Integrated reporting is defined as a concise report that organizations adopt in presenting their market value and corporate governance. In the present business environment, organizations are not following the integrating reporting framework in their current reporting making businesses to declare only 18% of their market values. This report presents the strategy that organizations must adopt in presenting their current reporting and follows the six framework of integrated reporting.
Integrated Reporting
Rapid changes in the contemporary business practice have made organizations to deviate from reporting larger percentages of their capital. The current reporting practice shows that organizations are merely reporting 18% of their physical and financial assets, and the evidence shows that organizations are not reporting array of assets they use to generate market values. (Deloitte, 2012). Failure of the current reporting to capture the inputs from natural capital and other form of capital required the need for the integrated reporting. International Integrated Reporting Council. (2013) defines integrated reporting as a concise report and communication that reveals organizational strategy, performances, governance and prospects, which assist firms to create values in the short, medium and long run.
To meet the needs of integrated reporting, organizations needs to integrate accountability in their corporate reporting. Organizations need to provide risk based information and new thought leadership in the accounting framework to meet the needs of integrated reporting. Moreover, firms must deliver report that should be able to reveal organizational overview and their operational strategy and relations to the external environment.
Moreover, current reporting should be able to reveal the organizational governance structure and its ability to create value in the short, medium and long run to meet the need of integrated reporting. More importantly, current reporting must be able to reveal the opportunities and risks that organizations are undergoing and how they affect firm's capacity to create value for their shareholders in the short, medium and long run. The current reporting should also be able to reveal the organizational performances and its strategic method in implementing resources allocation. The current reporting must reveal organizational outlook, challenges, and uncertainties that they are likely to encounter and its implication to business model. To meet the need of integrated reporting, organization must provide information about their financial, manufactured, intellectuals, human, natural and social and relationships capitals.
Answer to Question 3.
International Integrated Reporting Council. (2013) presents 6 frameworks that organization must adopt when preparing their integrated reporting. The six frameworks are presented below:
Financial capital: Financial capital is the assets that organizations use in the production of goods and services. This category of capital include balances in the banks account as well as funds that organization generates from selling shares to the public and capital generated from capital financing such as bonds and equity.
Manufactured Capital: This item include material goods as well as infrastructure owned by organizations. Manufactured capital also includes physical objects that include machine and building that organizations use to produce goods and services.
Intellectual Capital: The intellectual capital includes collective knowledge owned by organizations. Typically, intellectual capital is part of intangible assets that organizations use to generate market values. Many service-based firms use large proportion of their intellectual capital to generate market values. Examples of intellectual capital include tacit knowledge, systems brand, software, copyrights, patents, licenses and rights.
Human Capital: This is the collective value of employee that business use in the application of skills. Thus, human capital is organizational combine capabilities to solve business problems. Human capital includes people's competencies, capabilities, and motivation to innovate.
Social and Relationship Capital: The social and relationship capital include customer relationships, suppliers relationships. Typically, organizations acquire trademark and trade name by virtue of customer relationships making customer capital a central importance of organizational worth.
Natural capital: This item is the stock of natural ecosystems yield valuable goods and services. The items include all renewable & nonrenewable natural resources and mineral resources.
This framework will assist shareholders to better understand how organizations create values. Despite the benefits of the framework, its shortcoming is that the social and relationship capital should not be included as part of the framework since social and relationship capital have already existed for several decades. In both traditional and current business environment, organizations are required to create effective social relationships to enhance market advantages. Ability of organizations to improve its social relationships depends on their marketing strategy, quality of product and services produced and ability to improve corporate social relationships. Moreover, organizations generally depend on efficient suppliers to meet customers need in both traditional and current business environment. Thus, this report suggests that social and relationships capital should not be included in the framework in preparing integrated reporting because the social and relationship capital have already existed for several decades.
Answer to Question 4.
Since mid 2000s, regulators, international bodies, accounting profession and academic communities have implemented several initiatives to make organizations presenting integrated reporting framework in the annual report. For example, KPMG (2012) provides a comprehensive report on integrated reporting showing that organizations must show the world the strategy they employ to generate market values. The report reveals how South African government obliged South African companies to adopt integrating reporting. KPMG (2012) point out: "Companies listed on the Johannesburg Securities Exchange (JSE) were required to adopt Integrated Reporting from years commencing on or after 1 March 2010." (P 9). Thus, KPMG (2012) recommends that organizations in the United States and other advanced countries should emulate South African reporting approach.
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