“The way in which companies present their annual accounts needs to evolve to better reflect the wide range of factors that affect companies’ performance.” This statement has been uttered repeatedly by leading members of the accounting profession.

The fulcrum of business reporting information has traditionally been an entity’s financial statements (accounts), which have to be published every year by Maltese companies. Although many of these companies are tiny when compared to other European companies, the financial statements of the larger Maltese companies still run into the hundreds of pages, and it is in these companies that people invest.

Many commentators feel that there is far too much information to digest in a company’s annual report and the situation is not getting any better under the current reporting standards because these reports seem to grow longer with every passing year. Clearly, this is not a case of ‘the bigger the better’ because sometimes all this information fails to answer even the most basic question about the value of a particular company.

However,this is not only a local problem. In fact, Maltese companies generally draw up their financial statements using international rules developed by an international organisation that goes by the name of the International Accounting Standards Board (IASB). It is this organisation that has received the brunt of the criticism over the very long statements that are being prepared by companies. Indeed, in a recent survey carried out by the IASB, 80 per cent of respondents agreed that improvements could be made to the way financial information is disclosed.

Communicating the financial health of a company through financial statements ... is like driving a car while looking in the rear-view mirror

The main use of financial reporting information is to allow investors and other users to make informed decisions, which brings us to the other main issue: the traditional means of communicating the financial health of a company through financial statements cannot be seen as the sole and definitive measurement of a company’s performance; that is to say, financial reporting in itself is insufficient to provide all the information that users nowadays need to make high-quality decision-making. For them it is like driving a car while looking in the rear-view mirror.

Because of all the issues with traditional corporate reporting, those who support a new approach to corporate reporting have come to the fore. The general view within the profession is that the current corporate reporting framework needs to evolve to reflect the wide range of factors that affect corporate performance.

In 2010, a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs decided to address these concerns and come together to create a globally accepted new reporting framework.

The International Integrated Reporting Council (IIRC) was born. Its mission? To create a globally accepted method of reporting that elicits from organisations material information about their strategy, governance, performance and prospects in a clear, concise and comparable format.

This reporting method is known as ‘integrated reporting’ and what it aims to achieve is a more integrated approach to business reporting information because the business world needs to address issues of complexity, transparency, silo mentality, and the sheer size of company reports.

lthough this is a new concept for accountants, it has managed to generate a lot of interest and it seems that this could become the standard reporting practice of the future because at its heart is a focus on communicating how an organisation creates value for the long term, which is especially relevant to today’s global economy.

Work on an integrated reporting framework is going on in earnest. This framework includes a number of guiding principles for the preparation of information in integrated reports, which are: strategic focus and future orientation, connectivity of information, comparability, consistency, stakeholder responsiveness, materiality, conciseness and reliability. If this framework is adopted, it will revolutionise the way in which companies prepare information for the public.

While it is clear that business reporting needs to adapt to the new ways of how people are making modern investment decisions and allocate capital, it is hoped that the result of this new corporate reporting initiative will be a better explanation of what an entity is trying to achieve. In this way it can be better understood by its readers. If that information will also be cheaper to prepare, then everyone should be better off.

Mark Abela is the technical director at the Malta Institute of Accountants.

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