IndAS harmonised with IFRS will not only change the reported accounting numbers, but also bring more complexity as a result of the discretion it provides, and the corresponding disclosures it requires. An Integrated Report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term. One of its advantages is that it can bring simplicity, not only to reporting but also to the management of the organisation. Bill McDermott, CEO of SAP which has voluntarily adopted Integrated Reporting, says it allows them to tell a single unified story, beat complexity, and “run simple.” IndAS and <IR> therefore seem to be made for each other.
As it emphasises substance over form, IndAS will require lot more judgment, e.g., about fair values and existence of control over a subsidiary. Correspondingly disclosure requirements also increase. Various studies in countries that have adopted IFRS have shown a 24 percent to 60 percent increase in the size of the annual report as a result of additional disclosure requirements. While this is a good thing for sophisticated users because they will be able to get better information from such reports, it does create an information overload. Indeed on different occasions, Enron’s former CEO Jeffrey Skilling (MBA, Harvard), and Sun Microsystems’ former CEO Scott McNealy (MBA, Stanford) have publicly said accounting has become too complex for them to understand.
The problem is even more severe in emerging markets like India where there are relatively fewer sophisticated institutional investors and more unsophisticated individual investors. When the number of unsophisticated users is large, the firm has to go the extra mile to explain its numbers better. Otherwise it risks misinterpretation of its financials by investors, which will cause volatility in share prices.
<IR> provides a disciplined approach to explain the value creation process by linking (i.e., integrating) performance (financial and non-financial; short, medium, and long term) with the strategy and business model, and in turn with the external environment (opportunities and threats) and stakeholders (providers of capitals such as financial, manufactured, intellectual, human, social, and environmental). This integration or linking is a major factor in users being able to understand and make sense of the reports. It is difficult to understand disconnected facts. Integration provides the context for those facts, and thereby facilitates understanding. This is what McDermott means when he says <IR> allows SAP to run simple.
The complementary nature of <IR> with IndAS will help CFO’s evolve their current reporting structures towards the new Indian Accounting Standards.
This blog was initially published in the Confederation of Indian Industry newsletter, which can be read here.