PACC6005 - Economic Consequences of Non-Financial Reporting

This report examines the economic consequences of non-financial information and its reporting by companies. It identifies non-financial information such as corporate social responsibility (CSR) and environmental, social, and governance (ESG) initiatives, and discusses how transparent reporting can enhance a company's image, attract investors, and increase stock value. The report also explores the role of international standards like IFRS and GAAP in standardizing non-financial reporting. Furthermore, it provides recommendations for companies to prioritize non-financial reporting and for governing bodies to improve reporting interfaces. Overall, the report concludes that non-financial reporting is crucial for building a strong reputation, securing funding, and ensuring sustainable operation, and that the website Desklib provides past papers and solved assignments for students.

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PACC6005: FINANCIAL ACCOUNTING 3
SEMESTER 2, 2019: ASSIGNMENT 2

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Executive summary
This report has the objective to discuss the nonfinancial information of the companies and
their economic impacts. While proper non-financial reporting can increase the value of the
stock of the company it can also attract the investors of the market. Therefore, non-financial
reporting can indirectly help in the process of expansion. Apart from that, non-financial
reporting boosts the brand reputations of the companies that can pay its dividend in the long
run through an increase in sale. The report also furnishes the recommendations based on the
study of the paper that can make non-financial reporting more easy and fruitful for the
economy.

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Contents
Introduction................................................................................................................................4
Discussion..................................................................................................................................4
Identification and discussion of non-financial information.......................................................4
Identification and discussion of the nature of economic consequences.....................................5
Discussion regarding the process of Non-financial reporting....................................................5
Integration of the two concepts and the economic consequences..............................................6
Recommendations......................................................................................................................7
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

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Introduction
Apart from the profit maximisation, another important goal of the companies operating in the
market is to have a sustainable operation. This aim of sustainable operation requires a number
of actions from the company. These include the corporate social responsibility, Environment,
social and governance, reporting, environmental reporting etc. This information of the
companies is known as non-financial information and has certain benchmarks for the
reporting of the information. According to the data, the companies spend around 7-10% of
the net profit on non-financial activities. This non-financial information of the company and
their reporting has economic consequences as well. The objective of this paper is to find out
the economic consequences of the non-financial information and their reporting.
Discussion
Identification and discussion of non-financial information
The information of the companies’ transaction that is meant for the greater good of the
environment or society as a whole is termed as the non-financial information. These non-
financial investments made by the firms help in earning a good image among the customers
of the market. Firms' investments in nonfinancial activities are presented through
nonfinancial reporting (Ioannou & Serafeim, 2017). The proper adherence to the reporting
structure and benchmarks also makes the firm attractive to the potential investors as well.
There are various reporting benchmarks in the world such as IFRS and GAAP that
standardises the reporting process for better understanding of the customers and investors of
the market.
The nature of the nonfinancial information is such that it does not directly contribute to the
profitability of the company. These investment made by the firms are for the higher return in
the long term. For example, Environment, social and governance (ESG) is a non-financial
investment of a firm that is meant to contribute to the environmental standard from the side of
the company (Pizzi, 2018). This improvement in the environment can help the firm to acquire
resources from nature in the future leading to a stretched operational life of the firm. Apart
from that, the non-financial investments can also be made for the upliftment of the society as
well. For example, taking responsibility for educating children belonging to the
underprivileged section of the society is a very common practice among the firms. This may

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not directly increase the profit margin of the company; however, this investment on the
society can increase the customer base in the future leading to a higher demand for the
products sold by the company. All these expenditures are made from the profit made by the
companies and hence require proper reporting.
Identification and discussion of the nature of economic consequences
Proper reporting of the non-financial information of the firm can add to the transparency of
the company. According to Martínez‐Ferrero, Garcia‐Sanchez & Cuadrado‐Ballesteros
(2015), transparent operation of the company not only improve the image of the company
among the customers of the market but it also attracts new investors as well. Haller, Link &
Groß (2017) noted that there is a pattern in the likeliness of the investors to invest capital in a
company. The frequent the company is in publishing new non-financial information
regarding the company more is the bias of the investor towards the investment. The investors
around the world also look for the adherence of the company to different benchmarks such as
IFRS. These help the investors to collect information regarding the company they are
investing in. Thus, a clean reporting standard increases the liquidity of the company and the
availability of fund for expansion in the future.
In addition to that, non-financial activities and its reporting also increase the demand for
stocks of the company. Consequently, the stock price surges increasing the overall value of
the company. The companies such as Microsoft emphasises a lot on nonfinancial activities
and their reporting to maintain a high stock price of their companies. In addition to the
increase in the stock price, the proper reporting of non-financial information of the company
also helps in increasing the institutional ownership of the company as well. If the non-
financial investments of the companies are properly reported, the shareholders increase their
trust in the management of the company (Meynhardt, Gomez & Berndt, 2017). As a result,
the shareholders leave the decision making of the company to the management leading to a
reduction in conflict and dispute. Therefore the proper reporting of the nonfinancial activities
reduces the cost of operation of the company, increases the value through the stock price and
increases the ownership as well.
Discussion regarding the process of Non-financial reporting
The reporting of the financial and non-financial reporting of a company is governed by world
bodies such as International Financial Reporting Standards (IFRS) or the US generally

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accepted accounting standards. These governing bodies make it necessary for the companies
with more than 500 employees to disclose all the non-financial information of the company
for the transparency of the market. Under the directives of IFRS and GAAP, the companies
are required to disclose any kind of policies and investment from the company towards,
 Betterment and protection of the environment
 Improvement of human rights
 Corporate social responsibilities etc.
The member companies associated with the bodies such as IFRS and GAAP keeps on adding
new requirements in standard to make it more robust. There are different guidelines which
the companies can use for the reporting purpose. These guidelines include UN global
compact, OECD guidelines for reporting and ISO 26000 (Manes-Rossi et al. 2018).
ISO26000:2010 which also assists the companies is the most used guideline in the world. The
standard introduced in the year 2010 helps the companies to operate in a socially responsible
way. The firms can publish their non-financial information of the company based on their
usefulness and convenience. Many companies of the world take assistance from ISO26000
and publish their information directly in their annual reports. Other than that, the companies
can also take help from the ISO26000 to publish their information on different websites as
well.
Integration of the two concepts and the economic consequences
The non-financial information and their reporting can have vast economic impacts on the
firm both in the short and the long run. One of the major economic consequences of non-
financial reporting is that it allows the investors and the customers of the market to access
information about the company. Eastman (2018) stated that all the companies of the world
are a part of the environment itself and hence the reporting furnishes the commitment of the
company towards the environment. For example, if a company invests in the green
production equipment and reports in the non-financial reporting it put across a message
regarding the commitment of the company towards the environment. This message to the
potential investor most of the time influences the bias towards investing in the company
(Klaus et al. 2017). Therefore, the availability of the funds for further expansion of the
company will increase that will pay its dividend in the future.

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Apart from that, non-financial activities and reporting create a specific image of the company
in the minds of the customers of the market. According to Robson, Young & Power (2017)
customers behaviours and buying decisions depends on the image and the reputation of the
company among other things. Therefore, the boost in the brand image and the reputation due
to the transparent and inclusive operation of the company can increase the revenue and profit
margin in the future. Stock prices of companies are also influenced by the transparency of the
company and the nonfinancial reporting activities of the company (Camilleri, 2018). If the
customers of the market get to know from the report that the company is taking the
responsibilities of underprivileged children, that will influence the buying decision of buyer
in the stock market. Consequently, the value of the company will increase leading to higher
liquidity of the firm.
Recommendations
Based on the finding of this study it is recommended to the management of companies to
emphasize more on the reporting of the non-financial activities. Unlike the financial activities
of the company, the non-financial activities contribute to the operation of the company in a
stretched timeline. It is also recommended to the companies to have separate departments for
the nonfinancial reporting of the company and requirement for new non-financial initiatives
by the company as well. Recommendations for the governing bodies such as ISO 26000 are
to communicate to the stakeholders regarding the user-friendliness of the interfaces for
reporting the activities and investment.
Conclusion
Therefore, non-financial investment of the companies is as important as financial
investments. The reporting of the non-financial investments of the company towards the
environment and the society can help the company in building a good reputation among the
customers and the investors of the market. The appropriate non-financial reporting using
guidance can not only increase the sales revenue in the future but it can also increase the fund
availability for expansion as well. Thus, for the sustainable operation of the company, the
non-financial activities and their report can help and provide the base.

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Reference
Camilleri, M. A. (2018). Theoretical insights on integrated reporting: The inclusion of non-
financial capitals in corporate disclosures. Corporate Communications: An
International Journal, 23(4), 567-581.
Eastman, H. (2018). ‘The expansion of non-financial reporting’: a practitioner
view. Accounting and Business Research, 48(5), 549-552.
Haller, A., Link, M., & Groß, T. (2017). The term ‘non-financial information’–a semantic
analysis of a key feature of current and future corporate reporting. Accounting in
Europe, 14(3), 407-429.
Ioannou, I., & Serafeim, G. (2017). The consequences of mandatory corporate sustainability
reporting. Harvard Business School research working paper, (11-100).
Klaus, S., Aykut, B., Stiegler, T., & Hell, C. (2017). Is the Time Right for a Change in
Company Reporting? Development of Company Reporting from Financial to Non-
financial Information. Journal of Modern Accounting and Auditing, 13(4), 152-161.
Manes-Rossi, F., Tiron-Tudor, A., Nicolò, G., & Zanellato, G. (2018). Ensuring more
sustainable reporting in Europe using non-financial disclosure—De facto and de jure
evidence. Sustainability, 10(4), 1162.
Martínez‐Ferrero, J., Garcia‐Sanchez, I. M., & Cuadrado‐Ballesteros, B. (2015). Effect of
financial reporting quality on sustainability information disclosure. Corporate Social
Responsibility and Environmental Management, 22(1), 45-64.
Meynhardt, T., Gomez, P., & Berndt, T. (2017). How non-financial reporting can make use
of Public Value. The Reporting Times, (10), 463-486.
Pizzi, S. (2018). The Relationship between Non-financial Reporting, Environmental
Strategies and Financial Performance. Empirical Evidence from Milano Stock
Exchange. Administrative Sciences, 8(4), 76.
Robson, K., Young, J., & Power, M. (2017). Themed section on financial accounting as
social and organizational practice: exploring the work of financial
reporting. Accounting, Organizations and Society, 56, 35-37.