PACC6005 Non-Financial Information and Economic Consequences Assessment Answer
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 of company
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 and economic consequences
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.
Manner of reporting non-financial information
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:
- The reported information to be self-explanatory in nature and have sufficient explanation to make the reader understand it.
- The timing of reporting should be accurate and the information must directly relate to the opportunities or threats to the concerned environment which organization has generated through its operations.
- The manner in which the information can be accessed should be very much clear, and wherever possible facts should be pinned to add support and evidence.
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:
- The most common approach towards reporting about non-financial disclosures is in the form of releasing a separate report about this aspect. The report is generally named “Sustainability Report”. through this report, the organizations mention their CSR activities, social engagements, community services, employment conditions, actions for social welfare, charities, fundraisings, donations, energy emissions, pollution levels and all other environmental, ecological, social and societal actions taken by them (Stolowy, & Paugam, 2018). Also, the details of several partnerships that organizations have entered for the said causes are also described in this report. Along with the actions that organizations have taken, the accomplishments obtained against the actions are also reflected through the sustainability report.
- Another approach to follow is much rigorous and in-depth. The organizations can instead of reporting separately on both financial and non-financial information can also choose to report on an integrated basis. This could be done by preparing an integrated report. in this kind of report an organization strives to mention all the disclosures on the actions which it has taken and the value created as a result of these actions the actions disclosed are of monetary as well as non-monetary nature (Alfiero, Cane, Doronzo, & Esposito, 2017).. Hence, a single report reflects both financial information at one end, and non-financial information on the other. In some countries, the use of integrated reporting is even mandated, e.g. in South Africa.
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.
Consequences of non-financial information reporting
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:
- The organization helps itself and society by being sustainable and reporting about that. Firstly the resources are saved, which shall eventually help the organization later. Secondly, transparency is held high, which positively boost stakeholders’ sentiments.
- The legitimacy of the organization’s actions become evident by the disclosure of non-financial information and the actions of the entity become much more acceptable in the society (Dyczkowski, 2015).
- The overall trust placed by the stakeholders, mainly in the debt and capital market is enhanced.
- New opportunities become available, which if grasped accurately could even, help the entity to innovate.
- The clientele becomes strong and at the same time, all the stakeholders get much more aware of the entity’s internal environment (Boyko, & Derun, 2016).
- The brand image, goodwill, and trustworthiness of the organization grow. This helps to capture the good size of the market and raise the client’s loyalty (Fifka, & Adaui, 2015).
However, some consequences related to the disclosure or reporting of non-financial information are negative. These are as follows:
- The non-financial information, like financial information, requires crucial attention and time by the entity's management. The time is required to identify, quantify and decide disclosure mechanism. Hence the focus of management is distracted.
- The organization first needs funds to undertake activities that generate positive non-financial information and then later need funds to quantify and report them. Hence, with disclosure comes a huge expense attached for the organization.
- There is no standard unit to measure several kinds of non-financial information (e.g. working environment, employee satisfaction, etc.). Also, there are no prescribed principles to recommend the procedure to be followed for measurement. Hence, the organization faces a huge problem while measuring the same.
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.