Impact on SMEs
Nick Ridehalgh, a partner at KPMG, says ASIC has proposed that the integrated report be placed at the front of the annual report. It would not replace the financial report, which, he says, is under the mandate of the International Accounting Standards Board.
Ridehalgh says that, while the plan is to introduce integrated reporting for listed companies only, it has much broader application.
“At this stage, integrated reporting is being aimed at listed companies, but the framework itself is actually perfectly usable by any organisation,” he says. “It is not adding complexity of burden to private company SMEs. It’s a framework that would be of value to them as they are seeking to explain their business model and strategy.”
The question over integrated reporting is how to stop this useful framework from becoming an unnecessary new regulatory burden. Says Ridehalgh: “It’s a good question as to whether small listed companies would have the bandwidth to prepare integrated reporting.”
[breakoutbox][breakoutbox_title]What does integrated reporting include?[/breakoutbox_title][breakoutbox_excerpt]The International Integrated Reporting Council’s prototype framework for integrated reporting describes a business in terms of six types of resources and relationships. It calls them the six ‘capitals’.[/breakoutbox_excerpt][breakoutbox_content]The International Integrated Reporting Council’s prototype framework for integrated reporting describes a business in terms of six types of resources and relationships. It calls them the six ‘capitals’.
These are as follows:
Manufactured capital
Business assets, such as building and equipment.
Financial capital
The business’ generation and use of funds.
Human capital
Staff alignment, ability and motivation.
Intellectual capital
Intellectual property and intangibles, such as brand.
Natural capital
Effects on the natural environment.
Social capital
Values, relationships and the organisation’s ‘licence’ to operate within society.
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Challenges and opportunities
Concern about the reporting burden is also the IPA’s caveat on its support for integrated reporting. While the current proposal is to apply the system only to listed companies, there could be a flow-on effect for SMEs looking to expand.
“Will this just add a layer of complexity and put further pressure on SMEs before they become larger entities?” asks Conway. “It might well put in some barriers for growth.”
It could also present issues for SMEs seeking to raise finance from banks. “There will be almost a secondary focus from a financial institution on those integrated reporting elements and that’s what a financial institution will look to before funding operations,” says Conway.
For all this, integrated reporting brings the accounting profession one huge positive. As KPMG’s Ridehalgh points out, integrated reporting will create new opportunities for accountants to play a more active role in company strategy. The profession will gain the opportunity not only to calculate assets and liabilities but also to assess non-financial issues crucial to business strength and longevity.
“This is an opportunity to say: what is our core strategy? What are our key value drivers? What are the forward-looking risks that would have an impact on those value drivers? How are we mitigating those risks and maximising the opportunities? How have we done to date in delivering our strategy? And how have we set ourselves up to succeed in the future?”
