- Need for non-financial information being available
- Evaluation of the regulatory framework
- Reporting frameworks
- Principles of non-financial reporting
Disclosure has been defined as the provision of quantitative or qualitative information relating to a business entity in the annual reports. Non-financial disclosure is thus the provision of information other than financial information. These include customer issues, corporate social responsibility issues, and environmental issues. Non-financial disclosure can be in form of mandatory disclosure, which can be referred to as that information that the companies are obligated to disclose. It is disclosed by the accounting standards-setting body. On the other hand, voluntary disclosure refers to the release of certain financial information at the discretion of the reporting entity (ACCA and Corporate Register, 2004).
The users of financial information, including the financial analysts, investors and valuers, all user information in the financial statements of companies to make judgments about the future of the companies as well as performance. However, the relevance of financial information is decreasing as suggested by AICPA, while others suggest that it is stable. Despite this debate on the relative decline (or not) in the value of financial reporting, there have been calls from a different group of people that there needs to be an increase in the disclosure of non-financial information by companies (American Institute of Certified Public Accountants [AICPA], 1994).
The result of the need to increase the level of nonfinancial disclosure led to the production of a report on ‘improving Business Reporting’ by the Financial Accounting Standards Board (FASB). This body was aimed at enhancing Voluntary nonfinancial Disclosures to help companies improve their business reporting about nonfinancial disclosures. This report did not state that non-financial performance information must be disclosed.
However, companies should be encouraged to voluntarily report this type of information. Non-financial performance measures are important for predicting future financial performance and valuing corporate equity (American Accounting Association, 2002). While non-financial reporting is currently voluntary, it offers huge benefits to companies in terms of stakeholder engagement and reputation. This overview is important as it provides a clear understanding of the principles and the reporting frameworks. It also shows the source of information (American Institute of Certified Public Accountants [AICPA], 1997).
There are accounting principles that are generally accepted (GAAP). Accounting as a profession requires that certain categories of information be presented in the company’s financial statement. The body concerned with accounting also agrees that disclosing such information is very vital while writing a financial statement. This is especially important when the nondisclosure of that information would likely mislead the people that use the statement. This means that this information is vital and necessary for any potential creditor or investor (Sutton, 2004).
Need for non-financial information being available
Organizations in the public sector do not only render an account of the outcomes of the policy but also on the business operations associated with this. Non-financial information is approached from the context of business operations and policy performance. In the corporate world, decisions are rarely made, and the most common activities involve the search for information. This information is new and is characterized by a series of events that relate the company’s agenda with formal plans.
This communicative aspect implies a certain need for non-financial information to counteract the provision of such information in the past due to certain reasons. They include when managers regard such reporting as pointless when they fear disclosing too much information, when they lack comparable data and when there is a lack of empirical evidence about the usefulness of that information. Thus, the need for non-financial information being available can be discussed as follows.
Stakeholder’s perspective– since the stakeholders of the companies they own are entitled to receive nonfinancial information that can help them determine the decisions, they take over ownership and trading, voting and communication with companies. This is justified because the plans and performance of companies affect their interests and the law supports their entitlement to information. They report obligations amongst others.
Other stakeholders areas affected positively by companies’ environmental and social impacts. However, their interests may not be so well protected legally. From a stakeholder perspective, the need for non-financial disclosure is necessary for the sufficient transparency of information and for the information to enable them to make fully informed decisions. This is about a given company. It also allows them to be held accountable where necessary.
More recently, the scope and quality of reporting within ‘corporate responsibility have been very subjective. However, for the stakeholders, the actual reporting practices of companies must provide information in proportion to their impact on stakeholders. For example, where a company has a significant effect on the local community, the community is interested in being able to access the relevant information and it might be disappointed in case the information provided is irrelevant or insufficient.
The legal perspective – the Companies Act places an obligation on quoted companies to provide a Business Review within the Directors’ Report to inform the shareholders of the company and help monitor how the directors have performed their duties. This business review must contain relevant non-financial disclosure of information to the companies’ activities. However, the obligation to provide a Business Review applies only to the quoted companies that exceed a certain size so as not to place undue burdens on smaller companies.
This Business Review must contain non-financial information to the extent necessary for an understanding of the development, performance or position of the company’s businesses. This shows that such disclosure is intended for the shareholder’s purposes and that it will be available for other stakeholders only if it passes the shareholder’s significance test. Where a company has socially responsible investors, it is expected that the company would disclose more information to satisfy the directors’ requirements. This is usually for the ‘benefit of the members’ and to show that it ‘acts fairly among members’.
The non-financial information that is expected to be disclosed by a Business Review includes certain broad issues and can be among certain aspects. They include environmental matters, company employees, supplier relationships, social and community matters. However, in principle, organizations will be expected to disclose broadly on social and environmental matters.
Non-financial information relates to all information other than financial information that does not have a direct connection to the financial registration system. Often, there is no comprehensive registration system. As much as there are internal procedures for risk management and collecting information, these will (as a rule) contain fewer safeguards for the reliability of the information. This discloses the nonfinancial information important to the organization.
The need to disclose nonfinancial information comes from the nature of non-financial information that can either be qualitative or quantitative. Quantitative refers to that information that is numerical and it is possible to be expressed in numbers or figures. For instance, it may be in quantities or periods. Quantitative non-financial information, on the other hand, is related to financial information but it is less uniform.
What makes qualitative information necessary for disclosure is that it is descriptive. Examples include performance, the functioning of systems and processes, physical characteristics and compliance with codes of conduct. The information indicates a certain quality. Normally, there is no detailed registration system for this information. There are also no generally accepted frames of reference or standardized units.
The difference in disclosure requirements between quantitative and qualitative is insufficient to prompt a choice between assurance and no assurance. For instance, the numbers of employees in a company are recorded in the payroll system and are clearly defined. An auditor can assure this without any problems. A variety of measurement methods exists given the uncertainty that exists. For qualitative non-financial information such as the feeling of safety for the employees in the organization, the auditor will have to use other disciplines and will be faced with other less familiar methods of examination. This can mean that he cannot provide assurance and must limit himself to reporting findings on how the information is collected and processed.
Evaluation of the regulatory framework
Organizations in the public sector focus on public service and the creation of increasing public value. This has been the main motivating factor behind the formation and need for non-financial disclosure. The direction and management of these organizations focus mainly on the implementation and the results of the policy and framework that is adopted (Bujaki, 2002). This regulatory framework is based on the following aspects.
Performance data – the consequence of the focus on policy, business operations and effects is that other information, in addition to the financial information, is extremely important. In the public sector, financial information is seen to be less centralized than in the private sector. What matters is mainly the information on policy, business operations and policy effects that are presented. Such information cannot be influenced unlike the performance indicators, which can be influenced by the organization.
Performance indicators – these are specifically detailed strategic objectives and policy decisions. They provide information on the means, the usage, performance and outcomes of certain remote events in the company. Performance indicators are linked to non-financial framework and business operations and are thus instrumental in the direction and control of an organization’s success (Alford, 1993).
Non-financial reporting frameworks have been created to help organizations in reporting sustainable information. These include the GRI and Accountability Principles Standard along with some industry-specific guidelines commonly developed by industry associations (Radebaugh, 2006).
GRI is one of the most widely used frameworks globally. It is the most recent version. It provides guidelines and indicators to support sustainability performance disclosure. It is thus relevant to all organizations, regardless of size, sector or location, and can be easily and flexibly adopted. The sector is provided with additional supplements for certain industries to be able to capture unique sustainability issues (Meigs, 1993)
The internationally utilized GRI provides a framework for organizations to develop a principles-based approach to non-financial disclosure. It gives instructions on the identification of opportunities as well as the management of non-financial risks and compliance (Lewis, 2000).
Principles of non-financial reporting
A sustainability report should address all materials. These include both relevant and significant issues affecting stakeholders. Both provide a selection of principles to be considered when reporting on sustainability (Hunton, 2000). These include inclusivity, which states that inclusivity is much more than a stakeholder engagement process and it outlines it as the commitment to be accountable to those stakeholders that the organization impacts. Included are those stakeholders who have an impact on it (Kachelmeier, 2002). It also enables their participation in identifying issues and finding solutions. In accountability terms, it is means collaborating at all levels, including governance, to achieve better outcomes (Ittner, 1998a).
The non-financial reporting framework has led to the following principle indicators of making the disclosure. Materiality – an issue is said to be material if it will influence the decisions, actions and performance of an organization or its stakeholders. Thus, it is one of the important indicators of nonfinancial information. This is necessary for assessing the environmental and social impacts that would influence the assessments and decisions of stakeholders (Blake, 1981).
Responsiveness, as a non-financial indicator, means how an organization demonstrates its response and accountability to its stakeholders. Normally, a responsive organization addresses its material issues and responds to its stakeholders in a comprehensive and balanced manner (Ezejelue, 2001).
Stakeholder inclusiveness – this is an indicator that is similar to responsiveness. The GRI states that the reporting organization should identify all its stakeholders and disclose (in its report) how it has acted on their reasonable expectations and interests (Ali, 2004).
Completeness, per GRI, is the coverage of the material topics. The GRI indicators and the definition of the report boundary sufficiently reflect economic, environmental and social impacts. It enables stakeholder assessment (Ittner, 1997). However, completeness is no longer an important principle but it remains a key concept to the extent to which materiality, inclusivity and responsiveness have been achieved (Elliot, 2005).
Sustainability context – GRI requires that the non-financial report present the organization’s wider context of sustainability. Performance and organizations business strategy should be discussed in accessing the organization’s non-financial needs. The relationship between sustainability and organizational strategy should be clear just as should the context within which performance is reported (Ball, 2006).
According to Glautier (1997), the implementation of non-financial performance measures and control systems in high-technology manufacturing plants is vital. To prove this, he developed certain key success factors. They include customer satisfaction, manufacturing excellence, market leadership, quality, reliability, responsiveness, and technological leadership. However, the new non-financial measurement system was seen to affect the success of the strategy of the firm. In addition, the measures were actionable at the plant level, which provided the possibility for almost instant corrections. The controllers in the studied firms never took a negative position against the new control system. Rather, in one firm controllers were actively involved in the change process and took the leading role in the implementation of the system (Ittner, 1998b)
The new system did not have an impact in monetary terms. There was a problem in determining the connection between profit and improvements provided by the new system. Thus, there was a need for a theoretical framework aiding in the implementation of a non-financial system. Otherwise, non-financial measures may conflict, which would make trade-offs difficult to determine. Glautier states that it is important to understand the trade-offs. It is also important to know the strengths and weaknesses of non-financial measurement systems to explain the interrelationships existing within the system.
Qualitative information can always be translated into quantitative information by applying a quantitative framework of standards in the form of performance data and this will lead to a certain degree of simplification. Distinctions that are not sufficiently aligned to the quantitative framework of standards can consequently become submerged. The data will therefore no longer provide a complete view because the reality is more than the realization of some performance data. Therefore, developing performance data requires a careful process of alignment between parties involved (Barrett, 1975).
The implementation of non-financial reporting practices poorly shows the realities of the international economy in the current globalization age. There are very few developing and emerging economies that are included in regular surveys on nonfinancial disclosure trends. This is concerning the framework of implementation (Alexander, 2003).
When reviewing the non-financial disclosure of an organization, a question that is normally raised is the persons to whom the information is intended. The initial motivator for disclosing non-financial information is often stated as regulatory demand for performance-related information on such things as the environment, energy and water. For most organizations, the intended recipient of this information is the internal stakeholders. However, there is perhaps a need to start to differentiate between the internal audience who use this information to manage and the internal audience using the information to build a rapport with the organization (Izedonmi, 2001).
The media by which companies communicate has constantly changed beyond those used for planning and control to include television channels and even social media such as Facebook and Twitter. People discuss such issues in groups. Thus, it is expected that much of the future non-financial information that is not governed by performance reporting will be generated to meet internal needs and that these internal data sets are then available to those that produce reports for external users. This makes the extent and scope of this non-financial disclosure wide and subject to regulatory change as well as organizational change.
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