Extended External Reporting
In the October 2020 and March 2021 editions of Accounting Alert we provided information on the Consultation Paper on Sustainability Reporting that had been published by the Trustees of the IFRS Foundation (“the Paper”). The Paper proposed the creation of a sustainability standards board to sit alongside the International Accounting Standards Board.
The Paper does not sit in a vacuum – there is currently substantial, and increasing, interest in sustainability reporting and, more broadly, in what is often referred to as “extended external reporting”. The term “extended external reporting” refers to the provision of broader and more detailed types of reporting than the historical financial information captured in general purpose financial statements.
One of the key reasons for the increasing focus on extended external reporting is that financial statements present only historical financial information and therefore do not tell the whole story of an entity, while extended external reporting allows an entity to:
- Communicate information on the entity’s purpose, business model, strategy, prospects, risks, opportunities and governance
- Provide insights into performance
- Provide information on resources not recognised in the financial statements (for example, on unrecognised intangible assets, such as internally generated brand names)
- Communicate forward-looking information about the entity's long-term sustainability
- Communicate information on the entity’s economic, environmental, social and cultural impacts.
The External Reporting Board (“the XRB”), which is the independent Crown Entity responsible for accounting and auditing and assurance standards in New Zealand, notes that many New Zealand entities are already required to provide non-financial information to the market. For example, where an entity is listed on the New Zealand Exchange (“NZX”):
- NZX Listing Rules require it to make certain non-financial disclosures, including in relation to the gender composition of its directors and officers and its corporate governance policies, practices and processes
- The NZX Corporate Governance Code recommends the disclosure of additional non-financial information (such as the entity’s exposure to environmental, economic, social sustainability and other key risks and how the entity plans to manage those risks).
In addition, for all other entities, the Financial Markets Authority (“FMA”) recommends, in the FMA Corporate Governance Handbook, the disclosure of non-financial information on matters such as policies and performance relating to environmental, social and governance issues.
However, there is evidence of investor demand for the provision of increased non-financial information. In March 2018, the XRB and the McGuinness Institute produced a report on the findings of their joint research into extended external reporting. This joint research was part of the McGuinness Institute’s ReportingNZ policy project, which examines how public reporting works as a tool for improving the relationship between businesses and the communities in which they operate.
The joint research surveyed both users and preparers of financial statements about various aspects of extended external reporting. The key findings of the research were:
- Both preparers and users of financial statements welcome mandatory filing of annual reports, as it is a simple way to improve access to the extended external reporting information disclosed in annual reports
- Preparers and users of financial statements have different views over whether the audience should remain the shareholders or be extended to stakeholders
- Both preparers and users of financial statements welcome reporting on goals, strategies and targets, but users do not think this information is currently well reported and want more information than preparers provide
- Industry statistics are increasingly seen as a key requirement, as they enable comparability between companies/industries and contribute to a deeper understanding of risks and trends over time
- Future orientation information is an emerging key requirement, as it assists better decision making for existing and potential investors, government and other stakeholders
- Preparers of financial statements are not aware of the range of extended external reporting frameworks available (and some are not interested)
- Preparers and users of financial statements have different views over whether extended external reporting should remain voluntary or move towards a more mandatory approach; users favour mandatory reporting because, in an increasingly complex world, they want to make decisions based on timely, reliable, relevant and comparable extended external reporting information
- If requirements are to be mandatory, the XRB is the favoured standard-setter, and both preparers and users of financial statements look to the XRB for extended external reporting guidance
- Independent assurance is an emerging key requirement for extended external reporting information, as it inspires trust, which enables companies to build good relationships with stakeholders, including suppliers, consumers and the wider public.
There is also acknowledgement of the benefits to entities of undertaking extended external reporting, with the XRB identifying the following potential benefits for entities:
| External benefits | Internal benefits |
| Reduced cost of capital | Improved clarity on business issues and performance |
| Increased stock liquidity | Better business decisions, including allocation of capital decisions |
| Higher market valuation | Improved business risk management |
| A longer-term investor base | Improved employee engagement |
| Better performance | |
| Improved reputation or brand loyalty |
There is a wide range of extended external reporting frameworks and guidelines already in place, including integrated reporting, ESG (environmental, social and governance) reporting, sustainability reporting and corporate responsibility reporting. The number of available frameworks and the volume of already-existing guidance can make it difficult for an entity that is interested in reporting increased non-financial information to know where to start. In coming editions of Accounting Alert we’ll provide information on some of the available frameworks and guidance, as we continue our examination of various aspects of the complex and fast moving world of extended external reporting.
For more information on the above, please contact your local BDO representative.
This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in New Zealand to discuss these matters in the context of your particular circumstances.
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