Definitions and meanings:
Integrated reporting is a new domain in accountancy that aims to enhance the scope of corporate reporting. Unlike traditional approach, integrated reporting attempts to report the value creation process of an organization. It refers that both financial as well as non-financial factors are responsible for development of sustainable value addition for an organization. The framework of integrated reporting includes six capitals:
- Financial Capital
- Human Capital
- Manufactured Capital
- Intellectual Capital
- Social and Relationship Capital
- Natural Capital
Traditional financial reporting:
The reporting of financial results and disclosures of a company to its stakeholders is known as ‘Financial Reporting’. It can be of two types; external financial reporting and internal financial reporting. External financial reporting is done by the publication of ‘financial statements’ and is governed by the international standards on accounting or generally accepted accounting principles. Internal financial reporting can be formulated in the way that best suits the management to make well-informed decisions.
Difference between integrated reporting and traditional financial reporting:
The key points of difference between integrated reporting and traditional financial reporting are given below:
1. Relevant governing body:
Traditional financial reporting is governed by IFRS’s (International Financial Reporting Standards) which are issued by IASB (International Accounting Standards Board). These standards provide detailed guidelines about the recording, summarizing and presentation of financial results of an entity. Integrated reporting has been developed by the International Integrated Reporting Council (IIRC). IIRC is an international coalition of regulators, investors, firms and non-governmental organizations.
The main objective of ‘traditional financial reporting’ is to provide reports on structured information about the financial position and financial viability of an organization to the relevant stakeholders especially shareholders. These reports must be prepared in compliance with the relevant standards. However, the main focus of integrated reporting is to report on all aspects of an organization including financial reporting, sustainable reporting, management commentary and corporate governance in a single report. Additionally, integrated reporting emphasizes upon increased efficiency in corporate reporting by improving the standard of information available to investors of financial capital.
3. Application and comparability:
Financial reporting is currently adopted by almost all industrialized countries. As these reports are prepared according to the international accounting standards, the results of these reports are comparable among organizations.This is because implementation of these standards promote common business language which could be interpreted and understood even in different jurisdictions. Integrated reporting is not being adopted on a global scale yet, especially in developing economies. One major reason for this is that organizations do not want to indulge their capital in such sectors of reporting which do not derive direct and tangible financial inflow.
4. Organizational involvement:
Traditional financial reporting engages only those stakeholders that are important. The focus of traditional financial reporting is on the communication of financial matters of an organization.Integrated reporting aims to involve more stakeholders for greater collaboration amongst different facets of an organization. This makes it viable for the organizational members of different departments to collude and achieve congruent strategic objective.Integrated Reporting prevails a sense of corporate social responsibility, because if the organization will engage society at large into its operation, not only society will be benefited but positive effects will reciprocate in terms of good reputation for the organization.
The information gathered while traditional reporting of business transactions and for preparing financial statements of a company is mostly of financial nature. Therefore, the management of a company keeps an outdated approach and pay heed only to financial results of the company. These reports can only provide an orthodox analysis of financial dealings of the company while integrated reporting indulges other aspects like the environment in which the company is operating, the available resources a company etc. Additionally,Integrated reporting compels managers to not just rely on past data but to gather additional information about the business processes and future prospects of the organization. This incremental knowledge can enhance ways to exploit these resources or capitals in best possible manner to meet organizational goals.
Integrated reporting versus traditional financial reporting – tabular comparison
A tabular comparison of integrated reporting and traditional financial reporting is given below:
|Relevant Governing Body|
|Is promoted by International Integrated Reporting Council.||Is governed by the International Accounting Standards Board.|
|To improve the quality of information available to users of financial data and enable proactiveness in organizational cultures around the world.||To report the financial results of the company’s by preparing and publishing financial statements.|
|Application and Comparability|
|Is increasingly being adopted worldwide by businesses.||Is practiced in almost all industrialized jurisdiction with common reporting standards.|
|Aims to engage all relevant stakeholders.||Is beneficial for shareholders and other interested|
|Focus on financial and non-financial information gathering.||Focus of information gathering is mainly financial.|
Conclusion – integrated reporting vs traditional financial reporting:
Traditional financial reporting is an important facet of modern markets globally because economies of countries stand upon their stock markets therefore reporting financial results for large listed companies is mandatory. Recent trends among investors has increased an urge for more transparency and scrutiny in relation to operations of businesses because traditional financial reporting has failed to answer questions of investors about non-financial aspects of businesses especially the long term direction and the ability of an organization to sustain in its competitive environment. Integrated reporting aims to answer these question by increasing the level of knowledge an investor has about the company he or she has invested in. In this way, investors can become aware about any other risks or externalities other than financial risks that could impact their investment decisions and help them avoid possible future losses.