Relevance of Non-Financial Disclosures

This article critically evaluates the relevance of non-financial disclosures in corporate reporting. It discusses the importance of both financial and non-financial information for stakeholders and the benefits of voluntary non-financial disclosures. The article also covers the significance of corporate social responsibility and its impact on the overall performance of the business.

Running Head: Voluntary Non-Financial Disclosures
RELEVANCE OF NON-FINANCIAL
DISCLOSURES

Voluntary Non-Financial Disclosures 1
Critical Evaluation of Relevance of Non-Financial Disclosures
Introduction:
A business manager has to take into account both quantitative as well as qualitative
factors before taking any important decision relating to their business. Even the stakeholders
of the company require the company to report communicate with them, the financial and non-
financial information as well in relation to the company’s business environment so that they
can make informed decisions. Financial information is the collection of necessary facts in the
context of activities and transactions undertaken in the course of business. Such information
is expressed in the financial terms and is communicated through the means of annual report.
However, the contemporary annual reports are prepared on the basis of integrated reporting
framework. Integrated corporate reporting requires the annual report to not only cover the
information that helps in evaluating the financial performance of the business but it shall also
covers such information that helps to determines the company’s performance towards its
social and environmental responsibilities (sustainable reporting). The communication of both
financial and non-financial information between the managers and the stakeholders of entities
through the means of various reports minimises the information asymmetry between them.
The major two motives behind the disclosure of non-financial information is to comply with
the applicable regulatory requirements and to reduce the information gap between the owners
and stakeholders of the company. The former motive has a mandatory nature and also its
dynamics are varied from that of latter motive. Non-financial information is that information
that is not represented in the monetary value but yet it helps in evaluation of overall
performance of the business. The significant matters that have the potential to draw attraction
of users are: company’s corporate governance practices, company’s corporate social
responsibility and its initiatives towards it, company’s environmental sustainability.

Voluntary Non-Financial Disclosures 2
Critical evaluation of voluntary non-financial disclosures:
Stakeholders are the individuals or the group of individuals whose economic and other
related decisions are influenced by the company’s performance in financial and non-financial
areas. An entity has stakeholders from both within and outside the business. The employees,
board of directors, managers are the internal stakeholders of the company as they are directly
involved in the routine activities of the business. However, there are certain parties that
although do not directly participate in the internal activities of business such as carrying out
basic business operations, preparation and presentation of financial statements etc., yet they
are concerned about the company’s performance to take various significant decisions. Since
they are not involved in the internal activities of the business, they put heavy reliance on the
company for all the necessary information that can help them to take certain decision
regarding company’s business (Zimmerman & Yahya-Zadeh, 2011). These parties are
commonly called the external stakeholders of the business. External stakeholders may not
necessarily be directly linked to the company. Examples of such stakeholders are company’s
shareholders, customers, suppliers, providers of finance (banks, financial institutions or trade
creditors), governmental regulators and the business community in which it operates.
The financial information is used by the internal as well as external stakeholders of the
entity to understand the financial situation and performance of the business of the entity in
which they hold direct or indirect interest. The stakeholders need to analyse the financial
information contained in the various financial statements such as statement of profit and loss
(income statement), statement of financial position (balance sheet) and the cash flow
statement to understand how exactly the firm to which they are related to, is performing
(Wang, Jahangir Ali & Al-Akra, 2013). There are various methods and techniques to analyse

Voluntary Non-Financial Disclosures 3
the company’s financial information such as ratio analysis, fund flow or cash flow analysis.
Through the different financial measures the company can gauge its financial performance in
a particular year with reference to its financial performance in the other previous years
(McIntosh, 2017). However, to analyse the overall corporate performance, these stakeholders
require non-financial information also.
Non-financial information about the entity is the set of data that is not expressed in the
financial terms as such information is not related to the economic or financial activities
carried on by the entity. Financial and non-financial information serves as the language of
business as it facilitates the communication between the owners of business and other related
parties of business (Codjia, 2017). Annual report is the most effective medium of
communication of all necessary and relevant information regarding to the company to its
stakeholders. Therefore, corporate reporting has gained significant importance in the recent
times. Corporate reporting requires the preparers of reports of the reporting entity to use such
terms and concepts that are precise enough and easily understood by the users of the reports
provided they have relevant knowledge of business of the entity. To initiate the effective and
efficient communication between the reporting entity and the intended users of report, the
preparers of such reports must keep in mind the qualitative characteristics of the information.
The European Union has made it mandatory for certain entities to report about the non-
financial matters that are significant enough to draw the attention of the readers. As per the
key findings of certain surveys in regards to the non-financial information it is clear that there
does not exist any exact or common definition of non-financial information which is
generally and universally accepted (Haller, Link & Grob, 2017). Majorly the investors and
the regulators of business of the entity are concerned about the company’s performance. They
use various tools to obtain the information about the non-financial matters of the business.

Voluntary Non-Financial Disclosures 4
The resources that are available to them to collect the non-financial information are primarily
falls into two categories are internal sources and external sources. Internal information
concerns to the data as the human resource objectives of the company, its governance policies
and its strategic vision. The observers of performance of the entity may also make use of
organic information to determine the effectiveness of internal controls of the company and to
uncover the fraudulent or illegal practices or otherwise inappropriate business practices
undertaken by the business, if any. External information flows mainly from the market place
and is majorly related to the moves and strategies of rivalry firm of the concerned entity or
the lending conditions of providers of finance to the business legislation.
Managers of the company have to consider information of both financial and the non-
financial nature to manage the operations of business. Therefore, it is necessary for them to
critically understand the true meaning of both types of information and the impact that such
information holds on their business. While the ratios like net income to sales or total equity to
total assets etc. works as the financial measures to determine and analyse the financial
performance of the business from various aspects such as profitability, liquidity, solvency or
the efficiency of the business. The non-financial information measures that can be used by
the managers to evaluate the performance range from looking at the quality of the products
sold by company to the initiatives that the company takes to protect the interest of the society
and environment under which operates etc.
Voluntary and transparent non-financial information disclosures will not offer the
reporting entities the competitive edge over other firms operating in the same industry but it
will also allow such entity to bring media attraction that in turn will generate excellent public
image (Bushman & Smith, 2003). It will also encourage the reporting entity to maintain the
standards of its quality so that such practices can be effective communicated through various

Voluntary Non-Financial Disclosures 5
reports. Comprehensive disclosure of non-financial matters will also raise the level of
customer satisfaction of the company and will enable the reporting entity to attract more
customers and investors to the business. The companies that respect the interests of its
stakeholders such as its employees, customers, investors, society is found more attractive by
such internal and external parties and they tend to associate themselves further with the
company with more loyalty. Moreover, it gets more convenient for such companies to operate
smoothly in the highly competitive environment as the society supports them due to their
social and ethical practices. For the sustainability of business in the market where there is
intense competition, in the long run, concentration of only financial aspects of business is not
enough rather the managers must emphasise on other non-financial factors also that can
positively contribute to the growth and prosperity of business. Such factors are quality
excellence, brand image, maximum customer and employee satisfaction, social and
environmental responsibility of business, goodwill and reputation etc. Hence, a manager of
an entity must ensure that it operates its business keeping in mind both financial and non-
financial information.
In the recent times, the multinational corporations have expanded to such a point that
they have direct influence on the several areas such as economy, environment, society and so
on. The significant direct influence of businesses demand the companies to pay due regard
towards their social values, ethical principles, human right protection, environmental
protection and to safeguard the interest of the overall business community to which they
belong (Kolk, 2008). Hence, the non-financial reporting has gained great importance
nowadays. Such type of corporate reporting is concerned with making disclosures relating to
fulfilment of responsibilities in regards to its environment and society. Such type of
information is also called as Environmental, Social and Governance information (ESG). The
absence of certain voluntary disclosures of corporate information on part of company

Voluntary Non-Financial Disclosures 6
restrains it achieve corporate accountability, transparency and the responsible behaviour
(Plumlee, et. al., 2015). It is not that reporting of non-financial is mandatory and hence it
must be reported. Rather, the firms must themselves recognise the importance of disclosure
of non-financial matters for the investors or other key stakeholders and voluntarily disclose
such information through the means of various management reports. To obtain the
comprehensive view of the performance of business of the reporting entity, the concern of its
stakeholders is not merely confined to the financial figures contained in the annual report but
also they emphasise on the non-financial information contained in different reports such as
corporate social responsibility report, sustainability report, annual report etc. With growing
stakeholder awareness, the importance of information relating to the business model, value
chain development and the risk and opportunities available to the company is also increasing.
The sustainability and corporate social responsibility of business are main facets of non-
financial disclosures (Matsumura, Prakash & Vera-Muñoz, 2011). The combination of
financial and non-financial aspects of the business determines the true value of any
organisation. Further, the proper disclosure of financial and non-financial information can
reduce the information gap between the owners and the stakeholders of the company to a
great extent.
Though, the European Union Law has made it compulsory for the large public interest
entities and certain private entities with prescribed size, to make non-financial disclosures on
time to time basis to the stakeholders, but the other entities must also voluntarily take
initiatives to make such disclosures so that they can maintain sound relations with their
stakeholders that ultimately influence the overall performance of the business. Voluntary
disclosures do not only reflect the sense of responsibility of company towards its stakeholders
but it also encourages them to develop and adopt the most ethical and responsible business
approaches and behaviours. Moreover, non-financial reporting proves to be the effective way

Voluntary Non-Financial Disclosures 7
to improve the process of risk management and also it strengthens the long term performance
of company in the major areas like financial, social and environmental (Dominique, 2009). It
brings out the competitive advantage to the company by building a sound corporate image in
the overall business community. For the community and society that are directly affected by
the company’s functioning, disclosure of non-financial information allows them to be assured
of protection of their rights by the company and also restores their confidence and trust in the
business of reporting entity. Further, non-financial disclosures enable the investors and other
stakeholders of the company to predict the company’s performance and future stability in the
financial and non-financial markets (Vanstraelen, Zarzeski & Robb, 2003).
Since the last decade, the new trend of disclosing the non-financial information has
evolved viz. voluntary disclosure of corporate social responsibility. Corporate social
responsibly is increasingly gaining importance in the recent era because of increased number
of financial institutions, various online sources and media that are specialised in encouraging
the organisations to improve their business practices to accommodate the needs of the society
and environment (Orens, Aerts & Cormier, 2010). Such organisations are also encouraged to
disclose about their social practices to the outside world through various reports. Through
these disclosures, the reporting entity informs the users of its annual reports about its social
responsibility and its corporate efforts towards the major areas like corporate governance,
diversity, business community, environment, employee relations, protection of human rights,
product quality excellence (Akhtaruddin, et.al., 2009). A potential benefit that can be derived
from the initiation of CSR is that it will enable to maintain a lower cost of capital. Cost of
capital of an entity measures the inherent risk involved in the entity’s stock (Sieber, 2014). If
the stock of an entity involves high investment risk then it will definitely require the investors
to demand more return than what is offered by a low risk investment (El Ghoul. et. al., 2011).
The disclosure of CSR activities by an entity tends to minimise the perceived risk involved in

Voluntary Non-Financial Disclosures 8
the entity’s stock. It is generally observed that the companies that have large cost of capital in
past, are usually more likely to reduce their cost of capital through the initiation of CSR in
future period (Dhaliwal et. al., 2011). Also, the disclosure of facts of its social performance
could lead to attraction of potential institution as they generally provides preferences to the
corporations that are specially involved in some social and environmental activities it will
enhance their confidence in the worthiness of reporting entity’s business. Moreover, such
reporting easily fits in the eligibility criteria of large financial institutions that can offer them
large sums of finance to carry further business operations (Eccles, Serafeim Krzus, 2011).
Voluntary and transparent non-financial information disclosures will not only offer the
reporting entities the competitive edge over other firms operating in the same industry but
they will also allow such entity to bring media attraction that in turn will generate excellent
public image. It will also encourage the reporting entity to maintain the standards of its
quality so that such practices can be effective communicated through various reports.
Comprehensive disclosure of non-financial matters will also raise the level of customer
satisfaction of the company and will enable the reporting entity to attract more customers and
investors to the business. The companies that respect the interests of its stakeholders such as
its employees, customers, investors, society is found more attractive by such internal and
external parties and they tend to associate themselves further with the company with more
loyalty (Plumlee, et. al., 2015). Moreover, it gets more convenient for such companies to
operate smoothly in the highly competitive environment as the society supports them due to
their social and ethical practices (Liguori, Sicilia & Steccolini, 2012). For the sustainability of
business in the market where there is intense competition, in the long run, concentration of
only financial aspects of business is not enough rather the managers must emphasise on other
non-financial factors also that can positively contribute to the growth and prosperity of
business. Such factors are quality excellence, brand image, maximum customer and employee

Voluntary Non-Financial Disclosures 9
satisfaction, social and environmental responsibility of business, goodwill and reputation etc.
(Deloitte, 2015). For instance, an entity involved in the business of manufacturing of tyres,
emits the toxic elements in the open atmosphere which affects the health of different
constitutes of environment. Therefore, as a part of sustainability practices and CSR activities,
such company must implement such plant or equipment that can control the carbon emission
in air. Also such actions must be reported by it in the sustainability report prepared by it
(Saka & Oshika, T., 2014). Hence, a manager of an entity must ensure that it operates its
business keeping in mind both financial and non-financial information.
Although, there are sufficient numbers of reasons because of which the corporations
across the world are advised to make disclosure of non-financial information to the general
public, but it is necessary to understand that everything that has the potential to offer
significant benefits, has to face some limitations. So is the case of disclosure of non-financial
information by the companies as it requires considerable amount of time and cost to take-up
the activities that forms part of company’s CSR. Any business exists in the market with the
prime motive of maximising the wealth by earning higher profits. However, to undertake
CSR activities, entities have to spend a large portion of their earnings (Graham, Harvey &
Rajgopal, 2005). Also, the time spent to participate in CSR activities could be alternatively
utilised to the core business activities that contributes to higher profitability. Second, major
problem with the disclosure of non-financial information is that there is no common
denominator on the basis of which such information could be measured for the purpose of
disclosure. Further, preparation of such reports that depicts the non-financial information of
the company involves significant amount of time and cost as such reports requires the
approval of professional bodies through long processes such as environmental audit, CSR
audit etc.

Voluntary Non-Financial Disclosures 10
Conclusion:
From the above study on relevance of voluntary non-financial disclosures by the entity, it
can be stated that non-financial information plays great role in building sound public image
of the reporting entity as it enables the stakeholders of the company to evaluate company’s
overall performance so that they can make informed decisions on the matters concerning their
association with reporting entity’s business. Despite of the fact that disclosure of non-
financial information involves huge cost and time for undertaking such activities that forms
part of non-financial disclosure, it has become the integral part of the company’s corporate
reporting practices due to the increased awareness of the major stakeholders of the company.
Stakeholders in today’s world demands comprehensive information about entity’s overall
performance. The reporting of adequate non-financial information covers the areas related to
company’s corporate governance practices, social responsibility practices and global
reporting initiatives towards environmental sustainability of the business.
Though, the regulatory bodies of certain entities have made it necessary for them to make
non-financial information disclosures, it is also beneficial for other entities which are not
falling in such criteria to make voluntary disclosures of non-financial information in the
transparent manner to achieve competitiveness and to avoid invitation of legal and regulatory
interventions from different sources. It is obvious that the investors of the company can better
assess the risk and opportunities if they are offered better insights of company’s performance
and policies relating to the non-financial facets of the company’s business. However, since
voluntary disclosures have no defined limit, this causes non-uniformity of disclosure
practices of the company. Further, certain firms do not find it necessary only to disclose the
non-financial matters to the user groups even when it is quite necessary for them to disclose
certain significant matters to the stakeholders, therefore European union have made it

Voluntary Non-Financial Disclosures 11
mandatory for the public and private firms of prescribed size to strictly follow the disclosure
requirements regarding the matters like environment sustainability, corporate social
responsibility and corporate governance practices.

Voluntary Non-Financial Disclosures 12
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