Financial Reporting: Non-Financial Information and Stakeholder Impact

This report provides a comprehensive analysis of the evolving landscape of financial reporting, emphasizing the increasing importance of non-financial information. It examines the shift towards incorporating non-financial data to meet the growing demands of stakeholders. The report explores the nature of non-financial information, including sustainability and corporate social responsibility reports, and discusses various reporting frameworks like the Global Reporting Initiative. It highlights the benefits of disclosing such information, such as improved workforce retention, enhanced reputation, and stronger customer relationships. Furthermore, the report delves into the economic consequences of not reporting non-financial information, including potential impacts on valuation, share prices, and brand image. It also covers the integration of financial and non-financial information through tools like the Balanced Scorecard and emphasizes the importance of corporate social responsibility for ethical conduct and sustainable business practices. The report concludes by underscoring the need for quality disclosures and information symmetry to enhance transparency and credibility in financial reporting.

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
A report has been prepared on the changing requirements of the financial reporting off late. With
the increase in the stakeholder’s concept, the requirement to report the non financial information
in the financial reports has been increased. The same has been discussed in the report alongwith
the practices that is being followed in the other countries and economies to give the best possible
information to the stakeholders. The report also highlights the nature of the non financial
information that is usually warranted in the financials, the conomic consequences of not
reporting the same, how the same should be reported and how all these concepts can be
integrated in the financial statements.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Analysis........................................................................................................................................................5
Nature of nonfinancial information.........................................................................................................5
Non financial information reporting frameworks....................................................................................6
Benefits of the Non financial information...............................................................................................6
Nature of economic consequences.........................................................................................................7
Reporting of non-financial information...................................................................................................8
Integration of above 2 concepts and economic consequences of non-financial information.................8
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
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Introduction
Accounting and reporting has undergone huge changes post the introduction of the International
financial reporting standards and also the stakeholders requirements have increased as the
financial reports or the annual reports are no more considered as the post facto analysis which is
just the port mortem of what has happened in the past accounting year but also seen as a base for
taking future business and investment decisions. In such a scenario, these reports become
redundant if it does not gives the futuristic view and the non financial information which the user
wants to know before taking decisions (Alexander, 2016). Due to this, there has been an
increased importance on reporting of non financial information in the annual reports and the
reports demanded by the stock exchanges over different nations as this enable the stakeholders
and the users to access the true value of the entity. The same has been analysed using different
information and articles in the below section (Bizfluent, 2017).
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Analysis
Accounting and business reporting has been improving over the years and the focus on reporting
the non financial information arises of the fact that the percentage of the entity’s market value
that is attributable to the tangible assets has gone down from 80% in 1970s to 20% in 2009. This
shows the importance and how impactful the non financial information can be for the entity’s
future operation (Belton, 2017). Several studies have been done on the same but no consensus
has been reached as to uniformity in disclosure for non financial information and therefore the
current reporting is being done as per International financial reporting standards or as per the
Generally accepted accounting principles of US.
Nature of nonfinancial information
Companies have been experimenting with the same but with no success as to what exactly needs
to be reported. But the nature of non financial information can generally be described in the
nature of the sustainability report to show what the company has been doing from the
environmental, social and ethical perspective. It shows how the company has been able to
balance the human and business needs with its work and objectives and what has been planned
for the future. It focuses on the company’s initiative on the social well being and preserving the
natural resources and the ecosystem (Bromwich & Scapens, 2016). Furthermore, it also includes
disclosure of the corporate social responsibility report which shows the management’s approach
towards the general well being of the society and how the company is contributing towards the
same. It can be in the form of reducing pollution, welfare of the employees through education
and medical facilities for their families or on a national or global scale. Sustainability reporting
nowadays is being done on the basis of Global Reporting Initiative methodology and CSR
reporting has become inevitable in the reporting framework offlate. There is a need of integrated
reporting framework whereby financial reporting and sustainability reporting is given equal
importance (Choy, 2018).
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Non financial information reporting frameworks
The various reporting framework that have emerged overtime for non financial information in
the annual reports some of which are:
1. Global reporting initiative
2. Global Compact
3. AA 1000
4. Integrated Framework
5. ISAE 3000
Benefits of the Non financial information
The disclosure of the non financial information in the financial statements gives a lot of benefit
to the company as well as its stakeholders.
1. From the company perspective, it helps in attracting, retaining and maintaining the
quality workforce. It helps in saving the resources and increases efficiency of the
company of decreasing the normal operating costs (Werner, 2017). It also contributes in
managing the business risks and improves the efficiency of the process.
2. From the publicity perspective, it increases the goodwill and reputation of the company in
the industry and generates positive publicity in the media and the accounting world. Few
of the emamples include Google worldwide and Wesfarmer in Australia which is known
for this.
3. From the perspective of the customer, it helps in strengthening the customer relationship
and retention and provides reasonable assurance to the users that the company has been
providing quality products and correct information. It also enhances the relationship with
the suppliers and other stakeholders in the market (Visinescu, Jones, & Sidorova, 2017).
4. In terms of reputation, the non financial information improves the reputation thereby
increasing positively to the brand value, differentiates the products of the customers from
that which is being sold by the company and also helps in winning new business
opportunities (Trieu, 2017).
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5. Finally from legal perspective, it helps the company in avoiding and legal case or
litigation against the company and fines and penalties as the company is compliant in
terms of laws and regulations.
Nature of economic consequences
It is often argued that the non financial information cannot be disclosed or shown in the
monetary terms and hence it need not be reported but on the hindsight it is this non financial
information which drives the actual valuation of the company and its share prices in the stock
exchange. It mainly includes environmental effects, social responsibilities and the political
situations. In case the company does not meets the requirements, the implications can be hugely
detrimental to the interests of the company. It can include fines and penalties for not complying
with the legal and corporate governance requirements, the valuation and the share price of the
company may fall drastically, the brand image of the company may be tarnished and above all
the company may lose customers belief and the shareholder’s interests (Sonu, Ahn, & Choi,
2017). This is why Stakeholders’ Theory is being given importance over the individual interests.
In certain case, if the company is not following the given directives, it is perceived to be
unethical in its conduct and it faces several consequences as a result of the same. Some of the
companies which have suffered the most due to unethical accounting, lack of corporate
governance and incompetent management include HIH Insurance company, One Tel Phone
company, Enron, Worldcom, Lehman Brothers and many more. In case the sustainability
accounting and corporate governance would have been in place, the consequences would have
been surely different as the stakeholders would have known the futuristic view of the company.
Due to this major collapses only, the concept of corporate governance gained voice.
Reporting of non-financial information
There were many initiatives at the global front to report the non financial information like United
Nations Principles for Responsible Investment’s (UNPRI) Sustainable Stock Exchange Initiative
is one of them which was aimed at knowing how exchanges, investors, companies and the
regulators can work together to improve the disclosures relating to ESG in the annual report and
contribute to the long term approach (Sithole, Chandler, Abeysekera, & Paas, 2017). Some of the
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countries which are leading the way in terms of implementing sustainability requirements and
corporate governance are from the emerging economies like Brazil, India, China, Malaysia,
Egypt, Indonesia and South Africa. In 2011, many delegates and a group of investors made a
request to the CEOs of around 30 stock exchanges as to the sustainability reporting can be
embedded in the listing rules so that it becomes mandatory requirement and the voting would be
done in the Annual General Meeting of the company basis this (Raiborn, Butler, & Martin,
2016). Since then, the focus on integrated reporting has increased manifolds. There are many
ways in which the non financial information can be disclosed in the annual report of the
company. Many standards and the local GAAP focuses on the disclosure requirement of the
same. Some of the conmon ways in which it can be casted is through integrated reporting of the
social, environmental and ethical information, which will develop the social responsibility. Also,
the reporting can be done using various tools like balanced scorecard, sustainability balanced
scorecard, sustainability report and corporate governance report. Many companies are also in
practice of reporting the code of ethics and the conduct in the financial statements. Some of the
other ways that have developed over time are responsibility accounting, increasing the
transparency through the directors report, financial inclusion reporting and green banking
disclosures (Heminway, 2017).
Integration of above 2 concepts and economic consequences of non-financial
information
Corporate social reposnsibility is the concept whereby the company’s initiative and its
responsibility towards the social well being and environmental protection is highlighted in terms
of how the company is going beyond what is required by the regulators and protection groups. It
shows the company’s accountability for what it does for the braoder range of the stakeholders. In
the current situation, if the company is growth heavily in terms of bottomline and the topline but
is not ethical in its conduct or supercedes or avoid its responsibility towards the environment
then the company is not acceptable to the public as it is harming the common interest (Knechel
& Salterio, 2016). On the other hand, if the company is not earning substantial profits or are in
losses but its business conduct is compliant and viable in terms of sustainability, corporate
governance, environment protection and greater interests of the society then the government of
the country and the stakeholders are also supporting the same. The main purpose of all this is to
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ensure that the companies remain ethical in their conduct, develop relationship with customers
and employees, maintain the quality of the products being sold and socially responsible for the
investment that is being done in them. Furthermore, there are a variety of non monetary benefits
that accrue to the entity like better financial performance, reputation improvement and increased
customer loyalty, retention of quality and talented staff, brand recognition, cost savings,
organizational growth and access to capital, etc (Jefferson, 2017).
This can only be achieved and economic consequences can be avoided only through quality
disclosures in the annual reports. Even if the disclosure is being done but it does not align with
the financial information and lacks the requisite quality then the purpose is not fulfilled so it
needs to integrated. There should be an information symmetry which increases the information
demands of the users and which increases the credibility of the information and the enhances the
qualitative characteristics of the financial information. This also contributes in increasing the
transparency of the operations goingon within the company (Meroño-Cerdán, Lopez-Nicolas, &
Molina-Castillo, 2017). The Balanced scorecard is often told to be the first focus of the non
financial information as it focuses on the customer aspect, the employees, the society, learning,
growth, internal business processes and many more dimensions besides the financial information
measures. We have seen offlate that a number of companies have started reporting data on Green
house gas emissions as it is one of the burning issues in terms of environment upkeeping. Also,
there have been efforts from the corporates to promote the philanthropic giving as this focuses on
bringing society in par with the economic development and growth of the company (Dumay &
Baard, 2017).
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Conclusion
From the above decision and analysis, it can be concluded that both the financial and non
financial information is necessary and integral to the process of business decision making. Both
should form the part of the financial statements and the regulatory bodies worldwide need to
come out with the common framework on the same so that consistency can be ensured. Financial
information is something which can be easily quantified and saves businesses in the short term
whereas non financial information is something which focuses on the broad aspect and covers
and highlights all the risks and opportunities for the business in the long run and thus helping
business to identify what might be the possible financial consequences in the long run.
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References
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