11. Non-financial Reporting: Frameworks/Standards Flashcards
What is non-financial reporting?
Non-financial reporting is providing information on non-monetary factors associated with business
performance such as environmental, social, governance and ethical issues.
Therefore, can provide a more comprehensive view of an entity’s overall performance, position and potential prospects than can be provided solely by the elements of financial statements.
What information is included in non-financial reports?
Non-financial reporting includes:
* business strategy and performance - entity’s overall plan for how to position itself and set and achieve goals.
* governance - ethos and culture of an organisation and the relationships between stakeholders.
* sustainability - communicating information about an entity’s sustainability activities and approach.
Why is non-financial reporting becoming increasingly important, what factors have contributed to this?
The increase has been driven by a range of factors including:
- The globalisation of business, the increasing size, influence and impact of large multinational corporations and therefore the need to hold them to account
- An increase in the importance of resources that are not reflected in balance sheets, such as the quality of an organisation’s relationships with suppliers or the skills of its employees
- An increase in responsible investing
- An increase in geopolitical uncertainty and risks arising from social and environmental challenges, such as climate change and labour rights issues
- An increased desire of workers to work for employers whose values and business model are aligned with doing good
- An increase in consumers seeking to purchase products that do not have a negative societal and climate change impact
What is the relationship between financial reporting and non-financial reporting?
The information in corporate reports will be most useful when the links between financial and non-financial performance are clearly explained and analysed, so that the users of information can make decisions based on high-quality and comprehensive information.
Who are the users of non-financial information?
Non-financial reports are usually aimed at a range of external stakeholders:
* Actual and potential investors and lenders
* Governments and regulators
* Groups such as customers and suppliers
* Individuals and local communities
* Campaigners and ratings agencies
What are the benefits of having standards and frameworks for non-financial reporting?
These standards make sure the Non-financial reporting information is high-quality, consistent information to investors, lenders and other stakeholders interested in the financial position and performance of a business.
Thus easier to understand across countries/frameworks etc.
What are the key standards and frameworks for non-financial reporting?
- IFRS Sustainability Disclosure Standard
- European Sustainability Reporting Standards
- Global Reporting Initiative (GRI) Standards
- UK Sustainability Disclosure Standards
What are the different approaches to reporting non-financial events?
Different approaches are described using different variations of materiality.
- IFRS Sustainability disclosure standard mainly based on:
- Financial materiality - information which is important in financial decision making. - Global Reporting Initiative (GRI) mainly based on:
- Impact materiality - information about actions which could have significant impacts on the environment or society. - European Sustainability Reporting Standards mainly based on:
- Both financial and impact materiality.
Why are accountants well placed to play a key role in non-financial reporting?
Accountants are well placed for NFR because they already have the existing skills and experience to understand the link between both financial and non-financial performance of an entity and how social/environmental issues can impact the entity.
What are the links between financial and non-financial performance?
- Retailers often sell certified organic or ethically produced food at premium prices
- Consumer goods manufacturers emphasise reductions in packaging and offer ways to recycle their products
- Airlines offer travellers the opportunity to pay an additional amount for tickets to finance the use of sustainable aviation fuel
How are the skills and experience of accountants relevant to non-financial reporting?
The following skills are relevant and how:
- Data collation - understanding controls to make data reliable and the assurance process.
- Data presentation and interpretation - Experienced in presenting data to stakeholders and thus can provide sustainability data.
- Professional judgement and objectivity - Able to use judgement to notice the financial materiality and impact materiality
- Professional ethics training - Objectivity/Integrity are critical to produce relevant reporting on non-financial performance of the entity.
- Interaction across business functions - Able to work with multiple functions to produce good metrics/data that can help the entity.
How does the accountant play an active role in the sustainable development of the business?
Through:
- Ensuring sustainability reporting is accurate, verifiable and high-quality to aid decision making
- Accounting skill set is perfect for this set
- Accountants are already bound to a code of ethics and thus able to make stakeholders aware of the risks facing the organisation
What is the objective of the IFRS Sustainability Disclosure Standards?
- To provide a comprehensive foundation of disclosures for global adoption
- To be a common language for comparable, decision-useful disclosures
- To meet investor needs across global capital markets
What non-financial disclosures are appropriate under the IFRS Sustainability Disclosure Standards?
- IFRS S1 General Requirements for disclosure of Sustainability: Sustainability related risks and opportunities
- IFRS S2 Climate-related disclosures: Climate related risks and opportunities.
What are the requirements of the IFRS Sustainability Disclosure Standards?
IFRS S1 and S2 both require disclosures in four areas:
- Governance - governance processes, controls and procedures an entity uses to monitor, manage and oversee climate/sustainability -related risks and opportunities.
- Strategy - entity’s strategy for managing climate/sustainability-related risks and opportunities.
- Risk management - processes the entity uses to identify, assess, prioritise and monitor climate/sustainability-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process.
- Metrics and targets - entity’s performance in relation to its climate/sustainability related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.
