Nonfinancial Information Reporting Essay

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The complexity of modern business requires a company to disclose various information,  formatted  in numerous reports. Financial reporting traditionally has been regarded as the backbone of business reporting, which was more or less enough when an enterprise  was primarily, if not exclusively, assessed on its crude financial performance. On the other hand, financial reports have been statutory  driven and therefore compulsory, and companies  have had little choice but to comply with the requirements set in the Accounting Law (Act) and/or a set of financial standards.

With  the introduction and worldwide promotion of International Accounting  Standards  (IAS), nowadays the International Financial Reporting Standards (IFRS), the process  of harmonization of accounting rules and  principles  has been  accelerated.  A set of annual  financial statements  prepared  by a business entity, although reporting  primarily and numerically the results achieved in the past financial year, includes a narrative statement by the chairperson or president, giving his or her views on the position  and performance  of the company  in the past year. Often, this statement  is an additional important source of information  for financial and  business  analysts studying the performance  of the company.

Growth  Of Nonfinancial Reporting

The growth in nonfinancial information reporting has had exponential  growth with the rise in the importance of social reporting,  corporate  social responsibility (CSR), environmental reporting,  and  sustainable development and growth. The nature of investors may not have changed, but their perception of socially related  information   certainly  changed  in  the  last decade of the 20th century and the first decade the of 21st century. A famine for information  exists, going beyond classical financial reporting.  A good report by today’s standards  encompasses  not only detailed financial information  but also information  on the market; the human  resources function; the potential and problems of the company; the legal, political, and economic environments in which the company operates; and the view of management  on all the major issues that may influence the company’s position and market performance.

Financial performance  as a prime descriptor of the company’s success has been replaced by market performance. Business/financial analysts, investors, executives, and business and management  scholars would agree that  the very concept  of market  performance is more complex today and that making an appropriate assessment requires extensive use of information of a nonfinancial nature, more future oriented than a mere report on the past.

Motivation

Motivation for nonfinancial reporting usually is strategy driven, ensuring  that  the  reputation and brand of the company are taken care of. Managers perceive that nonfinancial reporting  practices are increasingly important due  to  competitor pressure.  Fewer than 50 companies  used nonfinancial  reporting  as late as 1992, but in 2006, more than 2,000 companies regularly reported  nonfinancial information.

Nonfinancial reporting is perceived to be driven by the clear interest of various stakeholders in receiving information beyond mere financial reports, regardless of how detailed those reports are. Stakeholder/shareholder activism directly influences trends in company reporting.  The most recent empirical research, however, has shown that  pressure  from nongovernmental organizations (NGOs) is declining and that direct shareholder  activism is exerting further  pressure for nonfinancial information  reporting.

Financial and business analysts are the driving force behind the increasing thirst for nonfinancial information. Financial analysts testified to the Jenkins Committee in the United States that nonfinancial information reporting is of ultimate importance for analyzing financial markets and understanding future development.

Although  the  pressure  from  analysts  is present at the  macro  level, the  perception  of companies  is that financial markets, per se, are not the key driver in defining the need for nonfinancial information reporting. The investment  community  is focusing increasingly on social information  reporting, and the top  (Forbes 500) companies  realize that  they must comply with the expectations  of current  and potential investors.

Future Reporting

It is difficult to foresee how nonfinancial information reporting will develop in the future, because the very nature of nonfinancial information  reporting  may change. At present,  it is largely voluntary; whether some information  will be disclosed is a decision  of the firm, based on management’s assessments of costs and benefits. Empirical research  has not as yet corroborated  the belief that  voluntary disclosures have a direct positive influence on the movement of share prices. In contrast,  some researchers  have suggested that it may have an adverse effect.

Overall, nonfinancial  information  reporting  may remain a dominant  practice primarily in large Western  companies,  most  likely those  that  are  on  the Forbes 500 list. Leading firms in emerging and developing markets may also endorse the practice, but it is not clear what benefits they will draw. The investment community  will also have to learn how to deal with the  increasingly important inflow of indirect  information  voluntarily  given by companies,  well above the level prescribed by law.

Bibliography:

  1. Alexander and  A. Britton,  Financial Reporting (Cenage,  2004);
  2. Gazdar, Reporting Nonfinancials (John Wiley & Sons, 2007);
  3. Grant,  T. J. Fogarty, R. J. Bricker, and G. J. Previts, Corporate Reporting of Nonfinancial Performance Indicators and Operating Measures  (Financial   Executives  Research   Foundation, 2000);
  4. V. A. Johnsson and P. E. Kihlstedt, PerformanceBased Reporting: New Management Tools for Unpredictable Times (John Wiley & Sons, 2005);
  5. Kai Kristensen and Anders Westlund,  “Valid and Reliable Measurements for Sustainable  Non-Financial  Reporting,” Total  Quality Management and Business Excellence (v.14/2, 2003);
  6. Anna Rylander, Kristine Jacobsen,  and  Goran  Roos, “Towards Improved Information  Disclosure on Intellectual Capital,” International Journal of Technology Management (v.20/5–8, 2000);
  7. United Nations Conference on Trade and Development,  Guidance on Corporate Responsibility Indicators in Annual Reports (United Nations, 2008).

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