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Understanding Nonfinancial Reporting

Corporate reporting has evolved over the last two decades. Mainstream financial reporting historically involved the legal documents and records that give investors, stakeholders and business analysts vital information, such as how much money a business is making or losing, how its assets stack up against liabilities, where the business gets its capital, and if the business has enough capital for future growth. Today, nonfinancial reporting, or integrated reporting (IR), is an emerging accounting approach that is gaining popularity with organizations around the world, according to the Chartered Institute of Management Accountants. A number of studies over the past several years on the complexities and challenges of financial reporting have revealed the need for clear, transparent financial and nonfinancial information about how managers runs businesses.

Accountants are responsible for the accuracy of the financial information their companies report, and they are playing an increasingly important role in integrating nonfinancial reporting. It is crucial that professional accountants and auditors understand not only the fundamentals of financial reporting and accounting practices but also the importance and methodology of using nonfinancial reporting to present a business's "big picture."

Implementing an effective nonfinancial reporting program is complex, but accountants with the know-how can become leaders in their organizations, helping their management teams improve decision-making and driving company-wide success. A report published by The Institute of Internal Auditors (Global Perspectives and Insights: Beyond the Numbers — Internal Audit's Role in Nonfinancial Reporting, October 2015), indicates that internal audit can be a change agent for nonfinancial reporting, providing guidance on implementation of plans and performance as well as providing assurance on the preparation of nonfinancial reports and on the processes that produce the data and information. The IIA says internal audit can partner with external audit to ensure that nonfinancial reporting is efficient, reliable and cost-effective.

What Is Nonfinancial Reporting, and What Are Its Benefits?

The term nonfinancial reporting is broad and, generally speaking, refers to information that falls outside traditional financial statements. Nonfinancial reporting is sometimes called social accounting, corporate social responsibility reporting, sustainability reporting, environmental reporting, triple bottom line reporting and service performance reporting. These terms are all elements of integrated reporting, which combines a company's financial and nonfinancial performance analyses. IR relies on integrated thinking, and it reports on a company's strategies, objectives, performance, risks, controls and incentives to demonstrate an organization's sustainability and short-, medium- and long-term values.

Since 2010, the IIRC (International Integrated Reporting Council) has led the effort to build the first IR framework. The IIRC has brought together world leaders from the corporate, investment, accounting, securities, regulatory, academic, civil society and standard-setting sectors to develop this new reporting concept. According to the IIRC, it is becoming more important that organizations understand and periodically report all facets of their performances and performance drivers and not just short-term financial aspects. Providing a "dashboard" view of an organization's activities and performance, IR will enable more effective decision-making by executives and boards of directors; it will also improve the information available to investors, and it will encourage more integrated thinking and better business practices.

The role of accountants and auditors in integrated reporting cannot be overemphasized. As the need for IR in business grows, accountants will be instrumental in its development and implementation, according to the joint report from ACCA (Association of Chartered Certified Accountants) and IMA (Institute of Management Accountants). The report, "From Share Value to Shared Value: Exploring the Role of Accountants in Developing Integrated Reporting in Practice," says accountants are in a unique position to identify areas to improve with IR and to develop solutions. "The roles of accountants in implementing UR are of utmost importance," says Faye Chua, head of business insights at ACCA. She goes on to say "CFOs can be leaders of the IR projects within their companies. Accountants, management accountants, and auditors have important roles to play in devising the right accounting for capitals, the right information systems, and the right assurance for the reported information."

Individuals and accountants who would like to be more involved with, or even drive, the IR efforts in their organizations might consider earning an online MBA in accounting. An online MBA in accounting from an accredited college or university can prepare students with a solid foundation in accounting as well as knowledge about nonfinancial reporting and the tools to develop and implement it.

Learn more about the UWF online MBA program with an emphasis in Accounting.


Sources:

IFAC: Roles and Importance of Professional Accountants in Business

GRI: What Is Sustainability Reporting?

Chartered Accountants Australia and New Zealand: Reporting

Houston Chronicle: The Definition of a Non-Financial Model

Houston Chronicle: The Importance of the Non-Financial Objectives Theory

BusinessFinanceMag: Accounting for Non-Accountants

MindTools: Understanding Accounts

EY: Investment Rules 2.0


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