Ch 2 Flashcards
Objective of Financial Reporting
(IASB Conceptual Framework)
To provide information about the reporting entity that is usfeul to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity
Example areas not covered by financial reporting
How the business is managed
Future prospects
Environmental policy
Attitude towards social responsibility
Difference in Approach: GRI vs IIRC
GLOBAL REPORTING INITIATIVE
guidelines that propose additional disclosures (economic, env, social perf indicators) in addition to standard F/S disclosures
INTERNATIONAL INTEGRATED REPORTING COUNCIL
Framework proposing a fundamental and revolutionary change to how entities are managed and how they report to st/h
How and GRI address historical over-reliance on solely financial disclosures and short-termist obsession
enables org to communicate clearly on how it draws from all resources and relationships to create and preserve value in the s/t, m/t and l/t
GRI
encourage orgs to disclose extra information (econ, env, social) alongside standard F/S - either in separate doc or as part of mgmt commentary within F/S
Overall Aim of GRI
GRI suggests that entities report performance indicators so that users can monitor their performance from economic, environmental, and social perspectives
G4
Latest version of GRI Sustainability Reporting Guidelines, dated May 2013
Contain PRINCIPLES on content, quality, and guidance on setting report boundary; plus DISCLOSURE ITEMS on mgmt of issues and actual performance indicators used
Central focus of MATERIALITY to build public trust and ensure info important for st/h is shared (its omission must otherwise be explained)
Overview of GR Guidelines
SECTIONS 1/2: PURPOSE AND HOW TO USE
Explains two elements of (1) Reporting Principles and Standard Disclosures) and (2) Implementation Manual
Gives step-by-step guide to using Guidelines and preparing a report
SECTION 3: CRITERIA FOR ORG TO PREPARE REPORT IN ACCORDANCE WITH GUIDELINES
Explains option for disclosures: CORE giving background against which org communicates economic, env, social perf; COMPREHENSIVE builds on this to require additional reporting of strategy/analysis, governance, ethics, integrity
SECTION 4: REPORTING PRINCIPLES
The required characteristics of the Report Content and Report Quality
SECTION 5: STANDARD DISCLOSURES
Largest section - goes through the different types of GENERAL and SPECIFIC DISCLOSURES
Then explains how to subcategorize INDICATORS (a specific disclosure)
SECTIONS 6/7: QUICK LINKS AND DEFINITIONS OF KEY WORDS USED
Overview of Specific Standard Disclosures (GRI)
Subdivided into:
(1) DIsclosures on Management Approach: org explains how econ, env, social impacts are managed
(2) Indicators: broken into econ, env, social categories
Description of GRI Indicators
ECONOMIC
flow of capital among different st/h, and primary economic impacts of org throughout society
ENVIRONMENTAL
impacts on inputs (energy, water) and outputs (emissions, waste); biodiversity, transport, and prod/svc-erlated impacts; env compliance and spending
SOCIAL
impact on the social systems the org operates in
Subcategories: Labor Practices and Decent Work, Human Rights, Society, Product Responsibility
Example Economic Disclosures (GRI)
Economic Performance
rev/costs, pension cont, taxes paid, subsidies rcvd
Market Presence
wage competitiveness, proportion of local hire SM
Indirect Economic Impacts
level of investment in infrastructure projects
Procurement Practices
proportion of spend on local suppliers
Example Environmental Disclosures (GRI)
Materials
volume of use, proportion that is recycled
Energy
total fuel consumption, reduction in energy reqs of sold prods/svcs
Water
Biodiversity
significant impacts, e.g. species affected and for how long
Emissions
total greenhouse gas/ozone depleting substances emitted, any deliberate reductions achieved
Effluents and Waste
Products and Services
how env impact is mitigated, proportion of products/packaging reclaimed
Compliance
Transport
Overall
Supplier Environmental Assessment
% of new suppliers screened for environmental criteria
Environmental Grievance Mechanisms
Example Labor Practices and Decent Work Disclosures (GRI)
Employment
turnover, # new staff, benefits provided (e.g. parental leave, life insurance)
Labor/Management Relations
Occupational Health and Safety
Training and Education
average hours of training provided
Diversity and Equal Opportunity
analysis of employees (and governance) by age, gender, ethnicity, etc.
Equal Remuneration for Women and Men
Supplier Assessment for Labor Practices
Labor Practices Grievance Mechanisms
Example Human Rights Disclosures (GRI)
/% of org investments/contracts which underwent human rights screening
Investment
Non-discrimination
Freedom of Association and Collective Bargaining
measures to support rights to both of these (e.g. joining trade union)
Child Labor
Forced or Compulsory Labor
Security Practices
Indigenous Rights
Assessment (of entity operations)
Supplier Human Rights Assessment
Human Rights Grievance Mechanisms
Example Society Disclosures (GRI)
Local Communities
operations with local comm engagement, those with significant actual/potential –ve impacts
Anti-corruption
Public Policy
analysis of donations to political parties (by region, recipient)
Anti-competitive Behaviour
legal actions faced re. anti-competitive behavior / violations of monopoly laws
Compliance
Supplier Assessment for Impacts on Society
Grievance Mechanisms for Impacts on Society
Example Product Responsibility Disclosures (GRI)
Customer Health and Safety
summary of H&S breaches reported by customers, results of any investigations
Product and Service Labelling
Marketing Communications
list of banned/restricted products per region, summary of any govt investigations into non-compliance with advertising regs
Customer Privacy
complaints received (e.g. losses of data, leaks)
Compliance
General Standard Disclosures (GRI)
Discuss General Issues relating to Entity > Specific Information regarding performance
Strategy and Analysis
Org Profile
Identified Material Aspects and Boundaries
Stakeholder Engagement
often ignored or underestimated, important for PR/marketing and to have a pulse on product reception
Report Profile
reporting date, date of last report, use of Core/Comprehensive Disclosures
Governance
Ethics and Integrity
org’s values and norms, plus int/ext mechanisms for reporting and seeking advice on ethical matters
Principles for Defining Content of the GRI Disclosures
STAKEHOLDER INCLUSIVENESS
who are the st/h and how the report responds to their expectations and interest
SUSTAINABILITY CONTEXT
MATERIALITY
threshold where Aspects become sufficiently important for refleting org’s econ/env/social impacts or influencing st/h decisions
COMPLETENESS
NON-DISCLOSURE
identification of omissions with explanations
Possible explanations for omissions (GRI)
Org should recognize that omission of large # of Standard Disclosures may invalidate claim that reporting is “in accordance” with GRI Guidelines
A Standard Disclosure, part of a Std Disc, or an Indicator is not applicable – reason why should be disclosed
Information is subject to confidentiality constraints – these constraints must be disclosed
Existence of Legal Prohibitions – these must be disclosed
Information is currently unavailable – steps being taken to get the information must be shared
Principles for Defining Report Quality (GRI)
BALANCE
positive and negative perf aspects presented
COMPARABILITY
consistent reporting, presentation to allow trend assessment over time and comparison to other orgs
ACCURACY
TIMELINESS
CLARITY
RELIABILITY
org should gather, analyze, and disclose info and processes used to prep rpt in a way that can be examined such that quality and materiality of information may be ascertained
Four-Step Process of Assembling a Report in accordance with GRI Guidelines
(1) IDENTIFICATION
(2) PRIORITIZATION
(3) VALIDATION
(4) REVIEW
Assembling a GRI Report - Step 1: Identification
Consider GRI Aspects list and other topics of interest
Principles of SUSTAINABILITY CONTEXT and ST/H INCLUSIVENESS:
Identify Aspects and other topics based on:
- econ, env, and social aspects of org activities, prods/svcs, relationships, OR
- influence on assessments and decisions of st/h
Identify whether impact is within or outside org
List our Aspects/topics considered relevant and their boundaries
Assembling a GRI Report - Step 2: Prioritization
Assess each Aspects for (1) significance of org econ/env/soc impact and (2) influence on st/h assessments and decisions
Document materiality thresholds and identify material Aspects (1+2 above)
For each material Aspect, decide level of data and narrative to disclose
List material Aspects to be included alongside Boundaries and level of coverage
Assembling a GRI Report - Step 3: Validation
Principles of COMPLETENESS and ST/H INCLUSIVENESS
Assess list of material Aspects against Scope / Aspect Boundaries / Time to ensure report provides reasonable and balanced view of org econ/env/soc impact and enables st/h assessment of perf
Internal SM validates list of material Aspects
Prepare systems/processes to gather info needing disclosure
Translate material Aspects into Standard Disclosures (DMA and Indicators) to report against
Determine which info is available and explain where mgmt approaches/info still needs to be established
Assembling a GRI Report - Step 4: Review
Principles of SUSTAINABILITY CONTEXT and ST/H INCLUSIVENESS:
review material Aspects from previous reporting period
Use review results to inform step 1 Identification for next rptg cycle
Objective of
Create a more holistic and balanced view of the org
Combining material aspects (strategy, gov’ce, perf’ce) in a way which reflects commercial, social, and env context
Link between Sustainability and
SUSTAINABILITY REPORTING
- key platform for communicating org econ/env/soc +/– impact
INTEGRATED REPORTING
- emerging and evolving trend in corp rptg
- provides fin cap provideres with integrated view of key factors affecting current/future value creation: strategy, gov’ce, perf’ce, prospects
- builds on sust rptg foundations but not intended as an amalgam of annual F/S plus sust rpt
- sooner a standalone which interacts with other rpts/comms by referencing detailed information disclosed elsewhere
Three Fundamental Concepts of
VALUE CREATION FOR ORG AND OTHERS
org’s activities and outcomes for capitals used affect its ability to continue to draw on these in a continuous cycle
CAPITALS
resources and relationships used and affected by org – not all six need to be adopted and/or included, only those relevant
VALUE CREATION PROCESS
centered on business model which draws on inputs to create outputs (prod/svc/by-prod/waste) and outcomes (int/ext consequences for capitals)
Stock and Flow of Capitals
All orgs depend on various forms of capital for success:
financial, manuf, intellectual, human, social/relationship, natural
capitals are stocks of value that are inc’d/dec’d/transformed through org’s act/outputs (e.g. training = + human cap, profit = + fin cap)
continuous interaction and transformation between capitals, e.g. training = + human and – financial
The Six Capitals
Financial
Manufactured
Intellectual
Human
Social and relationship
Natural
Financial Capital
Funds available for use in prod of gds/svcs
Funds obtained through financing or generated through ops/investments
Manufactured Capital
Physical objects available to org to produce/provide gds/svcs – buildings, equipment, infrastructure (builds, roads, treatment plants, etc.)
Often created by other orgs but including assets manufactured by reporting org when retained for own use
Intellectual Capital
intellectual property – patents, copyrights, software, etc.
organizational capital – tacit knowledge, systems, procedures, protocols
Human Capital
alignment and support for gov’ce framework, ethics
ability to understand and implement strategy
loyalties and motivations for improving processes/gds/svcs
ability to lead, manage, collaborate
Social and Relationship Capital
shared norms and common values/behaviors
key st/h relationships and desire to build/protect them
intangibles associated with brand and reputation
social licence to operate
Natural Capital
all renewable and non-renewabls rscs/processes providing gds/svcs to support past, current, future prosperity
e.g. air, water, land PLUS biodiversity and healthy ecosystem
Role of the Capitals in the Framework
Capitals as part of theoretical underpinning for concept of value creation
Capitals as guideline for ensuring orgs consider all forms of capital they use/affect
Note – different orgs categorize capitals in different ways – but the purpose is for orgs not to overlook capital it uses or affects
Overview of how to present the extra GRI / information
integrated report = designated, identifiable comm > summary of info from other comms
must explicitize connectivity of information and how value is created over time
either standalone or included as distinguishable and accessible part of another report – thus often included as part of Management Commentary (MC) accompanying F/S
Purpose of Management Commentary (MC)
narrative report providing context within which fin position, fin perf, and CF can be interpreted
mgmt can explain objectives and strategies to achieve them
users evaluate org’s prospects, risks, and success of strategies using MC
MC is for many orgs already an important element of comms with capital markets
Framework for Presentation of Management Commentary (MC)
(1) provides mgmt perspective of org perf/position/progress
(2) supplements and complements F/S info
(3) is future-oriented
(4) should possess characteristics of relevance and faithful representation (Conceptual Framework for Financial Reporting)
Challenges with Current Approach to Non-Financial Reporting
RELEVANCE
weight given to non-fin factors vs fin factors by investors, employees, consumers
RELIABILITY
what external assurance to validate the non-fin info?
COMPARABILITY
is information produced in a comparable manner, using similar policies etc. so informed choices can be made
ALSO - existence of GRI and as two complementary guidelines, PLUS voluntary nature of compliance - both are also challenges
Future Developments in Non-Financial Reporting
IASB and IIRC have agreed to collaborate, and communicate about work on their respective frameworks to aim for complementarity and compatibility as their two sets of standards evole
both have agreed to identify how to align and fin rptg standards to strengthen corporate reporting
likely future regulation to formalize link between the two orgs
United Nations Sustainability Development Goals
(1) No Poverty
(2) Zero Hunger
(3) Good Health and Well-Being
(4) Quality Education
(5) Gender Equality
(6) Clean Water and Sanitation
(7) Affordable and Clean Energy
(8) Decent Work and Economic Growth
(9) Industry, Innovation, Infrastructure
(10) Reduced Inequalities
(11) Sustainable Cities and Communities
(12) Responsible Consumption and Production
(13) Climate Action
(14) Life below water
(15) Life on lan
(16) Peace and Justice, Strong Institutions
(17) Partnerships for the goals
Objectives of United Nations Sustainability Development Goals
“end extreme poverty, fight inequality and injustice, and protect the planet”
will require strong links between governments, companies, and public
40% of largest 250 global companies discussed SDGs in their reporting in 2018
Long-Term Benefits to companies of adopting UN Sustainability Development Goals
Improved customer reputation of being socially responsible
Healthier and more skilled workforce
Greater growth opportunities as economies of developing countries strengthen – giving population more disposable income
Continued supply of raw mat from sustainable sources – securing l/t future of org
Reduced risk of reg breaches and negative press
Linkage between SDGs and Integrated Reporting
Integrated Reporting provides framework for SM to focus on SDGs and incorporate into l/t strategy
Both and GRI require orgs to consider ext env’s impact on value creation = direct link to several SDGs: population, human rights, poverty, climate change, etc.
mgmt should identify and evaluate which SDGs will help orgs create the most value, then develop m/t and l/t strategies to achieve
these should be communicated w/in the integrated report, alongside the +ve and –ve ways org can impact the SDGs
overall, likely will create more integrated thinking and build relationships within org and between org and external st/h
