THE UNIVERSITY OF NEWCASTLE
Task: This assessment is an individual task in which the student is required to write a report on a topic included in this paper.
Total Marks: 25 marks (25% of total assessment).
Reading Materials: Journal Articles
During the past two decades, there have been many ideas for improving business reporting, and nearly all of them focus on the importance of companies providing more nonfinancial information. One reason for the growth in disclosure of nonfinancial information is that the percentage of an entity’s market value that can be attributed to tangible assets has diminished from about 80% in 1975 to less than 20% in 2009. A 2003 Institute of Chartered Accountants of England and Wales white paper analysed 11 initiatives to reform reporting and reached the following conclusion:
“None of these models, whatever their merits, has so far succeeded in commanding general support.”
But if no framework for nonfinancial reporting has risen to the level of International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Standards (GAAP), an increasing number of companies have been experimenting with more eﬀective disclosure of nonfinancial information. According to CorporateRegister.com, a data repository with over 35,000 reports from 8,220 diﬀerent companies in 168 countries, almost 5,400 reports containing sustainability and other nonfinancial information were published in 2010.
In addition to voluntary nonfinancial reporting by companies, other initiatives have been launched to push the development of more rigorous and systematic reporting of nonfinancial information. For example, South Africa has mandated “integrated reporting”—specifically, a single report that combines information on the company’s financial performance with information on its nonfinancial performance. In 2010, the Johannesburg Stock Exchange (JSE) codified the King III recommendations by amending its listing rules to require approximately 450 listed companies either to produce an integrated report in place of their annual financial and sustainability reports or to explain why they are not doing so.
Another example is the United Nations Principles for Responsible Investment’s (UNPRI) Sustainable Stock Exchange Initiative. This initiative is aimed at exploring how exchanges, investors, regulators, and companies can work together to improve disclosure of ESG performance and encourage long-term approaches to investment. Emerging market exchanges are leading the way in terms of implementing sustainability disclosure and other measures to enhance corporate sustain-ability reporting of listed companies. For example, exchanges in Brazil, China, Egypt, India, Indonesia, Malaysia, and South Africa have all issued ESG disclosure rules in recent years.
In January 2011, a coalition of investors wrote to the CEOs of 30 stock exchanges to demand that sustainability reporting be embedded within listing rules and that listed companies put a forward-looking sustainability strategy to vote at their annual general meeting. The letter also sought opinions on, among other things, how companies should
be integrating sustainability into long-term strategic decision-making and encouraging companies to undertake integrated reporting.
The above paragraphs are extracted from the below article:
Eccles, R. G., & Serafeim, G. (2011). Market interest in nonfinancial information. Journal of Applied Corporate Finance, 23(4), 113-128.
Write a report (maximum 2000 words) to discuss the economic consequences of nonfinancial information reporting. In your report, you are required to:
Note: Where you refer to the accounting standards, text book, website or other resources you will need to include APA referencing. You should include a reference list at the end of your assignment.
With the ramified economic changes, each and every organization needs to align the domestic reporting framework with the international reporting framework to strengthen the transparency in the reporting program. It is considered that due to the developments observed in the corporate accounting world and growing needs of transparency for different stakeholders, corporations are nowadays moving to voluntarily disclose non-financial information through different reporting styles The current report has been arranged for the need to understand the nature of the information of non-financial nature, and the economic consequences attached to this kind of information.
Non-financial information consists of a variety of business areas that are not of monetary nature but impact the monetary results in the stretched run. The different areas which make up this information include, reporting on the environment, CSR, ESG (Environmental, Social and Governance), green banking, ecological, etc. This information is required by different stakeholders including the shareholders, administrators, society, etc. to judge the performance of the organization in a viable manner (COZMA IGHIAN, 2015). However, in spite of heavy importance attached to the disclosure of this information, no generally accepted or standard principle is available for regulating this area (Krištofík, Lament, & Musa, 2016).
Nature of non-financial information
The nature of non-financial information is concerned with those “non-monetary” areas which relate to information about the company’s actions impacting nature, society, environment, ecological balance, human rights, and sustainability. The non-financial information which is mainly disclosed voluntarily by corporations is about their “corporate social responsibility” accomplishments and sustainable actions (Maj, 2018). This is used to strengthen the sustainability and aligning the CSR in the reporting framework of the organization.
In the non-financial information dealing with CSR actions, the organizations strive to echo the activities or programs which they have initiated or supported for uplifting the edge social welfare. Different goals are attached to these programs and they deal with the organization’s support towards the eradication of poverty, unemployment, hunger, inequality, and malnutrition. Through these programs, different areas are also worked upon to raise their access and availability including education, healthcare, ecological balance, non-discrimination, animal welfare, and vocational training. Usually, organizations formulate a separate committee known widely with the name of the CSR committee (Quinn, & Connolly, 2017). The sole purpose behind this committee is to formulate an action plan for the Board to support or initiate projects in the discussed areas. The different areas which make up this information include, reporting on the environment, CSR, ESG (Environmental, Social and Governance), green banking, ecological, etc. This information is required by different stakeholders including the shareholders, administrators, society, etc. to judge the performance of the organization in a viable manner. This information is required by different stakeholders including the shareholders, administrators, society, etc. to judge the performance of the organization in a viable manner. However, it is used to strengthen the reporting framework and align the reporting framework with the CSR and ESG reporting.
The non-financial information dealing with sustainability, however, covers a wide scope of areas in the social, ecological, environmental and related forefront. The purpose of sustainable non-financial information is to reflect the business actions which help in preventing the ecological, social, commercial and environmental resources for an indefinite period. The goal of the organization is to prevent the immediate exhaustion of them and aid in their prevention for the longer run. Usually, organizations accumulate their sustainable and CSR goals to achieve overall welfare for the commercial, ecological, environmental and social issues. In addition, it is the non-financial information only through which an organization informs about its working culture, employment conditions, working environment, workers’ safety, and workforce safety (Gavana, Gottardo, & Moisello, 2016). Usually, organizations accumulate their sustainable and CSR goals to achieve overall welfare for the commercial, ecological, environmental and social issues. This is done with a view to align the interest of the organization with the stakeholder’s development and outcomes. Through these programs, different areas are also worked upon to raise their access and availability including education, healthcare, ecological balance, non-discrimination, animal welfare, and vocational training and aligning them with the reporting framework of the organization.
Nature of economic consequences
Non-financial information is bound to bring impact upon the entity’s capital and debt markets. The brand image, performance observed in the stock market, an organization’s market standing are all impacted by the non-financial information reported by them. The releases made by entities about the social, ecological and environmental steps taken by them directly impact the shareholders’ and financers’ sentiments. For every negative step taken in this regard by the organization, the brand image is influenced negatively, which eventually hurts the sentiments of the market and stakeholder.
More than pure financials, stakeholders, mainly the shareholders and the financers seek a deeper engagement with the organization and seek it for a longer-term. The image and standing of an organization in the longer-term are anyways impacted directly by its non-financial actions and releases. Hence, any negative or inappropriate action in this area has the ability to push down the stock markets and bring a credit crunch for the organization. It is because of these economic consequences only, many organizations even without any necessary standard try to voluntarily report on sustainability and CSR actions. Also, the initiative has been taken by the United Nations for recommending practices that can improve non-financial disclosures. This helps in improving the reporting framework and sets the triple bottom line approach in the reporting framework of the organization.
Before deciding on how to report, it is necessary for every organization’s management to understand the components to be reported. There are certain features of disclosure of non-financial information which are necessary to be considered before deciding upon reporting manner. The primary features require:
To decide upon the manner of reporting information, several alternatives are available to every organization. There is no standard method to report because there are no underlying accepted principles at a global level for the non-financial information. Hence, the reporting method varies with organizations. However, some of the commonly observed reporting methods are as follows:
However, non-financial information in no aspect means the information which cannot be quantified at all. Some kinds of non-financial information are regardless presented in quantified form only. E.g. the charity amounts, donation value, the portion of net profits which is spent on CSR, etc.
Even when no standard exists for non-financial reporting nor does a mandatory requirement exist, then too many organizations opt to voluntarily disclose the non-financial information. This is because the non-disclosure or inappropriate disclosure directly brings economic consequences as already discusses earlier. Therefore, it could be inferred that any negative or inappropriate action in this area has the ability to push down the stock markets and bring a credit crunch for the organization. It is because of these economic consequences only, many organizations even without any necessary standard try to voluntarily report on sustainability and CSR actions. However there are several advantages offered when non-financial information is disclosed, and they are as follows:
However, some consequences related to the disclosure or reporting of non-financial information are negative. These are as follows:
After assessing the annual report, it could be inferred that disclosure of non-financial information is hence very significant for an organization if it wishes to gain positive trust among its stakeholders. However, at the same time, the entity needs to consider the importance of proper reporting and the consequences of reporting. Only after identifying significant non-financial information and measuring it reliably, the decision to report should be taken. Therefore, it could be inferred that any negative or inappropriate action in this area has the ability to push down the stock markets and bring a credit crunch for the organization. It is because of these economic consequences only, many organizations even without any necessary standard try to voluntarily report on sustainability and CSR actions. Nonetheless, the reported information to be self-explanatory in nature and have sufficient explanation to make the reader understand it.