by Nick Topazio, ACMA, CGMA – Associate Technical Director, Management Accounting, Integrated Reporting Research – Association of International Certified Professional Accountants
Over the last 20 years, businesses have undergone dramatic change. Technology is disrupting not only the products we offer but also the way we earn profit. Businesses have moved from the manufacturing of tangible goods to service-based business models. And this shift is fundamentally changing the assets that affect a corporation’s market value.
Economists refer to this shift as the “rise of the intangible economy.” Non-financial and intangible assets such as intellectual property, customer relationships, brand, and human capital now make up a majority a corporation’s net worth. This is the mirror opposite from the 1970s when over 80% of a company’s market value could be traced through to the financial statements. Today, less than 20% of a company’s market value can be accounted for by its financial and physical assets.
So, what does this move from tangible to intangible value on a company’s balance sheet mean for today’s financial professionals? Quite a bit, actually. Business leaders look toward management accountants to provide a true picture of an organisation’s value.
This is where integrated reporting may help.
Why Integrated Reporting makes sense
Integrated reporting, or <IR>, is a way for businesses to share a holistic view with investors and stakeholders on how their strategy, performance and assets will create value over the short, medium and long term. The International Integrated Reporting Council (IIRC) made great strides in helping organisations adopt this new approach to corporate reporting when it introduced the International Integrated Reporting Framework more than a decade ago. The <IR> framework helps organisations measure against six broad categories of capitals: financial, manufactured, intellectual, human, social and relationship, and natural. Reporting through this framework enables businesses to be more future-oriented and helps them think about their business strategy within the context of the external environment. This leads to better informed decisions, management of key risks and identification of new opportunities.
For management accountants, adopting an <IR> reporting framework supports a fundamental principle of management accounting–integrated thinking. The Association of International Certified Professional Accountants, the new global organisation formed by members of the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), supports adoption of integrated thinking and <IR> for all organisations.
The Association’s Global Management Accounting Principles, the world’s first universal framework for management accounting best practice, provide the information required to support integrated thinking and decision-making, in particular, through assessing financial and non-financial performance – past, present and future. This information can help organisations to achieve a better understanding of how value is created through their business model.
Global adoption of <IR> is still a challenge
There are now more than 1,000 businesses globally using <IR> to communicate with investors, stakeholders and regulators, with countries such as South Africa, Japan, India and the UK leading adoption. However, the tipping point has not yet happened in markets like the US and China, the world’s two largest economies.
Why might this be? In the US, the business environment, especially in relation to corporate reporting, is heavily rules-based. The fear of litigation and personal liability seem to play a disproportionately significant role in determining corporate reporting disclosures. This attitude clashes with the principles-based nature of the <IR> framework, its focus on voluntary disclosure and its requirement for future-oriented information.
The outlook for China looks more positive. The Chinese Presidency’s determination for China to take a driving seat in international cooperation to respond to climate change is helping the cause for <IR>. Earlier this month, the China Securities Regulatory Commission introduced new requirements that, by 2020, will mandate all listed companies to disclose environmental, social and governance (ESG) risks associated with their operations. In addition, the current Ministry of Finance (MoF) Accounting Regulatory Department five-year plan cites <IR> and the intention of the MoF to participate in continued development of <IR>.
Despite global adoption challenges, there are reasons to be hopeful. There is “investor pull”, for instance, from Larry Fink, CEO of BlackRock, which has over $6 trillion of assets under management. He has reminded CEOs around the world that they need to start accounting for their company’s impact on society. In addition, there is growing momentum from “preparers,” and the US <IR> working group website lists a number of examples from well-known companies including American Electric Power, Coca Cola, Dow Chemical, General Electric and Pepsico.
Resources to help you on your <IR> journey
Whether your organisation has adopted <IR> or not, you can still embody the principle behind it, which is integrated thinking. The Association has several resources to help you develop the integrated thinking skills critical to lead decision-making in business. They include:
- A new report from the Association and Black Sun that shares executive insights on the global state of integrated reporting.
- This thought leadership paper that lays out ten recommendations to help aid the design and management of effective processes of integrated thinking and reporting.
- A recent Facebook Live interview with Neil Stevenson, Managing Director at the IIRC, which highlights how organisations can better express value through integrated reporting.
- And, our Global Management Accounting Principles that provide a universal framework to help management accountants achieve integrated thinking, the foundation of <IR>.