Discuss about the Analysis on Role of IFRS in Sustainability Reporting.
The International Financial Reporting Standard (IFRS) has been theorized, developed by the IASB in order to enhance comparability of relevant financial performance by different sets of current and prospective stakeholders of an listed corporate entity. These standards aims to be applied throughout the developed and emerging economies and provide opportunities for comparison and contrasting among different companies based upon set of standards that are maintained at an equal provision throughout the globe. The standards have gained recognition from over 100 countries with support from different sets of international agencies assisting and supporting the standard’s initiative. The first part of the study focuses upon the utilization and relevance of IFRS in terms of maintenance and enrichment of Sustainability reporting. Whereas, on the other hand the latter part of the study focuses towards evaluating the implementation of IFRS in the context of United Kingdom.
Shortcomings of Boards and Treatment of Assets:
Ioannou and Serafeim (2014) mentions that presence of a consistent set of parameters in order to facilitate the comparability through IFRS has enhance business decagons making in different parts of the emerging and developed market. Moreover, Fonseca, McAllister and Fitzpatrick (2014) states that the different sets of investment and divestment strategies are assisted through the availability of IFRS standards as two companies operating in a diverse set of market conditions, if required to be compared together, has to evaluate using a single set of benchmark. The consistency in terms treatment of assets and non asset resources depends largely upon the prevalent sets of standards laid out by different sets of Accounting Boards. However, junior, Best and Cotter (2014) discusses that the short comings of indigenous boards to take into account different sets of relevant changes in the industrial and corporate practices may in turn resulted towards non disclosure or inadequate treatment of certain ac. The difference in terms of treatability of depreciation in the books has been mired with speculations. Lozano (2013) arguing that the writing back of amortized assists onto company’s books tends to showcase an incorrect balance in goodwill in cases where the business is undergoing an merger or acquisition.
The adherence to IFRS by a public company facilitates the opportunity by its shareholders and other stakeholders to initiate comparability and contrasting of the current financial performance with that of the different other companies that tend to belong in other economies but are engaged in similar industry. For instance, a financial statement made by Nationwide Building Society Ltd in accordance with IFRS can assists its investors in comparing its current and previous financial performance of the company with other companies in Europe and North America engaged in providing similar products. Comparison of financial statement among publicly listed companies from different sets of geographical locations tends to be affected by the different sets of Accounting Standards that such companies are required to adhere to while treating its financial figures. For instance, the prevalence of straight line depreciation can probably be a norm amongst companies belonging to a particular economy. Whereas, the other company, with which comparison are to be drawn, has followed a method of written down value method of accounting.
Thereby, the valuation of deprecation provision is misleading in nature when resulting from comparison of data. Milne and Gray (2013) mentions that adequate sets of adherence to IFRS standards minimizes the degree of misleading information in terms of representation of values in sustainability through sets of accounting treatments that are consistent throughout the globe. Moreover, any form of misstatements can be fostered through wrongful utilization of loopholes in the accounting standards. IFRS encompasses a higher rate of rectification of any form of ambiguous statutes and accounting standards as it is subjected to scrutiny by over 100 countries who have mandated the implementation of such standards (Ifrs.org. 2016). The dynamism in corporate atmosphere tends to be reflected in the IFRS standards as the IASB tends to take into account the repercussions of changes in international relations, taxation policies prevalent in developed and emerging markets (Sustainability.thomsonreuters.com. 2016).
Frias?Aceituno, Rodríguez?Ariza and Garcia?Sánchez, (2014) mentioned that the notion of quality in terms of environmental disclosures results towards optimization of various decisional models thereby improving the degree of productive outcomes derived from such models. Thereby, the different sets of relevant disclosures initiated from the IFRS guidelines conveys accuracy and dissemination of data that can be utilized as independent variables in decision models. Pérez?López, Moreno?Romero and Barkemeyer (2015) stated that clarity in terms of the correlation among the different financial variable are enhanced through the IFRS standards as it fosters transparency and tends to diminish quantum of ambiguity in terms of reporting different sets of emissions undertaken by the firms. However, Higgins and Larrinaga (2014) argues that the quantum of transparency and quality in terms of reporting of emission statements cannot be determined solely by degree of convergence despite being mandated.
The realization of the instantaneous loss is considered as one of the main features of the IFRS and the objective of this is to provide advantage to the lenders, investors and other related shareholders of the firm (Brochet, Jagolinzer and Riedl 2013). Moreover, the realization of loss and the transparency of IFRS highlight the efficiency between the management and the firm. Therefore, Landsman, Maydew and Thornock (2012) stated that it might assist the organizations to enhance the methodologies of corporate governance. Moreover, the recognition of the loss identifies the specific time when the firm faces the economic loss and this might be delivered to the shareholders of the firm (Bebbington, Unerman and O’Dwyer 2014). Moreover, Ahmed, Neel and Wang (2013) argued that the organizations are capable to review the account book and the values of liabilities and assets, earnings and equity.
Opined to Christensen, Hail and Leuz (2013), the assurance of the transparency in the fiscal reporting is also considered as one of the essential advantages for transferring the data to the IFRS. However, it has been made since from the days when the EU was consistent on the various features of the macroeconomic environment (Ahmed, Neel and Wang 2013). Moreover, the standards of IFRS also help the firms to get ensured about the reliability of the fiscal reporting in order to enrich the bond between the firms, the management and the shareholders among the associate countries (Bebbington, Unerman and O’Dwyer 2014).
According to Horton, Serafeim and Serafeim (2013), the organizations are capable to standardize the procedure of financial reporting by the help of the implementation of the IFRS standard. It has been found that this finally helps in comparing the financial statements of the firm in the present fiscal market (Hail and Leuz 2013). Moreover, as rightly stated by Christensen et al. (2015) that the barriers to trade can be removed easily and thus, it assists the firms regarding winning the assurance and trust of the equity shareholders.
Sustainability reporting by UK public listed companies has been made mandatory by the Financial Reporting Council (FRC) under a circular made in 2006. The emphasis upon sustainability reporting tends to result from the dynamism in terms of operations of corporations. The FRC states that the degree of disclosure pertaining to emissions and environmental underpinnings in terms of financial reporting and dissemination of material facts followed by the enhance of overall reporting proceedings can be attributed to the adoption of IFRS. In terms of materiality attributes contained in the financial statements, IFRS has contributed significantly in improving the relevance of reports to the different sets of stakeholders. In terms of different sets of accounting treatments pertaining to environmental repercussions, adherence to IFRS has resulted in improvised sets of reporting coupled with relevant environmental legislations including Environmental Protection Act, 1990 and Environment Act, 1995 (Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros 2015).
United Kingdom has adopted the IFRS and this acceptance has ensured the preparation of sustainability report by putting more focus on economic component rather than on the legal form. It has been found that this has assisted the firms in the country and also their allied shareholders for depicting the true value of the transactions of business. Furthermore, the losses and the gains that are generally portrayed in the income statement of the organizations have put the same in a consistent and truthful situation to the investors. Thus, prior to making any decision regarding the type of investments, the investors put importance on the accounting revelations of the corporation along with the price movements or the fluctuations in the stock prices. Therefore, it can be said that the adoption of IFRS in UK has definitely assisted the indigenous organizations for reducing the equity capital costs by illustrating the total numbers of outlays from the investors.
Moreover, it has been noted that after the adoption of the IFRS in UK, the balance sheet statement has been modified. The reason behind this is the variation in the level of consistency and its layout (Brochet, Jagolinzer and Riedl 2013). Therefore, this implies a reasonable representation of the liability values and asset values of the UK firms in order to assist both the analysts and the investors for evaluating the monetary performance of the organizations. Finally, it can be said that the management departments of the larger organizations of UK are able to manipulate the accounts book in order to reduce their rate of ciontribution towards environmental degradation underneath the standard of IFRS (Bebbington, Unerman and O’Dwyer 2014). Therefore, the standards of accounting are highly familiarized by the shareholders, and thus, it ensures the methodologies of the sustainability reporting.
The IFRS guidelines are permissible by the companies listed in the London Stock Exchange or whose incorporations require them to adhere to IFRS Standards for material environmental disclosures. The advent of large degrees of environmental degradation on the part of manufacturing industries requires evaluation and prevention through different sets of limits on degrees of carbon emissions undergone owing to production and processing activities. The IFRS in UK targets companies that are both listed on the London Stock Exchange and those whose stocks tends to be traded in other secondary markets coupled with the unlisted companies that comes under the purview of the Companies Act,2006 (frc.org.uk. 2016). Moreover, the companies are mandated to provide key performance indicators that are formed in conjunction with the relevant environmental impacts and emissions that have occurred owing to the different sets of revenue generating activities. The UK firms are required to showcase sustainability indicators encompassing disclosures regarding the rate of employee turnover occurring in that entity, the quantum of emissions regarding greenhouse gases and the injury rate pertaining to the common workers of the organization. Moreover, the quantum of managing waste emissions derived as a byproduct of organization operations are pertinent to be included in the entity’s report owing the set of guidelines laid out by IFRS in terms of social and environmental governance.
The preference on the part of investors to invest in companies that displays higher degree of contribution to different sets of environmentally proactive initiatives. However, it can be observed that the degree of compulsion arising from the part of IASB to make environmentally sustainability reporting mandatory has been far from satisfactory (frc.org.uk. 2016). The different sets of data as regards to the non-disclosure or in most cases non preparation of sustainability reporting resulted from absence stringent rules in the part of the FRC, UK. A survey conducted by the Corporate Knights Capital displayed large quantum of non disclosures on the part of large public corporations in terms of degrees of sustainability reports regarding the rate of emission of green house gases (mayerbrown.com. 2016).
However, the development of Greenhouse Gas Emissions (GHG) reports tends to showcase the quantum of large degree of data pertaining to the carbon footprints created by the companies production operations. Further, data pertaining to the different sets of companies showcases the fact that over three fourths or largest companies in terms of revenue generated has failed to disclosed any forms of reports or material data regarding the quantum of emissions of greenhouse gases and other pollutants (mayerbrown.com. 2016). Moreover, large UK corporations have also displayed reluctance in terms of disclosing the level of water consumption. The data as regards to the rate of employees turnover too has failed to be disclosed by such UK corporations. In terms of exchanges whose participants have disclosed their sustainability reports, the London Stock Exchange stands at a ranking of 9th as compared to Euro Next occupying the second spot. This showcases that UK has somewhat lagged behind in terms of adherence to sustainability reporting.
The Accounting Standard Board (ASB), a section of FRC concludes that materiality in terms of disclosures in the annual reports has resulted in a large degree “Clutter” thereby hindering the decision making by the relevant stakeholders and prospective investors of the business (Green et al 2012). For instance, inclusion of trivial degree of information regarding usage of recyclable water containers in boards meeting results in too much clutter in the sustainability reporting. Moreover, ASB infers that the reason behind such immaterial disclosure arises from the fact that the companies have failed towards discussing several sets of parameters as regards to employee and environment followed by social repercussions of the activities that the company is engaged in.
The “evolving plethora of sustainability reporting” mentions that corporate entities, owing to the compulsion of preparing and subsequently disclosing sustainability reports, have sought to disclose information without taking into account the kind of products that they dealt with or the industry that they belong to. For instance the disclosure of sustainability reporting by Auditing Firms are somewhat less relevant as compared to that of firms engaged in manufacturing or assembling of products. Article 38 of the IFRS states that the degrees of allowance pertaining to green house gas emissions in R&D are capitalized through inclusions in shareholders’ equity (Ifrs.org. 2016). The inclusion of IFRS by European Union has resulted towards mandatory adoption of IFRS by EU members, thereby being formerly a member of European Union (Ifrs.org. 2016). Thereby, the inclusiveness of IFRS towards the innovations in the adaptation of energy efficient and environmentally friendly manufacturing and servicing processes has in turn facilitated financial as well as governance success of the firms.
The amount of sustainable performance as regards to the environment is inferred to have a positive correlation with the financial performance. In addition, sustainable operations with moderate amount of returns are more desirable to a firm’s stakeholders that high returns with large quantum of environmentally deplorable operations. The trade off amongst the revenue generation and environmentally sustainable sets of business proceedings can in turn be mitigated through large sets of adherence to IFRS standards. Thus aiming towards revenue generation using sustainable energy sources and environment and societal friendly alternatives tends to create a situation whereby both the company and its stakeholders and the community as a whole gets benefitted.
IFRS 3 with respect to “Business Combinations” has laid down different sets of guidelines as regards to the valuation principles utilizing fair value method as regards to the acquisitions. Thereby, the acquisitions pertaining to environmental liabilities tends to showcase the fact that the UK companies are required to adhere to fair value measure of environmental liabilities on the date of acquisition (Fonseca, McAllister and Fitzpatrick 2014). The “exploration for and evaluation of mineral resources” principles regarding which has been laid down under IFRS 6 caters to the sustainability disclosures of companies engaged in mining activities. The aforementioned standards tends to take into account the recognition of exploration expenses and discovered mineral resources as an asset thereby providing accountability to the costs and the assets in relation to mining and energy industry of UK (Milne and Gray 2013).
Conclusion
Therefore, it can be concluded that IFRS plays a vital role regarding improvement of the fiscal disclosures quality and also assists to ensure the lucidity in the “sustainability reporting” of the worldwide firms. Moreover, the investors are enabling in determining the performance of the market as well as the organizations by scrutinizing the performance of the share market and the fiscal disclosures. Furthermore, it has been assessed that the contrast between the fiscal disclosures has become comparatively easier by reducing the unethical practices of accounting in order to ensure the process of sustainability reporting. Nonetheless, some developments are required for the IFRS and the reason behind this is that the structure of fiscal disclosures is more complex in character for conveying an efficient data and information to the shareholders of the firm. The introduction of sustainability reporting has resulted towards compulsion on the part of the company towards taking into account the emissions, employee turnovers that has been undertaken in due pursuit of revenue generation capability. The evolving of agendas in relation to the different sets of environmental friendly practices has resulted in the different stakeholders undertaking greater interests in the procedures through which companies have undertaken production and manufacturing activities.
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