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Yen-pei Chen  | 

Materiality for financial reporting purposes is well understood. But in contrast, materiality in integrated reporting is not so clearly understood. In addition, there are those who cite concerns that corporate reporting is already too lengthy and complex and key messages are not being communicated effectively. Some, including the UK Financial Reporting Council, have called for more conciseness in reporting.

The International Integrated Reporting Framework defines an integrated report as a “concise communication about how an organization’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.” Materiality and conciseness feature as Guiding Principles in the Framework.

The Framework says: “a matter is material if it could substantively affect the organization’s ability to create value over the short, medium, or long term.” This definition provides guidance not only about deciding what items should be disclosed, but also, importantly, about how the materiality determination process itself should be disclosed.

A new study, Factors Affecting Preparers’ and Auditors’ Judgements about Materiality and Conciseness in Integrated Reporting, explores the issues of materiality and conciseness in integrated reporting from the perspectives of corporate report preparers and auditors. The report, commissioned by the Association of Chartered Certified Accountants, International Association for Accounting Education Research, and International Integrated Reporting Council and led by Marvin Wee and Ann Tarca of the University of Western Australia, provides timely evidence about emerging practices that will be helpful for the further development of integrated reporting.

Unlike previously existing research, which concentrated on practices in specific countries, this ambitious report draws on desktop research covering corporate reports from 28 countries around the world and interviews with corporate report preparers from 10 countries.

The research project, conducted over 12 months in 2014 and 2015, was based on three complementary activities:

  • Interviews
    • Learn about the experience of preparers of corporate reports with integrated reporting
    • Investigate how they make decisions on what information to include and how to achieve conciseness in their disclosure
    • Conducted with corporate report preparers from Australia, Canada, Denmark, Germany, Netherlands, Singapore, South Africa, Spain, Sri Lanka, and the UK
  • Corporate report reviews
    • Examine the materiality determination process from disclosures in 2012-13 integrated reports and other reports that were based on the principles of integrated reporting
    • Reports issued by 252 companies located in 28 countries were reviewed
  • Behavioural experiment
    • Investigate how the concepts of magnitude and likelihood affect judgements about the materiality of items to be disclosed by companies in narrative reports
    • Study includes corporate report preparers and auditors


In the interviews, the researchers asked: How do preparers make decisions on what information to include and how to achieve conciseness in their disclosure? This is what was learned:

  • Companies have specific processes for determining materiality. This mainly involves engaging with stakeholders and is influenced by statutory requirements (e.g., company law and accounting standards) and voluntary frameworks, such as the Global Reporting Initiative Guidelines.
  • A wide range of people, both internal and external, are involved in preparing corporate reports at any given organization.
    • Internally, these may include board of directors, board committees (such as the audit committee), senior executives, and staff from finance, treasury, investor relations, sustainability, and operations.
    • External parties that may influence corporate reports include auditors, legal advisers, regulatory agencies, and government bodies, as well as external stakeholders including shareholders, investors, customers, and employees.
  • Companies adopt a wide range of approaches to make their corporate reports as concise as possible. Key approaches include:
    • Focusing on material items—including adopting general reporting principles, such as transparency, consistency, completeness, and accuracy;
    • Being strict about content—both in terms of length and topics; and
    • Using presentation techniques—layout, interrelationship of sections, and cross-referencing within the report and to additional materials online.

When reviewing corporate reports, the researchers asked: do companies disclose their materiality determination process?

Out of the 252 companies reviewed, 195 stated on the cover of their report that it was an integrated report or indicated within the report that they followed at least some of the principles of integrated reporting. Of these:

  • 123 companies included a description of the steps they took to determine materiality of items in their integrated report;
  • 13 companies stated in another report (either an annual report or a sustainability report) that this process was undertaken; and
  • 59 companies did not provide a discussion.

Of the companies that describe their materiality determination process, most explained how they identified relevant matters as material (step 1 of the materiality determination process as set out in the Framework) and provided information about the items they identified as material (step 4). Few companies described the evaluation process used and the prioritizing of material items (steps 2 and 3).

In the behavioral experiment, the researchers looked at how 1) magnitude and likelihood and 2) type of information affect report preparers’ and auditors’ judgements about the materiality of an item.

  • An experiment was conducted whereby a case scenario comprising a draft of the chair’s letter to shareholders for a fictitious mining company listed on the London Stock Exchange was presented. The text referred to financial, social, and environmental matters that could affect the company’s ability to create value for providers of financial capital.
  • The participants’ task was to review some additional items of information and indicate whether they should be included in the letter, on the basis of the materiality of each item.
  • Participants’ scores for materiality were higher when both the magnitude and likelihood of the experimental items were greater and when the item was a financial item.
  • Magnitude was more influential than likelihood in materiality judgements when the two concepts interacted.

Conclusions: Challenges for Integrated Reporting

A key challenge for the proponents of integrated reporting is how to define integrated reporting’s interaction with regulatory requirements. The direction of travel will differ from jurisdiction to jurisdiction. Regulators, preparers, and users will need to engage in dialogue to resolve the following questions:

  • How do integrated reports fit within the requirements for other reports and the concepts used in those reports?            
  • How can useful information in integrated reports be promoted within existing legal reporting frameworks?

Dealing with business complexity and user expectations is another barrier to conciseness, which regulators, preparers, and users will need to overcome together. Although the Framework clearly identifies providers of financial capital as the primary audience of integrated reports, this research shows that preparers are concerned about how they can provide a concise report that is not too broad to be useful and at the same time meet the needs of a range of stakeholders with one report.

Further, in order for integrated reporting to become widespread practice, winning the cost vs. benefit argument is crucial. Integrated reporting is a potentially expensive activity because of the resources involved and the degree of cultural change required. To encourage widespread adoption, clear benefits need to be demonstrated, for example:

  • integrated thinking leading to management and operational synergies;
  • strategic opportunities from investing in new systems for data collection and analysis; and
  • cost savings from producing one single report rather than multiple reports.

Finally, there is a clear need to continue to educate preparers about integrated reporting. The new report suggests that part of the solution could come from clarifying the roles of auditors and assurance providers, and engaging with the auditing profession. An assurance framework for integrated reporting is yet to emerge, but auditors, who are experienced in providing assurance on management commentary and sustainability reports, have a role to play in raising awareness of integrated reporting concepts and shaping best practice in the design of internal controls around internal data collection systems.

Yen-pei Chen

Corporate Reporting and Tax Manager. Professional Insights, ACCA

Yen-pei Chen is a Corporate Reporting and Tax Manager in ACCA’s Professional Insights team. An ICAS-qualified chartered accountant, Yen-pei has previously worked as a corporate reporting Subject Matter Expert at BPP Learning Media, and as a Corporate Tax Advisor at EY.