Accountants are wonderful at providing the world with new acronyms. EER is one of these. This article looks at what this means and why it is important and starting to attract a lot more attention.
We’re not sure what it is with accountants and acronyms, but our profession seems to love them. Is it a way to retain some mystery by being able to speak in code? Is it a profession full of terms that are just too long for everyday use? We’re not sure of the answer but we do know we are good at it!
Hey, even our peak standard setting bodies are more commonly known by their initials than by the underlying words. In New Zealand its the XRB (the External Reporting Board), overseas its IFAC (the International Federation of Accountants Committee) and its sub-boards IASB (International Accounting Standards Board) and IAASB (International Audit and Assurance Standards Board). And this is just the tip of the acronym iceberg!
So, what is this new one EER? Type it into Google and the first hits that pop up are:
- Energy efficiency Ratio; or
- Estimated Energy Requirement
Well it’s not those. Rather EER in the accounting world stands for Extended External Reporting. It’s also a big emerging topic that is increasingly attracting a lot more attention.
The reason it is attracting more attention is due to increasing expectations of transparency, the concept that considerable value in many entities is not actually measured and reported in their core financial statements. For example, brand value of a company like Apple is not valued in monetary terms on its balance sheet by accounting standards yet is of huge importance to investors’ confidence. Social licence to operate as well as increasingly prevalent risks like climate risks and environmental impact of an entity’s activities also fall into this camp of increasingly important information.
Hence, you can best think of EER as an umbrella catch-all type term that is trying to describe other important information to investors and stakeholders presented in an entity’s statutory annual financial statements. It can include an entity’s reporting on their:
- Purpose and business model
- Material risks and opportunities
- Prospects (including forward-looking financial information)
- Economic, environmental, social and cultural impacts
EER can also encapsulate a host of other types of reporting including:
- Integrated reporting (IR)
- Sustainability reporting
- Non-financial reporting
- Pre-financial reporting
- Management discussion and analysis
- Management commentary
- ESG reporting (environmental, social and governance)
- Corporate responsibility reporting
- Community and environmental reporting
Financial statements are dictated by accounting standards, and then in many cases subject to oversight by independent audit and assurance activity to ensure the relevant accounting standards are correctly followed. Their purpose is to record the entity’s performance for the period and its assets and liabilities at a point in time. An intention of the accounting standards is to facilitate financial recording in a commonly agreed way to better allow understanding and comparisons between entities. A key flow-on objective is that this information can then be used by relevant parties (for example investors and owners) as a reliable basis upon which to make investment decisions.
However, financial statements, for all their good intention, only ever tell part of the story of an organisation. Hence, other information is also sought by stakeholders, and this has been growing in recent times.
The key driver for the increasing importance and emergence of EER is that it allows an entity to give a much more rounded and holistic view of its activities. As such it can hopefully engender a much better level of understanding, flowing on to a much better level of shareholder or stakeholder support.
A common example of EER type information to engender ongoing stakeholder support relates to providing more detail as to the sustainability of the entity’s operations and business model. The impact of a significant unexpected operational and economic event such as COVID has reinforced the need for additional information to better inform users to understand the sustainability and resilience of an organisation. As most financial information is backward looking, the core financial statements information doesn’t address such issues well.
The commercial sector may be able to learn from the experience of the public sector and many public benefit entities who have been reporting non-financial information through statements of service performance, which is another example of a type of EER. Specifically, funders of charities have welcomed the additional understanding they obtain of the organisations seeking their support through this more holistic view of reporting what an organisation exists for and has achieved.
What are some of the challenges and tensions?
So, all of the above sounds good – what are the potential problems?
- What’s in and what’s out? – The danger with an umbrella term like EER is that it could encompass every conceivable type of information. However, the general accounting standard setter and regulator view is that entities should report EER within their annual report to the extent that the information is relevant to the intended users of annual reports. Other types of, or more detailed, EER information, which may be demanded by other stakeholders, may be better located outside of the annual report.
- Where are the standards? – while there are many different reporting frameworks for many of the types of EER eg integrated reporting, environmental, social and governance reporting etc, there is not a single agreed upon reporting framework. However, much work is happening at an international level to address this, starting with some guidance coming soon. The key point here is that this area is evolving (and fast!). It is a journey and not a destination.
- Communicating useful information versus marketing spin – Accounting standards are fundamentally rules based. If a transaction is of this type, then it is treated in this way etc. They allow a high level of consistency and hence certainty. However, communicating other information such as business models and intentions lends itself more to narrative reporting and an understandable desire to present one’s organisation in the most favourable light. This tension reinforces the importance of good governance and tone at the top of organisations in order to present truthful information.
- Should assurance be provided/required over EER? - Logic says that if financial information is important enough to be independently assured then the same may apply to EER. The issue at 2 above is already increasing the demand for independent assurance over EER to give users comfort that this is not just marketing spin.
- Is this about compliance or value? – Perhaps this is the most important challenge out there. If organisations look at this evolving development as a compliance exercise, then it will be painful and just seen as a cost. However, the opportunity here is to see EER as a significant opportunity for organisations to tell their stories and engender much better shareholder and stakeholder support.