Friday, 19 September, 2014

Published July 10, 2014
The future of corporate reporting
The global adoption of integrated reporting is slowly but surely gaining traction, but obstacles remain. FRANCIS KAN reports.
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Mr Chen: Significant effort is required to move from awareness to broad-based acceptance of IR 

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A GLOBAL movement towards corporate reporting that aims to give a fuller picture of a company's performance beyond its financial health is fast gaining acceptance, but more needs to be done to bring such reporting into the mainstream.

An integrated report takes into account a host of factors not captured in a traditional financial report, such as a company's impact on the environment, its efforts to build sustainable practices and the health and wellbeing of its employees. This information helps investors and other stakeholders understand how a company's strategy creates value in the long run. Global interest in integrated reporting (IR) has been growing since the Great Financial Crisis, as more companies seek to rebuild trust among their stakeholders.

Chen Voon Hoe, the accounting and financial reporting advisory leader in PwC Singapore, said: "There has been significant progress in building awareness of IR in Asia. Many Singapore companies have shown interest in it, especially the listed companies. "However, significant effort is required to move from awareness to broad-based acceptance of IR. Many companies are still waiting to see the tangible benefits of IR from the pilot companies."

The International Integrated Reporting Council (IIRC), an organisation driving the adoption of the initiative globally, has attracted more than 100 of the world's leading companies such as Unilever, HSBC, Deutsche Bank, Hyundai, Microsoft, PepsiCo, National Australia Bank and Tata Steel on board a pilot programme. DBS Bank and Arisaig Partners are the Singapore-based businesses in it.

The Institute of Singapore Chartered Accountants (ISCA) and Singapore Accountancy Commission (SAC) are also currently undertaking several initiatives to promote IR in Singapore and in South-east Asia. The SAC is a government agency tasked with developing Singapore into a global accountancy hub.

Uantchern Loh, its chief executive, said: "The SAC is continually seeking to establish new contacts and facilitate connections and networking opportunities between organisations which are interested in IR, so as to raise awareness and to share best practices, knowledge and expertise."

Challenges ahead

Paul Druckman, chief executive of the IIRC, describes the council's task of bringing about the global adoption of IR across borders and sectors - with different regulators on different paths - as an ambitious one fraught with challenges. He said: "As with any evolution, there will always be a few obstacles. Some businesses are finding that information they need for their integrated reports are produced at different times or that they need higher-quality data in some areas. However, in general, because IR is being created by business for business, reactions have been encouragingly positive."

Hong Kong-based power company CLP Holdings, one of the firms in the IIRC pilot programme, is one organisation that has faced the challenge of integrating financial and non-financial information into one report. For instance, the boundary and scope of financial information can be different from the boundaries and scopes of the non-financial information included in the integrated report.

"If we applied the financial rules of reporting on what is in our 'control' to determine the scope of how we report our emissions data, we would not have had to report the emissions from a facility if it was a Joint-Venture (JV) status. But from an impact materiality standpoint, say if the facility was a coal plant, carbon and air pollutant emissions would be material in the eyes of certain stakeholders like environmental groups," said Jeanne Ng, director of group sustainability at CLP Holdings. Since 2010, the company has made three attempts at producing an integrated report.

Closer to home, Singapore bank DBS started its journey towards IR with its 2012 annual report. The lender was the first Singapore bank and listed South-east Asian company to participate in the IIRC pilot programme. Its chief financial officer Chng Sok Hui is a council member of the IIRC, making her the first member from a Singaporean company.

While the bank's efforts have received praise from analysts and investors, it has yet to see this result in a reduced cost of equity, said Mikkel Larsen, managing director and head of tax and accounting policy at the bank.

"Such a benefit would come in the longer term, when investors better appreciate the benefit of IR.  Internally, different parts of the bank are collaborating more in terms of articulating the DBS value proposition, and this has provided an immediate benefit.  Although the benefit is less tangible, it remains important," he said.

For the bank, the challenges of preparing an integrated report has not come in the form of costs or availability of data, but the need to focus on the stakeholders who may read that annual report, said Mr Larsen.

CLP tackles this issue by making clear that its annual report, while it incorporates non-financial information, is primarily aimed at shareholders and capital providers. For other stakeholders, it produces a separate sustainability report, something it has been doing since 2002.

"I would like one day to have just one integrated company report, but you still need to figure out ways to communicate information in your annual report that the sustainability report would have reported," said Dr Ng. "For instance we have data sheets which include carbon emissions, air pollutant emissions and other environmental and safety parameters on every facility that we have operated for a full calendar year and that was under CLP's operational control (as defined in the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition). Our capital providers may not be interested in that kind of detail, but the green groups are. So we are looking at how we can use our website to accommodate this non-financial information if we were to move towards a slimmer sustainability report."

PwC's Mr Chen said the ability to obtain reliable information and the fear of divulging sensitive competitive information when the company starts sharing certain elements of IR also poses challenges to its adoption. "Countries in Asia are in different stages of economic development and their companies' business information systems vary significantly, presenting many challenges in obtaining reliable and consistent information required for integrated reporting," he said.

Mainstream acceptance

A key milestone in the IR journey was reached last December with the release of an International Framework laying out the principles for adopting this holistic form of reporting. The framework will be tested against market adoption and best practices over the next two years, said IIRC's Mr Druckman. "We anticipate a further global consultation to revise and refine the framework within a three-year timeframe, and are encouraging businesses and investors to submit their feedback direct to the IIRC in the meantime," he said.

More broadly, he said he believed that IR was moving from a phase of innovation to wider adoption across the world. Around 1,000 businesses globally are adopting at least some of the principles of IR in their reporting processes, and the adoption rate is set to accelerate over the next two reporting cycles,.

Mr Druckman said: "While the IIRC Pilot Programme has been essential in developing the framework in a market-led way, we are now developing a business network of organisations which are committed to leading the way in driving innovations in reporting and inspiring a wider take-up of IR." Work to encourage its adoption is also continuing in Singapore. For instance, a senior executive from the IIRC will be based in Singapore for the next six months to promote the initiative.

Meanwhile, ISCA has formed a steering committee to develop and implement nation-wide IR initiatives, Mr Loh of SAC disclosed. "The SAC is working closely with the IIRC to keep abreast of the latest global developments, and also exploring possible avenues for greater collaboration and research efforts," he said.