Integrated reporting and performance management

A previous article introduced the idea of integrated reporting (IR) and its relevance to the APM syllabus. This article recaps the key features of IR, and then discusses the potential challenges a management accountant could face when implementing it.

Integrated reporting and performance management

A previous technical article – 'Integrated reporting' (see 'Related links') – discussed the relevance of Integrated Reporting to organisations’ performance management, and therefore how integrated reporting (IR) could be relevant to the APM syllabus. 

However, as well as recognising the overall significance of IR for organisations, in the APM exam you could also be expected to assess the practical implications of this for a management accountant – for example, how organisations can assess their performance in relation to the different capitals identified in IR.

This article begins by recapping the key features of IR, before then considering the role of the management accountant in collecting, collating, reporting the required data, and potential issues the management accountant may face in doing this.

Integrated reporting

An important development in performance reporting over the last few decades has been the recognition of the importance of measuring and monitoring non-financial aspects of performance, not just financial ones. This applies to corporate reporting (eg narrative commentary in companies’ annual reports), and to management accounting (eg multi-dimensional performance measurement systems such as Kaplan & Norton’s balanced scorecard, or Lynch & Cross’ performance pyramid.)

IR builds on these developments by looking to provide a more holistic way to report the value created by an organisation, by considering the use of non-financial resources as well as financial resources, and also by giving a longer-term view of the organisation.

IR provides an insight into an organisation’s business model, and how it draws on a range of different capitals as inputs and transforms them – through the organisation’s operating activities – into outputs (products, services, waste/pollution). The business model also leads to wider outcomes (eg staff development; investment in environmental regeneration, or in local infrastructure).

Six capitals

The International Integrated Reporting Council (IIRC) identifies six categories of capital which help an organisation create value: financial, manufactured, intellectual, human, social and relationship, and natural.

Capital Definition
Financial The pool of funds that is:

  • Available to an organisation for use in the production of goods or the provision of services
  • Obtained through financing, such as debt, equity, or grants, or generated through operations or investments
Manufactured Manufactured physical objects that are available to an organisation for use in the production of goods or the provision of services, including:

  • Buildings
  • Machinery and equipment
  • Infrastructure (eg roads, ports)

Manufactured capital is often created by one or more other organisations (not the reporting organisation) but can also include assets manufactured by the reporting organisation where these are retained for its own use

Intellectual Organisational, knowledge-based intangibles, including:

  • Intellectual property, such as patents, copyrights, and licences
  • ‘Organisational capital’ such as tacit knowledge, systems, procedures, and protocols
  • Intangibles associated with the brand and reputation that an organisation has developed
Human People’s competencies, capabilities and experience, and their motivations to innovate, including their:

  • Alignment with, and support for, an organisation’s governance framework and risk management approach, and ethical values, such as recognition of human rights
  • Ability to understand, develop and implement an organisation’s strategy
  • Loyalties and motivations for improving processes, goods and services, including their ability to lead, manage and collaborate
Social and relationship The institutions and relationships established within and between each community, group of stakeholders and other networks (and an ability to share information) to enhance individual and collective well-being.

Social and relationship capital includes:

  • Shared norms, and common values and behaviours
  • Key relationships, and the trust and willingness to engage, that an organisation has developed, and strives to build and protect, with customers, suppliers, business partners, and other external stakeholders
  • An organisation’s social licence to operate (eg approval from regulators, appropriate risk management and governance practices)
Natural All renewable and non-renewable environmental stocks that provide goods and services that support the current and future prosperity of an organisation. Natural capital includes:

  • Air, water, land, forests, and minerals
  • Biodiversity and ecosystem health

Source: International Integrated Reporting Council (2013)

Although intellectual, human, and social and relationship capitals are classified separately, the IIRC acknowledges that these are related and interdependent. However, it has argued there are sufficient differences between the that they should be viewed as three separate capitals, rather than combining them into a single group, and the IIRC suggests that one helpful way to differentiate between the three could be to view them in terms of the ‘carrier’ of each:

  • For human capital, the carrier is the individual person
  • For social and relationship capital, the carrier is networks within or between organisations
  • For intellectual capital, the carrier is the organisation.

Interrelationships between the six capitals

Together, the six capitals are the basis of an organisation’s value creation. However, they are not independent of each other. To take a simple example, if an organisation buys a new piece of equipment for its production process, the immediate effect of this will be to decrease the organisation’s financial capital (by the cost of the equipment) but to increase its stock of manufactured capital. Over time, the organisation should then expect the increased efficiency or productiveness of the new machine (ie increased outputs from its manufactured capital) to offset the initial decrease in financial capital, thereby adding value to the organisation overall.

Nonetheless, the extent to which organisations are building up or running down the various capitals can have an important effect on the availability, quality, and affordability of those capitals. This is of particular concern with respect to capitals that are in limited supply, such as skilled staff, and those that are non-renewable, such as fossil fuels. A reduction in those capitals could affect the long-term viability of an organisation’s business model and, therefore, its ability to create value over time.

As such, the IIRC highlights that IR also needs to encourage integrated thinking within an organisation; that is, management’s understanding of the interconnections between functions, operations, resources and relationships which have an effect on the organisation’s ability to create value over time.

Measuring and reporting on the capitals

It is all very well being aware of the different capitals, and their potential impact on an organisation’s ability to create value, but for IR to be useful to management for decision-making and control, they will need to be able to measure performance in key areas.

Quantitative indicators, such as key performance indicators (KPIs), could be very important in explaining an organisation’s use of, or impact on, various capitals. However, it is important to recognise that it would not be practical to expect organisations to quantify every aspect of all the capitals. Therefore, the objective of IR is not to measure all the capitals, or movements in them. Importantly, as the IIRC (2013; pg 4) notes: 'Many uses and effects on the capitals are best (and in some cases can only be) reported on in the form of narrative rather than through metrics.'

This could be important for a management accountant when deciding how to report on performance. It may be more appropriate to provide narrative commentary on performance in relation to certain capitals, whilst then using quantitative indicators to report performance in relation to other capitals.

Selecting performance measures

One of the key issues involved in using quantitative indicators will be deciding which indicators to include in a report. The International Integrated Reporting Council (IIRC)’s aim is that IR reporting should pull together relevant information to explain the key drivers of an organisation’s value. Information should only be included where it is material to stakeholders’ assessment of the business.

However, while the range of reporting (ie over the six capitals) may be wider than in traditional reporting, the underlying approach being advocated here should still be familiar to management accountants from traditional approaches to strategic planning and control: ie identifying the key factors of an organisation’s success (critical success factors (CSFs)) and then selecting the relatively small number of key performance indicators (KPIs) which enable an organisation’s performance against its CSFs to be measured.


One of IIRC’s aims for Integrated Reporting is that it should be clear and concise. As such, it argues that organisations should not report on every aspect of performance in relation to the six capitals but should focus on activities and issues which are material to it, and then identify key performance indicators linked to these key activities or issues.

Accordingly, part of the management accountant's role could be working with the board of directors or with operational managers to identify the issues which are critical for an organisation's success (critical business issues) and then identifying appropriate KPIs which can be used to monitor performance in relation to those issues.

This point about focusing on key indicators is also important in your APM exam. If you are asked to identify, or recommend, metrics to measure an organisation’s performance in relation to different capitals, you should look to identify the key value-creating activities1 in relation to the relevant capitals, and then recommend indicators which are most appropriate for measuring performance in relation to those activities (ie the performance indicators which are truly key to the organisation’s success).  

Worked example

Zaccair is an airline company, based in Zeeland, which operates passenger flights both domestically and internationally.

The performance reports it produces for the Board currently focus primarily on financial performance, but the CFO has argued that these reports should provide more information about Zaccair’s value, and he has argued Zaccair should adopt an integrated reporting approach.

He has highlighted that Zaccair’s performance reports do not currently provide any information about fuel efficiency, or safety, both of which he argues should be key areas the company reports on.

He has asked you to advise which capital each of these areas of performance is most appropriate to relate to in an integrated report, and to recommend a key performance measure for each area.

Fuel efficiency – should be classified within ‘natural capital’ because it relates to how efficiently Zaccair is using the non-renewable resources (oil) which aviation fuel is made from. Fuel efficiency also has an important impact on the outputs of Zaccair’s flights; reducing the amount of fuel used per flight should reduce CO2 emissions, and therefore reduce the impact of Zaccair’s flights on the atmosphere.

An appropriate measure to use will be kilometres flown per gallon of fuel. The measure needs to be ‘per kilometre’ rather than simply measuring the amount of fuel used ‘per flight,’ because Zaccair operates flights of different lengths (domestic; international). As such, fuel usage ‘per flight’ would be determined more by the length of the flight than the efficiency of Zaccair’s planes.

Increasing fuel efficiency should also benefit Zaccair’s financial capital – because it will help to reduce fuel costs.

Safety – should be classified within ‘social and relationship’ capital. Zaccair’s safety record will not only affect customer trust (and therefore their willingness to book with it) but it could also affect Zaccair’s ability to retain an operating licence from the industry regulator. Zaccair needs to ensure it has appropriate risk management and quality procedures in place to ensure the safety of passengers on its flights.

An appropriate measure to use could be the number of accidents and/or safety incidents in the last 12 months. Fatal plane crashes are relatively rare, so reporting only on crashes may have limited value (if the number reported is regularly zero.) As such, a more useful metric might be to look at safety incidents (eg near misses; losses of control in flights) which might have resulted in accidents but didn’t.

Short-term v longer-term performance

IR aims to promote decision-making and actions which support value creation not only in the short-term, but also over the medium- and longer-term, in order to ensure promotion of sustainable value creation. This also has significant implications for performance management, because it means the focus is no longer simply on short-term goals (or short-term results), but performance measures and performance reports also need to demonstrate how an organisation creates value in the longer-term, including through its commitment to social and environmental issues.

Business decisions which are solely dedicated to the pursuit of increasing profit (financial capital) at the expense of building good relations with key stakeholders such as customers or suppliers (social capital) are likely to hinder value creation in the longer term. Accordingly, this means performance metrics need to address the different capitals, and to provide some insight into longer-term value creation, not just short-term performance (eg annual profits).

Non-financial information – By definition, IR seeks to provide an integrated and holistic view of an organisation’s performance. As such, by focusing on value generation in a broader sense (rather than focusing on narrow, short-term financial objectives around revenue or profits, for example) IR will require organisations to use a more diverse range of performance metrics to measure and manage performance.

One of the main consequences of IR is likely to be the increased use of non-financial data to gain a clearer picture of an organisation and its performance, in relation to the different capitals, and to enable a wider understanding of value creation in an organisation, beyond that which can be measured through traditional financial terms.

Equally, IR should also encourage greater attention being paid to non-financial data in strategic decision-making. For example, investment appraisals may need to include non-financial costs and benefits (and sustainability information) as well as traditional financial costs and benefits.

Potential issues for management accountants in relation to integrated reporting

However, introducing IR could have significant implications and challenges for an organisation’s information systems, and for management accountants in trying to produce reports from those systems, and in relation to the different capitals. In particular: 

  • Data availability: Can the organisation's information systems supply the data needed to calculate the performance measures selected (particularly for the non-financial capitals)?

    If this data cannot currently be obtained from an organisation's information systems, how can the management accountant get the information needed for the report?

  • Consistency and comparability: Are non-financial data reliable, and comparable, in the way that financial data is? If organisations are going to use non-financial data for decision-making and control, they need assurance over the reliability of the data.

    There are standard definitions of financial performance metrics (eg operating profit, ROCE) which enable performance comparisons to be made over time, and against other organisations. However, if non-financial performance measures being used are not clearly and consistently defined, this reduces an organisation’s ability to compare its performance over time, or with other organisations.


One additional challenge relates to connectivity. As we have mentioned above, IR seeks to provide an integrated and holistic view of an organisation’s performance. However, to do this they need to show the connectivity between factors and capitals, to give a holistic picture of the interrelatedness and dependencies between factors which affect an organisation’s ability to create value over time. However, companies who have implemented IR in practice have identified that showing the connectivity of information is one of the biggest challenges they faced, because showing this connectivity required breaking down silos within the organisation and changing existing data collection processes.

International Integrated Reporting Council (2013), Capitals – Background Paper for <IR>. Available online at:

1 Although we have referred here to value-creating activities, key areas to report on could also be ones which could destroy value if they are not managed correctly: eg non-compliance with regulations, or safety requirements; failure to adapt to changing customer requirements or societal trends.

Written by a member of the APM examining team