Prof. Mervyn E. King Chair
International Integrated Reporting Council (IIRC)
By E-mail: [email protected]
14.12.2012
622/617
Dear Prof. King,
IIRC Prototype Framework
We would like to thank you for the opportunity to provide the International Inte-grated Reporting Council (IIRC) with our comments on the Prototype Frame-work.
We acknowledge that this document is a Prototype and that there will be chang-es over the next months as it is further developed. However, we believe that this Prototype is a good step forward on the way from the IIRC Discussion Paper “Towards Integrated Reporting – Communicating Value in the 21st Century” to creating a globally accepted International Integrated Reporting Framework. We welcome the efforts undertaken by the IIRC to clarify the concept of Integrated Reporting, especially by defining (long term) financial capital providers as the main audience for Integrated Reporting and by encouraging assurance of Inte-grated Reports.
We also welcome the principles-based approach as described in
para-graph 1.12. However, more guidance might be needed for some elements in the Prototype (e.g. for Multiple Capitals, paragraph 2.14). We should like to recom-mend avoiding – to the extent possible – over-standardisation: Instead of addi-tional clarifications within the Integrated Reporting Framework itself, examples of best practices identified in the Pilot Programme should be provided separate-ly. One of the reasons for proposing Integrated Reporting is the awareness that over-standardisation of reporting leads to checklist-driven disclosures and to a point, where users just receive more quantity, but not necessarily quality.
Alt-hough we share this view, we should also keep in mind, that there might also be a danger of under-standardisation of reporting, which could make intercompany comparisons more difficult.
We also suggest emphasizing the importance of management having adequate evidence to support the information provided in Integrated Reports and that management prepare appropriate documentation of that evidence. This is im-portant because otherwise management cannot be held accountable for the in-formation provided. In addition, evidence and documentation is a prerequisite for assurance.
Non-financial aspects are typically externalities which – by definition – are not recognised as expenses or revenues and therefore not included in companies’ financial accounts. However, non-financial information is provided in both the Management Discussion & Analysis (MD&A) and (consolidated) annual reports according to Art. 46 of the 4th EU-Directive 78/660/EEC and Art. 36 of the 7th EU-Directive 83/349/EEC. Problems and weaknesses stem from the rather qualitative and narrative nature of such reports. These will have to be consid-ered when developing an Integrated Reporting Framework. The IDW has broad practical experience regarding MD&A reporting, (consolidated) annual reports and assurance standards concerning these reports and we would be happy to contribute to the further development of a globally accepted International Inte-grated Reporting Framework on the basis of our experience in the fields of re-porting and assurance.
1. Overview
One of the main objectives for founding the IIRC was to improve capital market information by emphasizing more clearly those disclosures regarding a compa-ny’s future development including material risks and opportunities rather than “traditional” historically-oriented financial disclosures (see Accounting for Sus-tainability (A4S), Governance and Collaboration, p. 4). We therefore welcome the capital market orientation, as described in the Prototype (long term financial capital providers as an audience for Integrated Reporting). We acknowledge that Integrated Reporting is about changing companies’ behaviour in order that they can make better-informed decisions. However, we believe that Integrated Reporting is also about changing financial capital providers’ behaviour from short-termism to a longer term perspective. As this issue is already highlighted in paragraph 1.3 of the Prototype, we suggest referring to this in paragraph 1.4 by clarifying that long term financial capital providers are not the only audience for Integrated Reporting, but that Integrated Reporting is also about influencing
short and medium term financial capital providers’ decisions to encourage a long term perspective.
2. Fundamental Concepts
Defining KPIs and KRIs and their consistent application enhances the compara-bility of reports. However, there is a danger that companies may report on these KPIs and KRIs without assessing whether the particular indicators are relevant or not, and that they may not report on (other) material matters, just because such reporting is not required explicitly. In order to strengthen comparability, paragraph 2.20 should be amended as follows or similar: “If a company reports on the basis of KPIs or KRIs, it shall disclose the definitions of each indicator. Indicators shall be used consistently. The data for each indicator shall be re-ported for the past five years as well as the targets at least for the following two years.” Reference might be made to paragraphs 3.54-3.56.
In order to present a better understanding of how a company is governed and how it might develop in the future, the 4th and the 7th EU-Directive and, conse-quently some National Accounting Standards that deal with MD&A reporting al-ready oblige companies to report on those indicators that form the basis for management decisions. We suggest considering such disclosure obligations for Integrated Reports, as these could enhance quantitative company-individual disclosures.
3. Guiding Principles
We suggest replacing the term “freedom from error” (paragraphs 3.51 f.) by “freedom from material misstatement”.
4. Content Elements
We welcome the IIRC’s approach to clarify what is to be reported by asking questions (paragraphs 4.5, 4.11, 4.15, 4.17, 4.21 and 4.27), as we believe this will help companies to apply the International Integrated Reporting Framework. Dependencies on key suppliers (paragraph 4.30) is obviously relevant infor-mation for report users. Therefore the disclosure of such dependencies is al-ready sometimes required by National Accounting Standards. However, experi-ence shows that companies are reluctant to report on these dependencies, be-cause they fear their key suppliers (might) read the report as well and take
ad-vantage of this information. Such dilemmas should be taken into account before requiring the disclosure of information which might be detrimental to the compa-ny and consequently its stakeholders.
We understand that an Integrated Report shall include the most material finan-cial, non-financial and governance information about a company as well as how these aspects are connected with one another. To guide readers to more de-tailed information, the Integrated Report should include a reference to other publications (e.g. the company’s financial or sustainability report or website). However, we believe that this has not yet been clarified sufficiently (e.g. in para-graph 4.31 “While other reports…”). Preparers might misunderstand the concept of Integrated Reporting in a way that the Integrated Report shall either replace all other reports of companies or at least replace the sustainability report. Where a company publishes a separate sustainability report, some preparers could take the view that even material non-financial information does not have to be included in an Integrated Report, provided reference has been made to that sus-tainability report.
We should be aware that if an Integrated Report contains only the most material information about a company and further information is to be found in separate reports, this is a challenge for both users of these reports and for assurance practitioners. For these reasons, information provided in Integrated Reports must be reconcilable to the underlying reports. In addition, management must have obtained adequate evidence and documentation thereof to support the in-formation in the underlying reports from which the inin-formation in the Integrated Reports is derived. Moreover, an assurance engagement on an Integrated Re-port can only be performed if the commensurate information in the underlying reports has been subject to an assurance engagement with at least the same level of assurance as that sought for the Integrated Report.
As future outlooks and developments are, by nature, uncertain and cannot be subject to reasonable assurance in the same way as can historical information, an assurance practitioner can only evaluate whether the underlying assump-tions are reasonable and whether the information presented has been appropri-ately derived from the assumptions. In addition, we suggest requiring compa-nies to compare targets from previous reporting periods with the actual results. Such an obligation should be included in chapter G: “Future Outlook” (para-graphs 4.34-4.38). We further suggest defining the terms “extreme conse-quences” in paragraph 4.36 and explaining what “quite small” means in the con-text of probability, and how. It is important to recognize the difference between events with a small probability of occurrence but with extreme consequences,
which may be more important in the long run, than events with a large probabil-ity of occurring with minor consequences.
5. Preparation and Presentation
We suggest defining the time frames in paragraphs 5.9-5.11. We should be aware, that these terms cannot be used in the same sense as in financial report-ing, where short term is regularly defined as “less than one year”, medium term as “between one and five years” and long term as “more than five years”. We believe that these timelines would be too short for Integrated Reporting – partic-ularly for sustainability issues and issues related to climate change, for which intergenerational timeframes may be more appropriate.
The minimum reporting boundary (paragraph 5.12) of an Integrated Report should be based on the reporting boundary for consolidated financial reporting. However, negative externalities often do not arise in the company itself but in its supply chain and the environment in which it operates. Therefore the Integrated Report must include relevant information concerning the supply chain, and where necessary the operating environment. We are not sure whether the prob-lems and practical aspects regarding the collection of relevant data from suppli-ers have been adequately considered in the Prototype Framework.
We welcome the statements concerning assurance (paragraphs 5.30-5.32). We believe that assurance is crucial for enhancing a report’s credibility and prevent-ing Integrated Reports beprevent-ing misused as marketprevent-ing brochures. In our experi-ence those providing financial capital require reports that have been subjected to an assurance engagement when assessing whether they will provide a com-pany with capital or not. This should be borne in mind when further developing the International Integrated Reporting Framework, as equity and financial capital providers, respectively constitute the primary audience for Integrated Reporting. As noted previously, evidence and its documentation to support the accountabil-ity of management’s assertions in integrated reports are fundamental to the ac-countability of management for those assertions and for any assurance: without adequate evidence, Integrated Reporting is nothing more than an exposition of “speculative schemes which have no more basis than so many feet of blue sky”. We believe that any assurance standard pertaining to Integrated Reports, that might be developed in the future, must be based on ISAE 3000 or, as applicable ISAs 800 and 805. Therefore the provisions of these standards will need to be considered when further developing the International Integrated Reporting
Framework – thus ensuring that (reasonable or limited) assurance can be ob-tained on Integrated Reports.
Considerations concerning costs and benefits of Integrated Reporting are dis-cussed in chapter I “Other considerations”. We suggest moving these consid-erations to paragraph 3.47 (“Completeness”), because they are crucial for an appropriate definition of a complete Integrated Report including all material in-formation.
The IDW would be pleased to have the opportunity to provide further assis-tance, especially in the field of assurance. We would be happy to contribute to the further development of the International Integrated Reporting Framework. Yours truly
Klaus-Peter Naumann Executive Director
Norbert Breker Technical Director Accounting and Auditing
