EXTERNAL FINANCIAL

REPORTING STATEMENTS - 6

Integrated Reporting
As defined by the International Integrated Reporting Council (IIRC), integrated
reporting (IR) is “a process founded on integrated thinking that results in a periodic
integrated report by an organization about value creation over time and related
communications regarding aspects of value creation.”

This definition of integrated reporting requires an understanding of three major

concepts:
• Integrated thinking
• The integrated report
• Value creation

The process to publish an integrated report is based on integrated thinking within the
organization. It is important to note that integrated reporting is not a static concept but
a process that continuously evolves and aims to improve reporting, internal decision
making, and integrated thinking.

Integrated Thinking
• Integrated thinking is a process of decision making, management, and reporting
based on the connectivity and interdependencies between several organization-
specific factors that affect the organization’s ability to create value over time
• Integrated thinking is a prerequisite to integrated reporting. Understanding the
influences financial and nonfinancial factors have on each other is necessary to:
o Report in an integrated manner about the performance of the organization
and
 o Make well-informed decisions for long-term value creation.
• Through integrated thinking, an organization learns how its interdependencies
between financial and nonfinancial aspects interact, as well as how they affect
value creation.

Integrated Report
• Integrated reports should be prepared in accordance with the IR Framework
published in 2013 by the IIRC.
• The main goal of an organization’s integrated report is to give the providers of
financial capital more information about how the entity creates value over a period
of time.
• An integrated report concisely communicates how strategy, governance,
performance, and prospects lead to value creation over time in the context of the
organization’s external environment by intelligently combining financial and
nonfinancial information.
• It provides a holistic view of the organization for all relevant stakeholders.
• It defines the interdependencies between financial and nonfinancial information
and explains how they interact in the organization’s value creation process.

Value Creation
• When an organization sells a product, it creates value for itself and indirectly for
the customer.
• This process affects not only the financial aspects of the organization, but also its
reputation and its relationships with its stakeholders.
• When the value created by the organization for itself or for others is material, it
should be incorporated into the integrated report.
The Six Capitals
• Financial Capital: funds available for an organization to use. It is the liquid capital
available through financing for production of goods or provision of services (e.g.,
equity, debt, investments, or operational activities).
• Manufactured Capital: consists of manufactured tangible objects.
• It is the physical capital (not natural capital) available for the production of goods
or provision of services. Examples include property, plant, and equipment and
infrastructures, such as roads and ports.
• Manufactured capital is not about ownership but about availability of the tangible
objects. For example, the closure of a port a company relies on due to political
irregularities decreases its manufactured capital, even though the port is not owned
by the company itself.
• Intellectual Capital: is the intangible knowledge of the organization. It includes
intellectual property, e.g., software, patents, copyrights, and licenses, and
organizational capital, e.g., systems, procedures, and protocols.
• Human Capital: refers to employees’ competencies, abilities, and experience,
including:
o Training and development.
o Ability and willingness to understand and implement the organization’s
strategy.
o Loyalty to the organization and motivation for the job.
• Social and Relationship Capital: is the relationship of the organization with the
environment in which it operates. This includes:
o Networks between and among the organization, stakeholders, institutions,
communities, and shareholders.
o Brand recognition and the external reputation of the organization.
• Natural Capital: consists of the renewable and non-renewable environmental
resources and processes that provide goods or services that support the
organization’s prosperity.
Guiding Principles of Integrated Report
• Strategic Focus and Future Orientation
• The report should indicate
o How strategy affects the ability to create value in the short, medium, and
long term.
o How strategy affects the capitals.
o Whether the organization is ready for a possible change in the capital
streams.
• Connectivity of Information
• The integrated report should:
o Show a holistic picture of the interrelatedness of different aspects of the
organization.
o Explain how these factors impact the ability of the organization.
• Stakeholder Relationships.
o The key stakeholders and the quality of their relationship with the
organization should be reported.
• Materiality
o The organization should disclose information that has a substantial impact
on its ability to create value over time.
• Conciseness
o An integrated report should be clear and concise.
o A judgment must be made as to what information should be included in the
report.
• Reliability and Completeness
o An integrated report should be free of material errors.
o An integrated report must include all material information, whether it is
positive or negative.
• Consistency and Comparability
o The material information in an integrated report should be consistent over
time.
o Changes and improvements made should be explained.
o Comparability among organizations is difficult due to the application of the
<IR> Framework to the specific situation of each organization.
Elements of the Integrated Report
• Organizational overview and external environment: what an organization does and
circumstances under which it operates?
o An integrated report identifies the market in which the organization operates,
its mission and vision, competitive landscape, key quantitative information,
stakeholder needs, external environment changes, and reactions to external
environment changes.
• Governance: How does the organization’s governance structure support its ability
to create value in the short, medium, and long term?
o An integrated report provides insight about an organization’s leadership
structure, diversity, strategic decision-making processes, values and ethics,
and linkage between remuneration and value creation.
• Business model: What is the organization’s business model?
o An organization’s business model is part of its value- creation process and
is usually supported by a narrative, identification of critical stakeholder and
other (e.g., materials) dependencies, and a diagram or flowchart.
• Risks and Opportunities

What are the specific risks and opportunities that affect the organization’s ability to
create value over the short, medium, and long term, and how is the organization
dealing with them?

• Risks and opportunities may be internal, external, or a combination. An

assessment of materiality should be made in the event the identified risk actually
occurs.
• Strategy and Resource Allocation
Where does the organization want to go, and how does it intend to get there?
• Strategic objectives, resource allocation plans, and measurement of goal
achievement are often included.
• This Content Element is closely linked to the business model and external
environment.
• Performance

To what extent has the organization achieved its strategic objectives for the period,
and what are its outcomes in terms of effects on the capitals?
• Qualitative and quantitative measures should be used.
• Linkages between historical performance and future plans are important.
• Connections between financial performance and performance of other capitals can
be made.
• Outlook
What challenges and uncertainties is the organization likely to encounter in
pursuing its strategy, and what are the potential implications for its business model
and future performance?
• An analysis is usually made of expectations about the future, possible changes
and responses, and the organization’s ability to react to those changes.
• Basis of Preparation and Presentation
How does the organization determine what matters to include in the integrated
report, and how are such matters quantified or evaluated?
• An overview of the materiality determination process (often shown as a materiality
matrix) is provided.
• The organization identifies the reporting standards and other frameworks used in
its preparation.
• General Reporting Guidance
• This item in the Content Elements is not based on a question. It provides
information about essential issues that should be considered during the
preparation process, such as materiality, capital disclosures, and an explanation
of the business model.

Benefits of Integrated Report

• Linking financial and nonfinancial information, which provides more clarity about
the value-creation process.
• Better decision making and resource allocation
• Better relationships with stakeholders
• More employee engagement
• Lower reputational risk
• More committed customers
• Better measurement and internal control systems for nonfinancial information.
Costs of Integrated Report
• Collecting and analyzing new types of data
• Setting up new data sets
• Hiring people with the proper analytical skills
• Setting up new internal control systems
• Providing assurance on the integrated report
• Disclosing true information