Background to the IR Framework

The International Integrated Reporting Framework (the <IR> Framework or IIRF) was published by the International Integrated Reporting Council (IIRC) in December 2013, explaining the fundamental concepts of integrated reporting and providing principles-based guidance for entities wishing to prepare an integrated report.

In January 2021, the IIRC published revisions to the <IR> Framework (revised <IR> Framework (2021)) to enable more decision-useful reporting. Notably, the IIRC framed the revision as a ‘refresh’ through minor corrections and clarifications, rather than a wholesale change.

Entities are not required to comply with the <IR> Framework, unless specifically required by their jurisdiction. However, integrated reporting complements many of the various developments in financial and other reporting taking place in national jurisdictions around the world. It was the intention of the IIRC that the <IR> Framework will accelerate these individual initiatives and provide impetus to greater innovation in corporate reporting globally.

Some background about the Value Reporting Foundation (VRF), which has been formed by a merger of the IIRC and the Sustainability Accounting Standards Board (SASB) is provided, which also includes the history and structure of the IIRC. The remainder of this chapter is divided into the following sections:

• overview of the <IR> Framework and the fundamental principles underpinning it;
• guiding principle for the presentation and preparation of an integrated report;
• the content elements for an integrated report; and
• a summary of the requirements for an integrated report.

This chapter focuses on recommended content for an integrated report based on the <IR> Framework. A comprehensive discussion of the concepts underlying ‘integrated thinking’ and reporting on ‘value creation’ is beyond the scope of this manual; readers should refer to the detailed discussion on these topics in the <IR> Framework.

The Value Reporting Foundation

The Value Reporting Foundation was formed in June 2021 by a merger of the IIRC and the SASB.

The VRF supports business and investor decision-making with three key resources: Integrated Thinking Principles, the <IR> Framework and SASB Standards. These tools help businesses and investors develop a shared understanding of enterprise value and how it is created, preserved or eroded over time.

The VRF is also committed to the delivery of a more coherent corporate reporting system by working closely with the IFRS Foundation and other leading framework providers and standard-setters around the world.

The IIRC was initially created in 2010 by the UK Prince of Wales ‘Accounting for Sustainability Project’, the Global Reporting Initiative (GRI) and the International Federation of Accountants to bring together leaders from the corporate, investment, accounting, securities, regulatory, academic, civil society and standard-setting sectors to develop a global framework for Integrated Reporting.

Further details about the VRF can be found on their website www.valuereportingfoundation.org.

The <IR> Framework

Overview of the <IR> Framework

Integrated reporting aims to: [Preface to the <IR> Framework]

• improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital;
• promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time;
• enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies; and
• support integrated thinking, i.e., the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects. Integrated thinking leads to integrated decision-making and actions that focus on the creation, preservation or erosion of value over the short-, medium- and long-term.

To achieve these aims, the <IR> Framework focuses on a set of six capitals – financial, manufactured, intellectual, human, social and relationship, and natural – to ensure that a business takes a broader view on how it creates, preserves or erodes value over time. Further, the focus of integrated reporting is on current and future value creation, preservation or erosion, whereas traditionally corporate reporting guidelines have focused more on current and past performance.

As emphasized in the foreword to the <IR> Framework, while consistent with some of the requirements of financial and other reporting around the world, an integrated report differs from other reports and communications due to:

• its focus on the ability of an organization to create value in the short-, medium- and long-term;
• its combined emphasis on conciseness, strategic focus and future orientation, the connectivity of information, and the capitals and their interdependencies; and
• its emphasis on the importance of integrated thinking within the organization.

The adoption of integrated reporting varies considerably between jurisdictions. Of note, however, is that an integrated report may encompass reporting that can be described variously as the annual report, strategic report, integrated annual review, narrative commentary, management commentary, management’s discussion and analysis (MD&A), operating and financial review (OFR), business review or management’s report.

Whichever format the integrated report takes, the Framework <IR> is clear that an integrated report claiming to be prepared in accordance with its requirements should be a designated, identifiable communication.

Structure of the <IR> Framework

The <IR> Framework is organized into two parts:

• Part I provides guidance on using the <IR> Framework, including key definitions and objectives, and explains the fundamental concepts of integrated reporting; and
• Part II sets out the guiding principles and content elements that govern the overall content of an integrated report.

These chapters are bound by an executive summary and a glossary of key terms.

Parts I and II both include requirements in bold italic type with which any communication claiming to be an integrated report prepared in accordance with the <IR> Framework should comply.

Text in the <IR> Framework that is not in bold italic type provides guidance to assist in applying the requirements. It is not necessary for an integrated report to include all matters referred to in the guidance.

The requirements of the <IR> Framework relating to the content elements of an integrated report are phrased as questions, emphasizing the principles-based nature of the <IR> Framework. As a result, the content of an integrated report will depend on the particular circumstances of the organization, as well as the exercise of judgement by senior management and those charged with governance in applying the <IR> Framework’s guiding principles and content elements.

Objectives of the <IR> Framework

The purpose of the <IR> Framework is to establish ‘guiding principles’ and ‘content elements’ that govern the overall content of an integrated report, and to explain the fundamental concepts that underpin them. The <IR> Framework:

• identifies information to be included in an integrated report for use in assessing the organization’s ability to create value; it does not set benchmarks for matters such as the quality of an organization’s strategy or the level of its performance; and
• is written primarily in the context of private-sector, for-profit companies of any size, but it can also be applied, adapted as necessary, by public-sector and not-for-profit organizations.

While an objective of the <IR> Framework is to establish guiding principles and content elements that govern the content of an integrated report, a primary goal is also to establish a process of integrated reporting founded on integrated thinking. This process extends further than the production of an integrated report. It involves embedding integrated thinking into internal business processes, management information and decision-making.

Definitions

The following definitions are used in the <IR> Framework.

• An integrated report is “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”
• Integrated reporting is “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation, preservation or erosion over time and related communications regarding aspects of value creation, preservation or erosion.”

Purpose and users of an integrated report

The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates, preserves or erodes value over time.

An integrated report benefits all stakeholders interested in an organization’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers.

A principles-based approach

The <IR> Framework is principles-based – designed with the objective of achieving an appropriate balance between allowing flexibility to take account of the individual circumstances of different organizations and the need for comparability.

While principles-based, the <IR> Framework has mandatory content elements which any communication claiming to be an integrated report should include. However, the <IR> Framework is high-level and does not prescribe how these content elements should be covered, but leaves this to the reporting organization.

The <IR> Framework does not prescribe specific key performance indicators (KPIs), measurement methods or the disclosure of individual matters. Those responsible for the preparation and presentation of the integrated report therefore need to exercise judgement, given the specific circumstances of the organization, to determine:

• which matters are material; and
• how those matters are disclosed, including the application of generally accepted measurement and disclosure methods as appropriate. When information in an integrated report is similar to, or based on, other information published by the organization, it is prepared on the same basis as, or is easily reconcilable with, that other information.

Quantitative and qualitative information

The <IR> Framework takes the position that the ability of an organization to create value can best be reported on through a combination of quantitative and qualitative information. Both qualitative and quantitative information are necessary for an integrated report to properly represent the organization’s ability to create value because each provides context for the other. Including KPIs as part of a narrative explanation can be an effective way to connect quantitative and qualitative information.

Form of report and relationship with other information

An integrated report should be a designated, identifiable communication.

An integrated report is intended to be more than a summary of information in other communications (e.g., financial statements, a sustainability report, analyst calls, or on a website); rather, it makes explicit the connectivity of information to communicate how value is created, preserved or eroded over time.

An integrated report may be prepared in response to existing compliance requirements. For example, an organization may be required by local law to prepare a management commentary or other report that provides context for its financial statements. If that report is also prepared in accordance with the <IR> Framework, it can be considered an integrated report. If the report is required to include specified information beyond that required by the <IR> Framework, the report can still be considered an integrated report if that other information does not obscure the concise information required by the <IR> Framework.

An integrated report may be either a stand-alone report or be included as a distinguishable, prominent and accessible part of another report or communication. For example, it may be included at the front of a report that also includes the organization’s financial statements.

An integrated report can provide an ‘entry point’ to more detailed information outside the designated communication, to which it may be linked. The form of link (or signposting) will depend on the form of the integrated report (e.g., for a paper-based report, this may involve attaching other information as an appendix; for a web-based report, it may involve hyperlinking to that other information).

This signposting can answer the needs of stakeholders other than the providers of financial capital who may require more detailed information and can use the integrated report to understand the organization better and to access the information they require more easily.

Compliance with all requirements of the <IR> Framework

Any communication claiming to be an integrated report and referencing the <IR> Framework should apply all the requirements identified in bold italic type unless: [

• the unavailability of reliable information or specific legal prohibitions results in an inability to disclose material information; or
• disclosure of material information would cause significant competitive harm.

When disclosure could cause competitive harm, an organization should consider how to describe the essence of the matter without identifying specific information that might cause a significant loss of competitive advantage. Accordingly, the organization considers what advantage a competitor could actually gain from information in an integrated report, and balances this against the need for the integrated report to achieve its primary purpose.

In the case of the unavailability of reliable information or specific legal prohibitions, an integrated report should:

• indicate the nature of the information that has been omitted;
• explain the reason why it has been omitted; and
• in the case of the unavailability of data, identify the steps being taken to obtain the information and the expected time frame for doing so.

Responsibility for an integrated report

An integrated report should include a statement from those charged with governance that includes:

• an acknowledgement of their responsibility to ensure the integrity of the integrated report; and
• their opinion or conclusion about whether, or to the extent which, the integrated report is presented in accordance with the <IR> Framework.

Where legal or regulatory requirements preclude a statement of responsibility from those charged with governance, this should be clearly stated.

The revised <IR> Framework (2021) retains the requirement for those charged with governance to make a statement of responsibility, when possible, under local legal and regulatory requirements. Revisions have been introduced to provide clarity to the definition of those charged with governance and to promote the integrity of the integrated report. Guidance is provided for organization-specific governance models, such as for organizations with two-tier boards. However, the intent is to promote oversight by the highest level of governance, regardless of how this is defined in an organization’s governance structures.

The revisions acknowledge that organizations may be on a journey to preparing a full integrated report, and therefore allow for statements to specify requirements that have not been applied and why.

In addition to the statement of responsibility, organizations are also encouraged to provide process disclosures, including systems, procedures and controls and the role of those charged with governance in the process, to enhance disclosures on how the integrity of the report is ensured. When those charged with governance are unable to prepare a statement of responsibility owing to legal or regulatory requirements, these process disclosures provide an important insight into the organization’s governance structure.

Fundamental concepts

An integrated report explains how an organization creates, preserves or erodes value over time and aims to provide insight about:

• the external environment that affects an organization;
• the resources and the relationships used and affected by the organization; and
• how the organization interacts with the external environment and the capitals to create, preserve or erode value over the short-, medium- and long-term.

There are three fundamental concepts of integrated reporting which underpin and reinforce the requirements and guidance in the <IR> Framework:

• value creation, preservation or erosion for the organization and for others;
• the capitals; and
• process through which value is created, preserved or eroded.

The revised <IR> Framework (2021) places more emphasis on value erosion to encourage more balanced coverage of outcomes, recognizing that there can be positive and negative impacts on organizations. This is reflected in the fundamental concepts of integrated reporting.

The terms ‘value preservation’ and ‘value erosion’ are referenced more frequently at strategic places throughout the <IR> Framework (2021). As a result, preparers should acknowledge and describe in integrated reports ways in which value may be eroded, or simply preserved, as well as created.

The following terms are important for an understanding of the fundamental concepts.

• Capitals are the “[s]tocks of value on which all organizations depend for their success as inputs to their business model, and which are increased, decreased or transformed through the organization’s business activities and outputs. The capitals are categorized in the <IR> Framework as financial, manufactured, intellectual, human, social and relationship, and natural.”
• Value creation, preservation or erosion is “the process that results in increases, decreases or transformations of the capitals caused by the organization’s business activities and outputs.”
• Value creation, preservation or erosion for the organization and for others: key to integrated reporting is the underlying premise that value has two interrelated aspects – value created, preserved or eroded for (1) the organization itself, which affects financial returns to the providers of financial capital, and (2) others (i.e., stakeholders and society at large).

Key to the value creation, preservation or erosion process is the organization’s business model and the external environment in which it operates. The organization’s business model draws on various capitals as inputs and, through its business activities, converts them to outputs (products, services, by-products and waste). The organization’s business activities and outputs also lead to outcomes in terms of effects on the capitals. As value is created over different time horizons and for different stakeholders through different capitals, the outcomes of the organization for the capitals may materially affect its ability to create value in the short-, medium- and long-term. As such, the value creation, preservation or erosion process is not static. The premise here is that whether an organization creates value for others materially affects its ability to create value for itself – and whether an organization creates value for itself materially affects its ability to create value for others. This is why an organization’s business model and value creation process benefit not only providers of financial capital but also all other stakeholders interested in the organization’s ability to create value over time.

The value creation process diagram in the <IR> Framework depicts this dynamic relationship: an organization’s activities, its interactions and relationships, its outputs, and the positive and negative outcomes associated with the various capitals it uses and affects, influence its ability to draw on these capitals in a continuous cycle.

In line with its intention to encourage disclosure of outcomes in a balanced way, the IIRC introduced a definition of outcomes in the revised <IR> Framework as the “internal and external consequences (positive and negative) for the capitals as a result of an organization’s business activities and outputs”.

The value creation process diagram was updated to give better signposting to and differentiation of outcomes from outputs. The diagram now suggests that both business activities and outputs can lead to outcomes. The IIRC’s own research indicated that outcomes-related discussions in many integrated reports excluded negative developments or underperformance. By highlighting that outcomes might be positive or negative over the short, medium and long term, the IIRC intended to create a better foundation for evaluating trade-offs and interdependencies. The IIRC also wanted to encourage a more thorough assessment of the use and effects on capitals, using qualitative and quantitative information.

Identifying how the organization creates value over different time horizons and for different stakeholders through different capitals is challenging. Organizations transitioning to integrated reporting typically take the following steps (in order of complexity): (1) defining their business model; (2) understanding the flow of capitals; and then (3) translating their findings into a value creation assessment.