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The Evolution of Corporate Reporting: A Shift to Value Non-Financial Information

Financial_reportingWhen I tell people that I work on improving the relevance of corporate reporting, I often get asked about the value of reporting on non-financial information. I remind them that not all aspects of a company’s value can be ascertained from historical financial statements, which is why it’s important to consider a company’s intellectual, human, natural and social and relationship capital in addition to its financial and manufactured capital. In recent years, there has been a shift as investors and other users of corporate reports are beginning to consider more than just financial statements in their evaluations.

We can think about how we determine a company’s value in a similar manner to how we determine a person’s overall health. Just because an individual is physically in good condition does not mean that they are emotionally, mentally or socially healthy. When doctors perform annual wellness exams, they not only consider weight, temperature, heart rate and blood pressure, but also inquire about a person’s diet, stress levels and living environment to evaluate overall health. They explore risk factors and opportunities that could impact their health over time, too. Similarly, for a company to have a true understanding of their value and health, they have to consider more than just historical and current financial information.

In 1975, a study of Standard & Poor’s 500 companies indicated that more than 80% of a company’s market value was reflected in its tangible assets, meaning those captured in traditional financial reporting. In contrast, a 2010 survey of S&P 500 companies found that only 20% of a company’s market value related to tangible assets. As a result, investors and other stakeholders have begun attributing greater value to non-financial information, which among other things includes information about a company’s environmental, social and governance matters, as well as information about a company’s innovation capacity, quality of management, brand, customer satisfaction and reputation. These factors help stakeholders see the bigger picture of a company’s value creation potential over the short, medium and long term, and help to illustrate the company’s overall health.

In recent years, companies have begun preparing sustainability reports to show their value and overall health. These reports are separate from reports about profits and instead measure progress in sustainability by considering environmental, social and governance factors. Companies creating sustainability reports understand the value of corporate reporting that integrates all forms of capital – both tangible (financial, manufactured) and intangible (intellectual, human, social and relationship and natural). By presenting non-financial information in conjunction with a company’s financial statements, shareholders, prospective investors, employees, customers, regulators and others gain a more thorough understanding of a company’s overall health and value creation potential, which allows for more informed business and investment decisions.

A number of new market-driven initiatives have been formed to develop voluntary frameworks for corporate reporting that complement traditional financial reporting. By leveraging these voluntary frameworks to engage in meaningful sustainability and integrated reporting, companies and their stakeholders can gain better insight into their overall health as well as their value creation potential over time. CPAs in business and industry who embrace Integrated Reporting are not only taking advantage of an opportunity to improve the relevance of their companies’ external reporting, but also to gain significant benefits that result from the reporting process itself, such as improved internal communication and more informed decision-making. CPAs in public practice can assist companies that are producing sustainability reports by providing assurance, and can provide consulting services to companies preparing sustainability reports and Integrated Reports. By entering this space, CPAs reinforce their roles as trusted business advisers.

To learn more about the changing landscape of corporate reporting, take a look at this FAQ that the AICPA Business Reporting Assurance and Advisory Services team has developed. The document outlines the similarities and differences between the frameworks available, explains the benefits of evolving corporate reporting and more. Additionally, you may be interested in viewing a relevant CGMA report, “Rebooting Business: Valuing the Human Dimension”.

Amy Pawlicki, Director - Business Reporting, Assurance and Advisory Services and XBRL, American Institute of CPAs. Amy staffs the AICPA Assurance Services Executive Committee, is responsible for building awareness and understanding of the eXtensible Business Reporting Language and coordinates AICPA activities related to Integrated Reporting and Sustainability, including collaboration with other organizations around the world that are dedicated to improving the quality and transparency of business reporting.

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