CHAPTER 8 Analysis and interpretation of financial statements 353REALITY CHECK
Integrated reporting at the crossroads?
The transformation of business reporting is at risk of being undermined by bias. Every so often there
are encouraging signs in the business community of a consensus to adopt initiatives that will address
problems of global consequence. Prominent examples are the separate and joint activities of the World
Business Council for Sustainable Development and World Resources Institute, collaboration between
the United Nations and finance sector that has given rise to the Principles of Responsible Investment,
and continuing modernisation and harmonisation of international business law under the umbrella of the
United Nations Commission on International Trade Law (UNCITRAL).
Indeed, the current International Financial Reporting Standards (IFRS) would not have been possible
without national regulators, the business community and professional bodies surrendering parochial
interests (and some pride). The upshot has been a global approach with achievement of capital market
efficiencies and transparency paramount considerations.
Another initiative that has resulted from a broad business constituency — within which accounting bodies
and the profession have played a major role — is the development of integrated reporting (IR), culminating in
December 2013 with the International Integrated Reporting Council releasing the IR Framework.
Taking a slightly philosophical bent, IR calls on accountants to reflect on their role in organisations
and the purposes to which their professional skills are applied — not only in terms of defining a lead or
ownership role for oversight and presentation of IR, but in the challenge of shaping the ends to which
IR itself is applied.
Evidence of a bias in arguments for the uptake of IR is apparent from the emphasis given to legal pro-
tections that ought to be extended to companies and directors in making forward-looking disclosures.
There is also a persistent view that while IR might be a beneficial medium of corporate disclosure, its
adoption should entail a trade-off in the abandonment of some other disclosure — quite likely sustain-
ability reporting.
IR was conceived as part of an optimistic endeavour to transform corporate reporting. Nonetheless,
in a wider context it has also taken place during a profound shift in understanding the ways in which the
wealth of future generations may be created and — equally significantly — distributed. This is evident in
the statement by the IIRC as to why we need IR, in which it emphasised the interdependencies:
• globalisation
• growing policy activity around the world in response to financial, governance and other crises
• heightened expectations for corporate transparency and accountability
• actual and prospective resource scarcity
• population growth
• environmental concerns.
This theme of interdependencies (also termed connectivity) is applied in an organisational context
within IR. It occurs through the IR Framework’s description of the wealth creation process, which has at
its core an organisation’s business model.
Source: Purcell, J 2014, ‘Integrated reporting at the crossroads?’ InTheBlack, 30 June 2014.VALUE TO BUSINESS
• Examining the ratio interrelationships helps to explain changes or differences in performance and
financial position.
• Limitations of the analytical process need to be considered when interpreting and relying on the
ratios to form an opinion of an entity’s financial health, past, present and future.
• Limitations of ratio analysis are often related to limitations of financial statements. For example, the
required information may not be disclosed, the information may be outdated, or comparability may
be impeded by accounting policy and estimation choices.
• Ratio analysis is only one financial analysis tool. Comprehensive and effective financial analysis
considers information beyond the financial statements.
• Non-financial considerations, such as environmental performance, are also taken into consideration
by users when assessing an entity’s performance.