Nonfinancial Information Reporting Essay ⋆ Business Essay Examples ⋆ EssayEmpire

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Financial performance as a prime descriptor of the company’s success has been replaced by market performance.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:

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

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