Know Your Boundaries

Stathis Gould | June 23, 2014 | 4

Decisions on reporting boundaries need to be informed and transparent if investors and other stakeholders are to be able to compare and benchmark non-financial performance. Seeking to address this need, and a lack of guidelines in the area, the Climate Disclosure Standards Board (CDSB) has a released a paper, currently open for consultation, that nails down the critical issues for groups of companies in determining boundaries for non-financial reporting. Proposals for Boundary Setting in Mainstream Reports discusses the extent to which non-financial reporting should include information about the activities of a parent company and its subsidiaries, joint ventures, associates, investees, suppliers, and upstream and downstream activities.

The paper explains how organizational boundary setting affects the usefulness and understandability of non-financial information. The CDSB has usefully navigated the complex and multifaceted issue of boundary setting, which is caused by various reporting frameworks and regulations, and because the financial world has traditionally been largely disconnected from the physical world in reporting.

The language of boundary setting is derived from multiple disciplines and is defined in various ways, including in financial reporting (IFRS 10, 11, and 12), integrated reporting (International Integrated Reporting Framework), and sustainability reporting (Global Reporting Initiative, Sustainability Accounting Standards Board (SASB), and Greenhouse Gas Protocol, among others).

The application of the concept of consolidation used in financial reporting to non-financial reporting extends the scope and content of disclosure beyond those matters where an organization has direct control or significant influence. The problem is that the various standard setters differ in their requirements, although there is a high degree of commonality between the International Integrated Reporting Framework, the SASB, and the CDSB’s Reporting Framework, which are all focused on providers of financial capital as the primary user. These frameworks recommend that financial information beyond financial consideration should be reported only where necessary for investors to understand the organization’s performance with respect to non-financial areas of performance and impact.

The CDSB makes six proposals to encourage a standardized and practical approach to organizational boundary setting in mainstream corporate reporting. Mainstream reporting includes the financial statements as well as other information outside financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions, such as management commentary or management discussion and analysis.

I encourage you to respond to CDSB, or in our comments section below, with any suggestions regarding the design and application of these proposals. The proposals are summarized below:

Proposal 1: Clarify the link between the objectives of non-financial reporting, materiality, the audience for reporting, and organizational boundary setting

This proposal is designed to help reconcile a wider stakeholder view of what is material for disclosure while also recognizing the limitations of matters over which the organization has control or influence.

Where the objective of non-financial reporting is to inform investors on how management uses and manages resources for organizational success, the boundary of the organization can be the organization as understood for financial consolidation purposes (i.e., entities the reporting organization has control and influence over). Risks arising beyond the organizational boundary, such as supplier vulnerability, would be reported as risks. Where the objective is to demonstrate to society the organization’s stewardship and accountability to the environment and society, the reporting boundary might extend beyond those entities and activities over which the company has control and influence. But the difference between these objectives needs to be understood and distinguished.

What does this mean in practical terms? Where non-financial reporting requirements are added to existing mainstream reporting requirements, the boundary used for existing mainstream reports should apply equally to non-financial reporting requirements. If any information is required about the outcomes or impacts of business activity beyond the reporting boundary used for mainstream reporting, the circumstances in which such information should be provided should be specified and the resulting information separately labeled.

Proposal 2: There should be a single, standardized approach to group organizational boundary setting in mainstream reporting (that should have the characteristics outlined in proposals 3-6)

Non-financial information can be prepared at activity, facility, or entity level, often because of the requirements specified by regulators. Investors need consolidated non-financial information disclosures for corporate groups, much as they need, and rely on, consolidated financial statements. Using IFRSs, consolidation does not involve aggregating local statutory accounts prepared for each of the entities within the consolidation. Rather, consolidation requires the preparation of a group account. Where an organization is subject to different reporting demands (including boundary demands) from local authorities, these should be disregarded for consolidation as these reports are local statutory reports that cannot be the base for a group report.

The CDSB proposes that a similar approach to financial consolidation is taken for group non-financial information reporting and that such group disclosures should not simply aggregate the facility or entity level reporting prepared according to national requirements or voluntary initiatives as they can be defined differently in each country and for each business, making comparisons difficult. Furthermore, in the case of large conglomerates with intercompany trading, an approach that simply aggregates national, entity level reporting could result in double counting, particularly where two or more entities within the group have prepared entity level results with different boundaries.

Proposal 3: The consolidated group boundary should align with consolidated profit and loss/comprehensive income financial reporting

The CDSB proposes that non-financial information disclosure should be aligned with the preparation of a profit and loss (P&L), or comprehensive income statement, as non-financial reporting reflects resources used and affected during the year, much as income statements reflect revenue earned and expenses incurred. It follows that the classification of joint arrangements as joint operations or ventures should follow IFRS 11 for non-financial reporting purposes.

Proposal 4: Non-financial information should be reported by the user of resources (the user is the party that has the right to use and/or direct the use or operation of the resource and to derive or control output or utility from the use of that resource)

The CDSB proposes that the user of resources should report outcomes from the use of resources for conducting business activities because the definition of user aligns with the definition of control in IFRS 10. Additionally, the user of an asset is, in many cases, more likely to have access to information that supports the production of disclosures on results and performance.

Proposal 5: No distinction should be made between financial and operating leases for non-financial information reporting purposes

As the user of an asset or resource should report on the results and outcomes from that use, the type of arrangement under which use is permitted becomes irrelevant to reporting. Therefore, the CDSB proposes that no distinction should be made between financial and operating leases for non-financial reporting purposes.

Proposal 6: Policies applied for the preparation of consolidated climate change-related disclosures should be stated

As with financial statement preparation, the CDSB proposes a similar approach for the preparation of explanatory notes to non-financial information, including a narrative on how the group’s organizational boundary has been determined and what it includes.


Based on the assumption that investors demand consistency in financial and non-financial reporting, then action is needed. Do these proposals work in practice to help meet this objective?


Stathis Gould

Director, Advocacy, IFAC

Stathis Gould heads up the development of international services for professional accountants working in business and industry at IFAC. A key element of his work is developing thought leadership and guidance in support of finance professionals and their roles facilitating sustainable organizational performance. Before moving to IFAC, he was at the Chartered Institute of Management Accountants (CIMA) responsible for planning and overseeing a program of policy and research. Prior to serving the accountancy profession, Mr. Gould worked in various roles in the private and public sectors in the UK. See more by Stathis Gould


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Nick Topazio June 26, 2014

I like your response, Stathis. It provides a bridge between the consistency argument so eloquently expressed by Bill and the need for flexibility that I maintain is an essential element of effective corporate reporting. Companies need to be free to tell their story in their own words through integrated narrative reporting but, I accept, this needs to be firmly based on consistent and comparable financial indicators.

Stathis Gould June 25, 2014

I would generally agree with your thoughts Nick. As is the case when thinking about how various definitions of materiality are applied, I think there might two aspects to this debate. Research shows that investors value consistency of reported data so they can compare and benchmark, and use the data in their financial analysis and assessment of organizational performance. However, the two main aspects of disclosure are 1. narrative (qualitative) and 2. indicator (quantitative). I suspect that the importance of consistency (which is partly related to the reporting boundaries selected for data collection) is more relevant to the latter, which would include disclosures such as on GHG emissions. The narrative part of disclosure that explains the importance of the issue and supporting data to strategy, the business model and ability to create and preserve value over time is a management-driven analysis that will clearly highlight matters (risks+opportunities) arising beyond the reporting boundary. As the 2012 CDSB paper on consistency highlighted, climate change disclosures are subject to a myriad of different measurement/reporting standards, and issues around reporting boundary/materiality definitions and choices, which lead to difficulty for users in interpreting and comparing information. This seems to be particularly the case for performance indicators. Although we might seek consistency at an indicator level, say around disclosure on emissions, the management commentary on what this means to the organization and its ability to create value should not be a boilerplate disclosure, if it is to be useful to users. The matter of defining reporting boundaries is important to all types of disclosure but might present users specific problems at the indicator level.

William Schneider June 25, 2014

If we are adding non-financial reporting requirements to mainstream reporting as discussed in proposal 1 then it is important that the boundary of what makes up the organization being reported be the same. The confusion from different organizational boundaries in the same report would be make the financial and non-financial reports more difficult for the average user to understand. There are additional important reasons to keep the reporting in line with the financial reporting concept of control. There is already tremendous pressure on organizations to "control" their vendors when such ability ultimately comes down to a either buying from the vendor or not. Adding requirements to report down the supply chain ignores the difficulties in getting such information from vendors that don't have to tell you anything and would bring in questions of how far down do you have to go (your vendor has vendors who have vendors who have vendors and so on). The use of the same concept of control used for consolidation, while not perfect to everybody is a reasonable compromise to a difficult question.

Nick Topazio June 25, 2014

External corporate reporting should represent the 'top slice' of information considered by Boards as essential for the effective management of the business. Boards are free to determine the reporting boundary that they consider relevant to their consideration of long term value creation and business resilience. I think it would it be interesting to let Boards determine the reporting boundary for external non-financial reporting? Not only could this provide relevant third-party non-financial information but also allow judgement to be made about the breadth of vision of boards in this respect, especially if actual external reporting is narrow compared to peers. Of course, transparency on the reporting boundary set is essential but I feel that, in this case, as the importance placed on comparability grows, true insight into the working of the board diminishes. These are personal thoughts. I’d be interested to see your comments – am I being naive to think that a market led response to the question of non-financial reporting boundaries could be best?


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