IIRC Integrated Reporting FrameworkExecutive summary

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Integrated reporting has grown in stature in South Africa and internationally over the last few years. Introduced as a voluntary recommendation in King III, JSE listed companies are required to prepare an integrated report, or explain why not. As a result, for most companies in South Africa, the integrated report has become their primary report.

The International Integrated Reporting Council (IIRC) released the Interna-tional Integrated Reporting Framework (Framework) on 9 December 2013. The Framework is the culmination of the IIRC’s process over the last two years to develop globally accepted integrated reporting guidance. The Framework will fur-ther be updated intermittently as additional research is undertaken and practical application thereof matures. This document identifies the key highlights and provides an executive summary of the Framework.

Key highlights of the new Framework

The following are the key highlights of the Framework:• The Framework clarifies the difference between integrated thinking, integrated

reporting and an integrated report. An explanation of integrated thinking and how this results in integrated reporting and an integrated report is provided.

• The Framework does not identify or define a specific audience for the integrated report. The Framework instead refers to what an integrated report’s primary purpose is i.e. to explain to providers of financial capital how an organisation creates value over time.

• The Framework clarifies how an integrated report interacts with an organisation’s reporting suite and other communications.

• The Framework requires the integrated report to not just identify those charged with governance who have oversight responsibilities for integrated reporting, but to also include a statement from those charged with governance acknowledging their responsibility for integrated reporting by no later than the organisation’s third integrated report that references the Framework.

• The Framework requires an integrated report to disclose a summary of significant frameworks and methods used to quantify or evaluate material matters disclosed in the report. This was done to enhance comparability and to support the Framework’s ability to act as suitable criteria for preparation and presentation.

• The Framework clarifies that an integrated report’s purpose is not to necessarily quantify or monetise the value of an organisation at a point in time, the value it creates, or its uses of or effects on the capitals, but that a combination of both quantitative and qualitative information may best explain how an organisation creates value over time or its uses of or effects on the capitals.

The new integrated reporting Framework

01

IIRC’s visionThe IIRC’s vision is that integrated thinking will be embedded within mainstream business practice facilitated by integrated reporting as the corporate reporting norm.

Definition of integrated report“An integrated report is a concise communication about how an organisation’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.”

Purpose and users of an integrated report“The primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time.” However, the information therein may benefit all stakeholders interested in an organisation’s ability to create value over time.

Purpose of the FrameworkThe purpose of the Framework is to establish Guiding Principles and Content Elements that govern an integrated report’s content and to explain the funda-mental concepts that underpin these. The guidance provided by the Framework is principles-based, rather than prescriptive.

Application of the FrameworkThe Framework is written “primarily in the context of the private sector, for profit companies”. However, it can also be applied by public sector and not for profit organisations.

Any communication that claims to be an integrated report and references the Framework should apply all the Guiding Principles and Content Elements as well as the other “bolded text” within the Framework. The bolded text in summary is:

• That an integrated report is to be a designated identifiable communication and

• A statement from those charged with governance acknowledging their role and responsibility regarding integrated reporting.

All bolded text is summarised in the “Appendix” to the Framework for easy reference.

Non application of the Framework is only allowed in the case of the unavailability of reliable information or specific legal prohibitions or when disclosure of material information would cause significant competitive harm.

IIRC Integrated Reporting Framework – Executive summary

02

Form of report and relationship with other information“An integrated report should be a designated identifiable communication. An integrated report may either be a stand alone report or be included as a distinguishable, prominent and accessible part of another report or communication.” An integrated report is more than a summary of information in other communications, but can also provide an entry point to more detailed information in other communications.

Responsibility for an integrated reportAn integrated report should include a statement from those charged with governance that includes:• An acknowledgement of their responsibility to ensure the integrated report’s

integrity and that they have applied their collective mind to the integrated report’s preparation and presentation

• Their opinion or conclusion on whether the integrated report is presented in accordance with the Framework

Or if it does not include such a statement, it should include:

• What role those charged with governance played in its preparation and presentation

• What steps are being taken to include such a statement in future reports• The timeframe for doing so (which should be no later than the organisation’s

third integrated report that references the Framework)

Reporting boundaryThe boundary for an integrated report should be based on:• The financial reporting entity• Risks, opportunities and outcomes attributable to or associated with other

entities/stakeholders beyond the financial reporting entity that have a significant effect on the ability of the financial reporting entity to create value

Figure 1: Entities/ stakeholders considered in determining the reporting boundary (source: IIRC Framework)

03

Parent

Employees Customers Suppliers Business partners

Commu-nities

Others

Join arrangements Investments (other forms)

Reporting boundary for the integrated report( risks, opportunities & outcomes)

Subsidiaries

Value creation processFigure 2: The value creation process (source: IIRC Framework)

Value creationValue created by an organisation over time manifests itself in increases or decreases of the capitals as a result of the organisation’s business activities and outputs. Value can be viewed from two perspectives – value created for the organisation itself and value created for others. Whilst providers of financial capitals are interested in the value an organisation creates for itself, it is understood that the value an organisation creates for others impacts on the ability of an organisation to create value for itself. This includes taking into account the extent which effects on the capitals have been externalised (i.e. costs not owned by the organisation). Material activities, interactions and relationships that impact on an organisation’s ability to create value over time (including externalities) should be included in the integrated report.

CapitalsAll organisations depend on various capitals. The capitals are stocks of value that are continually increased, decreased or transformed through the organisation’s activities and outputs. The Framework defines six capitals:

• Financial (pool of funds obtained through financing for use in the production of goods and services e.g. debt or equity capital)• Manufactured (manufactured physical objects for use in the production of goods or services e.g. equipment) • Intellectual (organisational knowledge-based intangibles e.g. patents) • Human (peoples’ competencies, capabilities and experiences) • Social and relationship (institutions and relationships within and between communities e.g. values, brand, reputation) • Natural (environmental resources e.g. water, biodiversity)

Whilst these six capitals have been defined, organisations preparing an integrated report are not required to adopt this categorisation. Regardless of how an organisation categorises the capitals for its own purpose, the categories that are defined in the Framework are to be used as a guideline to ensure that the organisation does not overlook a capital that it uses or affects. However, in addition, not all capitals are equally relevant or applicable to all organisations. Where an organisation’s interaction with a capital is so minor or indirect, this does not need to be included in the integrated report.

04

Joint arrangements

Financial reporting entity(Control & significant influence)

Intellectual

05 Guiding Principles

Strategic focus and future orientation: An integrated report should provide insight into the organisation’s strategy, and how that relates to its ability to create value in the short, medium and long term and to its use of and effects on the capitals.

Connectivity of information: An integrated report should show a holistic picture of the combination, inter-relatedness and dependencies between the factors that affect the organisation’s ability to create value over time.

Stakeholder relationships: An integrated report should provide insight into the nature and quality of the organisation’s relationships with its key stakeholders, including how and to what extent the organisation understands, takes into account and responds to their legitimate needs and interests.

Materiality: An integrated report should disclose information about matters that substantively affect the organisation’s ability to create value over the short, medium and long term.

Conciseness:An integrated report should be concise.

Reliability and completeness: An integrated report should include all material matters, both positive and negative, in a balanced way and without material error.

Consistency and comparability: The information in an integrated report should be presented:• On a basis that is consistent over time• In a way that enables comparison with other organisations to the extent it is material

to the organisation’s own ability to create value over time Note: The Content Elements are not mutually exclusive i.e. they do not need to appear in a set sequence or in discrete stand alone sections in an integrated report. Rather, information in an integrated report is presented in a way that makes the connections between the Content Elements apparent.

Timeframes for short, medium and long term

The length of each timeframe for short, medium and long term will differ by organisation and is decided with reference to the business and investment cycles, strategies and key stakeholders’ legitimate needs and interests.

Qualitative vs quantitative information

Whilst quantitative information may be useful in explaining how an organisation creates value, qualitative information or a combination thereof may provide the best information. In addition, it is not the purpose of an integrated report to quantify or monetise an organisation’s value at a point in time, the value it creates over a period, or its uses of or effects on the capitals.

Aggregation and disaggregation

The level of aggregation or disaggregation will differ by organisation, but when determining this, consideration should be given as to how senior management and those charged with governance manage and oversee the organisation and its operations.

Integrated thinking

Integrated thinking is defined as “the active consideration by an organisation of the relationships between its various operating and functional units and the capitals that the organisation uses or affects. “ Integrated thinking leads to integrated decision-making and these two together will result naturally in integrated reporting and an integrated report.

06The Content Elements

Organisational overview and external environment: What does the organisation do and what are the circumstances under which it operates?

Governance: How does the organisation’s governance structure support its ability to create value in the short, medium and long term?

Business model: What is the organisation’s business model?

Risks and opportunities: What are the specific risks and opportunities that affect the organisation’s ability to create value over the short, medium and long term, and how is the organisation dealing with them?

Strategy and resource allocation: Where does the organisation want to go and how does it intend to get there?

Performance: To what extent has the organisation achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?

Outlook: What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?

Basis of presentation: How does the organisation determine what matters to include in the integrated report and how are such matters quantified or evaluated?