Relevance of Non-Financial Disclosures

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.