Nonfinancial Information Reporting

The complexity of modernbusiness requires a company to disclose various information, formatted in numerous reports. Financial reporting traditionally has been regarded as the backbone of business reporting, which was more or less enough when an enterprise was primarily, if not exclusively, assessed on its crude financial performance. On the other hand, financial reports have been statutory driven and therefore compulsory, and companies have had little choice but to comply with the requirements set in the Accounting Law (Act) and/or a set of financial standards.

With the introduction and worldwide promotion of International Accounting Standards (IAS), nowadays the International Financial Reporting Standards (IFRS), the process of harmonization of accounting rules and principles has been accelerated. A set of annual financial statements prepared by a business entity, although reporting primarily and numerically the results achieved in the past financial year, includes a narrative statement by the chairperson or president, giving his or her views on the position and performance of the company in the past year. Often, this statement is an additional important source of information for financial and business analysts studying the performance of the company.

Growth of Nonfinancial Reporting

The growth in nonfinancial information reporting has had exponential growth with the rise in the importance of social reporting, corporate social responsibility (CSR), environmental reporting, and sustainable development and growth. The nature of investors may not have changed, but their perception of socially related information certainly changed in the last [Page 1223]decade of the 20th century and the first decade the of 21st century. A famine for information exists, going beyond classical financial reporting. A good report by todays standards encompasses not only detailed financial information but also information on the market; the human resources function; the potential and problems of the company; the legal, political, and economic environments in which the company operates; and the view of management on all the major issues that may influence the company's position and market performance.

Financial performance as a prime descriptor of the company's success has been replaced by market performance. Business/financial analysts, investors, executives, and business and management scholars would agree that the very concept of market performance is more complex today and that making an appropriate assessment requires extensive use of information of a nonfinancial nature, more future oriented than a mere report on the past.

Motivation

Motivation for nonfinancial reporting usually is strategy driven, ensuring that the reputation and brand of the company are taken care of. Managers perceive that nonfinancial reporting practices are increasingly important due to competitor pressure. Fewer than 50 companies used nonfinancial reporting as late as 1992, but in 2006, more than 2,000 companies regularly reported nonfinancial information.

Nonfinancial reporting is perceived to be driven by the clear interest of various stakeholders in receiving information beyond mere financial reports, regardless of how detailed those reports are. Stakeholder/shareholder activism directly influences trends in company reporting. The most recent empirical research, however, has shown that pressure from nongovernmental organizations (NGOs) is declining and that direct shareholder activism is exerting further pressure for nonfinancial information reporting.

Financial and business analysts are the driving force behind the increasing thirst for nonfinancial information. Financial analysts testified to the Jenkins Committee in the United States that nonfinancial information reporting is of ultimate importance for analyzing financial markets and understanding future development.

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