explain and predict an accounting method. These methods are; 1. bonus plan hypothesis, 2. debt hypothesis and 3. Political cost hypothesis. In bonus plan hypothesis managers of firms without bonus plans are likely to use accounting methods that will increase the current period reported income. Debt hypothesis bases its hypothesis on the debt equity ratio; the higher the firm’s debt equity ratio the higher the likelihood of managers to use methods that increase income and the higher the firm is to constraints in debt covenant. Political costs hypothesis; larger firms are more likely to use accounting theories that will reduce reported profits than smaller firms. This reduced reported income is used to argue that the organization is exploiting other parties. Research has shown that managers will act opportunistically when selecting accounting methods. This research discourages the success of integrated reporting which relies on credible and concise disclosure of resources and information. This is because; 1. Managers act out of self interest and they end up manipulating information to their advantage. This is because this theory is value-free. 2. Positive accounting theories are way too flexible and allow manipulation of accounting figures for their own benefit. 3. Positive accounting theory does not provide prescription. 4. In undertaking large-scale research it ignores other relationships like organizational-specific relationship. List of References Consultation draft of the international framework, 2013. Integrated reporting. Retrieved on 13th September, 2013 from < http://www.theiirc.org/consultationdraft2013/> Integrated reporting, 2013. What is integrated reporting. Retrieved on 13th September, 2013 from Ross, L. W. and Jerold, L.., 1986. Positive Accounting Theory. United States: Prentice-Hall Inc. Accounting Scholar.com, 2013. Positive Accounting Theory (PAT). Retrieved on 13th September, 2013 from Read More