[FAQs] on Overview of Reporting in Accounting

Financial reporting is the process of producing statements that disclose an organisation’s financial status to management, investors and the government. Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organisation over a specified period of time. These stakeholders include – investors, creditors, public, debt providers, governments & government agencies. In case of listed companies the frequency of financial reporting is quarterly & annual.

The main components of financial reporting are:

• The financial statements – Balance Sheet, Statement of Profit & Loss, Cash flow statement & Statement of changes in stock holder’s equity.
• The notes to financial statements.
• Quarterly & Annual reports (In case of listed companies).
• Prospectus (In case of companies going for IPOs).
• Management Discussion & Analysis (In case of public companies).

Financial reporting is the process of producing statements that disclose an organisation’s financial status to management, investors and the government.

• Purpose of Financial Reporting: Financial reporting serves two primary purposes.

1. 1. It helps management to engage in effective decision-making concerning the company’s objectives and overall strategies. The data disclosed in the reports can help management discern the strengths and weaknesses of the company, as well as its overall financial health.
   2. Financial reporting provides vital information about the financial health and activities of the company to its stakeholders including its shareholders, potential investors, consumers, and government regulators. It’s a means of ensuring that the company is running appropriately.

• Limitations of Financial Reporting: Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organisation over a specified period of time. These stakeholders include-investors, creditors, public, debt providers, governments & government agencies.
• In case of listed companies the frequency of financial reporting is quarterly & annual. However, the current financial reporting model was developed in the 1930’s for an industrial world.
• In general, the model provides a backwards-looking review of performance and does not provide enough relevant information for decision- making today.
• The financial reporting model is like “looking in the rear-view mirror,” when in fact the road ahead is very turbulent and there are huge impacts on the company, both societal and environmental.
• It is not necessarily the volume of information, but the lack of a comprehensive story, which is where improvements in corporate reporting are needed.
• In today’s world Investors expect information about Business model and strategy, intangible factors and sustainability (i.e. economic, environmental, social) commitments, impacts and performance that affect a company’s value today and its ability to create value in the future, etc.

A board’s report should typically include information under following heads:

• Company Specific Information
• General Information
• Capital and Debt Structure
• Credit Rating of Securities
• Investor Education and Protection Fund (IEPF)
• Management
• Disclosures Relating to Subsidiaries, Associates and Joint Ventures
• Details of Deposits, Particulars of Loans, Guarantees and Investments
• Particulars of Contracts or Arrangements with Related Parties
• Corporate Social Responsibility (CSR)

Non-financial reporting is an opportunity to communicate in an open and transparent way with stakeholders. In their non-financial reports, firms volunteer an overview of their environmental and social impact during the previous year. The information in non-financial reports contributes to building up a company’s risk-return profile. Non-financial reporting includes

• Board’s Report
• Corporate Social Responsibility Report
• Corporate Sustainability Reporting

Many opine that from the time of Industrial Revolution, economic development has come at the cost of environment and has brought about large scale destruction of nature. Due to the negative externalities of economic development, the practice of non-financial reporting started largely in response to pressure from non-governmental organisations (NGOs) and civic society, which claimed that many firms lacked social and environmental responsibility. It epitomises that a company’s financial health is dependent on much more than the assets on its balance sheet and the movements on its profit and loss account.

Therefore non-financial reporting plays an important role as is a structured way of presenting information about ones performance. It is the practice of measuring, disclosing and being accountable to internal and external stakeholders for organisational performance towards the goal of sustainable and inclusive development.

‘Sustainability reporting’ is a process for publicly disclosing an organization’s economic, environmental and social performance. Global Reporting Initiative (GRI) has developed a generally accepted framework to simplify report preparation and assessment, helping both reporters and report users gain greater value from sustainability reporting.

Sustainability Reporting Framework in India

In India, the Ministry of Corporate Affairs (MCA) recommends sustainability reporting. Considering the importance of sustainability in businesses, MCA had launched Corporate Social Responsibility Voluntary Guidelines in 2009.

To take this further, in 2011 MCA issued ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ which encouraged reporting on environment, social and governance issues.

SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental, social and governance perspective in the prescribed format.

Regulation 34(2)(f) of SEBI (LODR) Regulations, 2015

The annual report shall contain the following:

For the top one thousand listed entities based on market capitalization, business responsibility report describing the initiatives taken by them from an environmental, social and governance perspective, in the format as specified by the Board from time to time:

Provided that the requirement of submitting a business responsibility report shall be discontinued after the financial year 2021-22 and thereafter, with effect from the financial year 2022-23, the top one thousand listed entities based on market capitalization shall submit a business responsibility and sustainability report in the format as specified by the Board from time to time:

Provided further that even during the financial year 2021-22, the top one thousand listed entities may voluntarily submit a business responsibility and sustainability report in place of the mandatory business responsibility report:

Provided further that the remaining listed entities including the entities which have listed their specified securities on the SME Exchange, may voluntarily submit such reports.

Explanation: For the purpose of this clause, market capitalization shall be calculated as on the 31st day of March of every financial year.

[Substituted by the SEBI (Listing Obligations and Disclosure Requirements)(Second Amendment) Regulations, 2021 w.e.f. 5.5.2021].

Annexure I of SEBI’s circular dated 4th November, 2015 prescribes the format given below for “Business Responsibility Report”:

The distinctive elements of the GRI Standards – and the activity that creates them – include:

1. Multi-stakeholder input: The approach is based on multi-stakeholder engagement, representing the best combination of technical expertise and diversity of experience to address the needs of all report makers and users. This approach enables to produce universally-applicable reporting guidance.
2. A record of use and endorsement: New audiences for sustainability information, like investors and regulators, are now calling for more and better performance data. Annual growth in the number of reporters is expected to continue, as we work towards a key area of our strategy; more reporters and better reporting.
3. Governmental references and activities: Enabling policy is a key aspect of overall strategy and GRI work with governments, international organizations and capital markets to further this agenda. As a result, 35 countries use GRI in their sustainability policies and look for guidance as the world’s most widely used sustainability reporting standards. In addition GRI have long-standing collaborations with over 20 international organizations such as the UNGC, OECD and the UN Working Group on Business & Human Rights.
4. Independence: The creation of the Global Sustainability Standards Board in 2014, and related governance structure changes, have strengthened the independence of the standards aspect funding approach also ensures independence. It aims for a degree of self-sufficiency. Funding is secured from diverse sources; governments, companies, foundations, partner organizations and supporters.
5. Shared development costs: The expense of developing GRI’s reporting guidance is shared among many users and contributors. For companies and organizations, this negates the cost of developing in-house or sector based reporting frameworks.

Investors expect the following information:

1. Business model and strategy.
2. Intangible factors and sustainability (i.e. economic, environmental, social) commitments.
3. Impacts and performance that affect a company’s value today and its ability to create value in the future.
4. Key aspects of corporate governance.
5. Internal controls.
6. Human rights/diversity practices and policies.
7. Key financial ratios

(i) Importance of sustainability reporting

Internal benefits of sustainability reporting for companies and organizations can include:

• Increased understanding of risks and opportunities.
• Emphasizing the link between financial and non-financial performance.
• Influencing long-term management strategy and policy, and business plans.

External benefits of sustainability reporting can include:

• Mitigating – or reversing – negative environmental, social and governance impacts.
• Improving reputation and brand loyalty.
• Enabling external stakeholders to understand the organization’s true value, and tangible and intangible assets.

(ii) Sustainability report

A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities. A sustainability report presents the organization’s values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy. A sustainability report is the key platform for communicating sustainability performance and impacts – whether positive or negative.

Sustainability Reporting Framework in India

In India, considering the importance of sustainability in businesses, MCA had launched Corporate Social Responsibility Voluntary Guidelines in 2009.

To take this further, in 2011 MCA issued ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ which encouraged reporting on environment, social and governance issues.

SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 vide Regulation 34 has mandated the requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental, social and governance perspective in the prescribed format.

(iii) Following are the challenges in main streaming sustainability reporting:

1. Government Encouragement: In many jurisdictions, there are no guidelines on sustainability reporting to encourage the corporate sector. While on the other hand, there are voluntary as well as mandatory guidelines from regulators for reporting on sustainability aspects like in India we have SEBI framework of Business Responsibility Report.
2. Awareness: Lack of awareness about the emerging concept of sustainability reporting is also a major challenge which the government and corporate governance bodies need to address by arranging the sustainability awareness programme for the Professionals, Board of Directors and Management in the corporate sector.
3. Expertise Knowledge: Sustainability Reporting is relatively a new concept in many jurisdictions and organization found it very difficult to prepare a sustainability report in the absence of expert guidance on the subject. The professional bodies in various jurisdictions should impart the expert knowledge of sustainability reporting to their members to develop a good cadre of experts in this emerging area of sustainability reporting.
4. Investor Behaviour: It is a recognized principle that investors should consider the Environmental, Social and Governance (ESG) issues while making investment decisions. There are specific regulators guidelines for the institutional investor to be vigilant on voting aspects and be concerned about the governance practices of the companies in which they invest.

Sustainability reporting is a process for publicly disclosing an organization’s economic, environmental and social performance. Global Reporting Initiative (GRI) has developed a generally accepted framework to simplify report preparation and assessment, helping both reporters and report users gain greater value from sustainability reporting.

Benefits of sustainability reporting

• Emphasizing the link between financial and non-financial performance.
• Influencing long term management strategy and policy and business plans.
• Streamlining processes, reducing costs and improving efficiency.
• Benchmarking and assessing sustainability performance with respect to laws, norms, codes, performance standards and voluntary initiatives.
• Avoiding being implicated in publicized environmental, social and governance failures.

Key drivers of sustainability reporting

• Regulations: Governments, at most levels have stepped up the pressure on corporations to measure the impact of their operations on the environment. Legislation is becoming more innovative and is covering an ever wider range of activities. The most notable shift has been from voluntary to mandatory sustainability, monitoring and reporting.
• Customers: Public opinion and consumer preferences are a more abstract but powerful factor that exerts considerable influence on companies, particularly those that are consumer oriented. Customers significantly influence a company’s reputation through their purchasing choices and brand.
• Loyalty: This factor has led the firms to provide much more information about the products they produce, the suppliers who produce them, and the product’s environmental impact starting from creation to disposal.
• NGO’s and the media: Public reaction comes not just from customers but from advocates and the media, who shape public opinion. Advocacy organisations, if ignored or slighted, can damage brand value.
• Employees: Those who work for a company bring particular pressure to bear on how their employers behave; they, too, are concerned citizens beyond their corporate roles.

The GRI Standards represent global best practice for reporting publicly on a range of economic, environmental and social impacts. Sustainability reporting based on the Standards provides information about an organization’s positive or negative contributions to sustainable development.

The modular, interrelated GRI Standards are designed primarily to be used as a set, to prepare a sustainability report focused on material topics.

Preparing a report in accordance with the GRI Standards provides an inclusive picture of an organization’s material topics, their related impacts, and how they are managed. An organization can also use all or part of selected GRI Standards to report specific information.

GRI Sustainability Reporting Standards (GRI Standards) help businesses, governments and other organizations understand and communicate the impact of business on critical sustainability issues.

The Global Reporting Initiative (GRI) had launched the fourth generation of its sustainability reporting guidelines: the GRI G4 Sustainability Guidelines (the Guidelines) in 2013. The aim of G4, is to help reporters prepare sustainability reports that contain valuable information about the organization’s most critical sustainability-related issues, and make such sustainability reporting standard practice.

Applicability

G4 is applicable to all organizations, large and small, across the world. The Guidelines are now presented in two parts to facilitate the identification of reporting requirements and related guidance. It consist of following two parts—

Part 1 – Reporting Principles and Standard Disclosures: It contains the reporting principles and standard disclosures and also sets out the criteria to be applied by an organization to prepare its sustainability report in accordance with the Guidelines.

Part 2 – Implementation Manual: It contains reporting and interpretative guidance that an organization should consult when preparing its sustainability report.

Standard Disclosures

Following are two different types of Standard Disclosures