Operating Segments in the International Accounting Standard Board - Essay Example

Operating Segments Introduction The international Accounting Standard Board (IASB) did the International Financial Reporting Standard 8 (IFRS 8) operating segments on November 2006. The IFRS 8 has exceeded the IAS 14 segment reporting in many ways and were presently applicable since the adoption of the Regulation 1606/2002/EC. The management has an overall positive influence on the quality of the segment information. The relevance and usefulness of the operating segment information have overweighed the expressed concerns on the comparability of the financial report (Behn, 2002). The operating segment was issued by IASB to replace IAS 14. Since then there have been minor changes that have been made to IFRS 8 by the other IFRSs. This has included improvements on the IFRSs, IAS 24 with related party disclosures, IAS 19 Employee Benefits, IFRS 10 Consolidated Financial Statements and Annual Improvements to IFRSS 2010-2012 Cycle. The main function of the IFRS 8 operating system is to establish recommendations that ensure the disclosure of information on an entitys operating segments. This includes the entities products and services, the major customers it serves as well as the geographical regions of operation. These functions are mainly geared towards the achievement of global accounting standards as per the objectives of the International Accounting Board. It specifies on the entitys information reporting on its operations in its annual financial statements. It requires the authority in reporting information related to financial and descriptive matters on its reportable segment. These reportable segments comprise of aggregations of operating segments with specific criteria. Operating segments comprises of entities upon which different financial information available is put under an evaluation on a regular basis to decide on the allocation of resources and performance assessment (Belkaoui, 2004). It operates through an entity that ensures reporting as a measure on the operating segment of profits or losses being incurred by an entity. This enables an entity to report on a measure of segment liabilities and provides the decision makers with useful accounting information needed for the reconciliation of the total profits or loss, liabilities, segment revenues, total assets and other reportable amounts in correspondence to those of the financial statements. Requirements of IFRS 8 with the operating segment The IFRS is in need of an entity to put forth the information on revenues gotten from products and services. This is especially needed for the countries in which revenues are earned, assets are held, and the majority of customers are based with disregard to whether the information is useful to the management in operating decision formulation. At the same time however, the IFRS has no use to an entity for reporting information not meant for internal use in case the useful information is unavailable while the cost for its development is so high (Chambers, 2005). It requires an entity that can provide descriptive information on the manner in which the operations segments were determined, the segments provision on the products and services the periodic changes in the measurements of the amounts of the segment. An entity that exclusively sells to other operating segments forms part of the IFRSs definition of an operating segment. For the assessment of the performance and resource allocation purposes, the amounts reported for each operating segment should be the measures reported to the chief operating decision makers. The IAs 14 recommends the information preparation to be in unison with the accounting policies for the presentation and preparation of the financial statements of the entity. The IAS 14 has defined the segment expense, segment assets and liabilities, segment results and revenue. While the IFRS only requires explanations on the profits and loss, the assets and liabilities are measured as reportable segment without defining the terms. It has put requirements for an organization to be able to disclose to the board several information that pertains to: factors identifying the operating segment of in an entity involving the basis of an organization, the product and service types from which revenues are driven (Crawford, 2010). Its policy is for every organization to disclose specific information relating to its exclusive operating segment. It wants an organization to be reporting separately on interests revenues differently from interests expense for each segment. This is aimed at enabling the assessment of the segments performance and determines the level of resources to be allocated to each segment. The IAS 14 was not in need of the disclosure of the expense and income interests. The IFRS requires an entity to disclose information on its entire products, services, major customers as well as its operating geographical area. The requirement is applied across the board of an entities organization regardless of whether the information is part of the disclosure on the segments. While the IAS 14 only required the publication of secondary information segment for the industry in .order to provide a supplement of information available for primary segments. The IAS 14 prefers a segment information preparation to be in conformity with the policies of accounting that are adaptable in the preparation and presentation of financial statements for the consolidated entity (Edwards, 2006). Quality of information to the users of financial statements The IFRS 8 has been able to address the global needs on financial statements users and encourages the availability of information on Corporate Social Responsibility with the support of such disclosures guidelines. It provides the small listed companies with appropriate reporting segment regardless of the companies size. The adoption of IFRS 8 is aimed at reducing the uncertainty on the financial treatments and supporting the overall objectives for the required reconciliation. IFRS 8 require a disclosure of information that would enable users of financial statements to evaluate the financial effects of business activities to engage on economic environments in which to operate. This is applied through the separate equity instruments that are traded in the financial market. The entitys files are evaluated with the securities commission for the purpose of providing the public market. It provides the users with a consolidated financial statement with which the equity instruments are traded in the domestic and foreign markets (Emmanuel, 2002). In situations where entities with no obligations to apply the IFRS choose to disclose the information on segments that are non-compliant with the IFRS, the information will not be regarded as segment information. Segment information is of the essence only in cases of consolidating the financial statements. The operating segment as a component of an organization engages in business actions that earn revenues as well as incurring expenses. The IFRS 8 allows for a joint account operation for revenues, assets, and expenses that relates to the interest of the operators. It enables the entities to evaluate the risks and interests as well as the entities financial positions, performance, and cash flows. It makes a significant judgment and assumptions in the determination of the nature of interests in the arrangements within which arrangements are made. It provides a customer base especially on the extent to which it relies on the major customers. This provides a total disclosure of the total revenues that are being earned by each customer in cases where a single transaction with an individual adds up to 10 per cent. It enables the entities to be able to disclose the amount that is being reported by a major segment in terms of revenues. IFRS 8 has made it convenient for a reporting group of entities to consolidate under one common control considered a single customer (Ettredge, 2005). Importance of the information to the users An operating segment has become a component of entities engaging in businesses in which they revenues. It relays useful information on the performance of an entity and the overlapping components for holding responsible the leadership of entity in case of an event. This is important since in some organizations the managers do hold the responsibility for a wider geographical area. In such cases the entity determines the set of components and the financial information that are available (Elliott, 2013). More often than not, the operating segment does exhibit common long-term performances in financial matters if they have a similar economic characteristic. The core principle of IFRS often enables the aggregation of two or more operating segments into a single operating segment. The similarity of such interventions are based upon the certain aspects which include; the nature of products, services and processes, customer types for their services and products, the methods of distribution used for the products and services, as well as the nature of the regulatory environment (European Securities and Markets Authority, 2011). The IFRS 8 has put it as a policy for the entities to disclose information to the entire public including the consumers. An entity is required to disclose the general information on the factors for the identification of the entities reportable segments including the foundation of an organization, the kinds of judgments made by an organization on the application of the aggregation procedures which includes the description of the economic indicators and the types of the products and services from which the revenues are driven by the reportable segments. In conclusion, it provides the users with information on the profits or losses in each segment. Here an entity reports on its total assets and liabilities and also discloses on the amounts of profits and loss it makes thereby providing its investors with information on how it is run with regard to the policies set aside for its operations. As such, the IFRS 8 operating segment forms a critical component transparency in the running and management of an entity (Financial Accounting Standards Board Statement of Financial Accounting, 2007). References Behn, K.B., Nichols, N.B. and Street, D.L. (2002), ‘‘The predictive ability of geographical segment disclosures by US companies: SFAS No. 131 vs SFAS No.14’, Journal of International Accounting Research, Vol. 1(1), pp31-44. Belkaoui, A.R. (2004), Accountancy Theory, Fifth Edition, Thomson: London. Chambers, R. J. (2005), ‘Blueprint for a theory of accounting’, Accounting Research, Vol. 6, pp17-25. Crawford, L., Helliar, C.V. and Power, D.M., (2010), ‘IFRS 8: Exploring stakeholder perceptions of the new standard and its EC endorsement process’, ICAEW Briefing Paper, ICAEW: London. Edwards, P. and Smith, R.A. (2006), ‘Competitive disadvantage and voluntary disclosures: the case of segmental reporting’, British Accounting Review, Vol. 28, pp155-172. Emmanuel, C.R., Garrod, N.W., McCallum, C. and Rennie, E.D. (2002), ‘The impact of SSAP 25 and the 10% materiality rule on segment disclosure in the UK’, British Accounting Review, Vol. 31, pp127-149. Ettredge, M., Kwon, S., Smith, D. and Zarowin, P. (2005), ‘The impact of SFAS 131 business segment data on the market’s ability to anticipate future earnings’, The Accounting Review, Vol.80 (3), pp773-804. Elliott, B. & Elliott, J. (2013), Financial Accounting and Reporting (16th edition), FT Prentice Hall, pp.73-80. European Securities and Markets Authority (2011), Report: Review of European enforcers on the implementation of IFRS 8 – Operating Segments, 9 November 2011, ESMA/2011/372, ESMA: Paris. Financial Accounting Standards Board Statement of Financial Accounting (2007), Standards No. 131 Read More