Impact of the Requirements of IFRS 8 Operating Segments on the Quality of Financial Statement - Essay Example

IMPACT OF THE REQUIREMENTS OF IFRS 8 OPERATING SEGMENTS ON THE QUALITY OF INFORMATION AVAILABLE TO FINANCIAL MENT USERS University Affiliation: Date: Introduction Among the most important reports that every stakeholder in a business should be highly interested in are the financial statements of the organization, both interim and final. In most cases, interim financial statements are released in the course of a trading period or year. Final financial statements on the other hand, are released once and at the end of a trading period or year. These financial statements are mean to inform the reader on the assets, liabilities, revenues and expenditures of a business organization (Collings, 2012, pp. 280-300). In other words, they enable various investors at different levels to see for themselves what their money does. The other purpose of such statements is to assist the stakeholders in decision making, regarding how to invest in the future, as these statements are a presumed to be a true reflection of the market value of the business organization as a whole. Discussion Financial statement users (stakeholders) have different interests and concerns regarding the financial statements of an organization. At this juncture, though, it is worth mentioning that financial statements are made up of statements of financial position, statements of comprehensive income, directors’ statements and statements of cash flows (Melta & Ankarath, 2010, pp. 200-413). The information provided in these statements work to serve different stakeholders in different ways. For example, the government is majorly interested in finding out the gross profit of an organization from a trading period, for the purposes of taxation. Shareholders on the other hand are interested due to what they expect from the organization in form of dividends. The other important financial statement users are potential investors, who are interested in knowing the true (market) value of any given business organization before deciding to invest their money in the same. These financial statements, for most of the organization especially public entities, are made public so as to enable the general public in addition to the stakeholders to have a look at the same. As much as this information is usually provided by the management, there has been a general feeling among stakeholders and business experts alike, that the information provided is always not sufficient to assist in decision making. According to many, the information provided is normally shallow, and contain approximations and assumptions that the financial statement users are not aware of. This usually leads to poor decision making that is influenced by an error of judgment, if not intended miss-representation. Throughout the years, there have been efforts by the International Accounting Standards Board to reconcile the financial reporting and accounting standards used in different countries. This is so as to facilitate and make effective international transactions and business operations. Prior to the year 2009, the IAS 14 were the main international financial reporting and accounting standards. However, these provisions presented some of the challenges discussed above, something that necessitated a call for amendment. As a result, the International Financial Reporting Standard (IFRS) 8 Operating segments came in to replace the IAS 14. The IFRS 8 operating segments was made to replace IAS 14 entirely, though that has not or will not be the case, since the differences between the two sets of standards are not too significant (Alexander & Archer, 2008, p. chap.3). This paper, therefore, focuses on the requirements presented by the IFRS 8 operating segments in comparison to those presented by the IAS 14. It is worth noting, however, that the differences are not too significant, as earlier mentioned. The paper goes ahead to then identifies how these IFRS 8 requirements on operating segments will facilitate the dissemination of quality information to financial statements users. As earlier mentioned, the aim of introducing the IFRS 8 operating segments was not entirely to replace the accounting standards presented by IAS 14. It was meant to build on the provisions of IAS 14, so as to enhance the quality of the information supplied to various stakeholders through different financial statements. The new IFRS 8 n operating segments are meant to compel entities to disclose sufficient information, so as to enable the stakeholders and users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages, and the economic environment in which it operates (Conolly, Nd, p. 1). Generally speaking, the requirements are to the effect that specific classes of business organizations release to its stakeholders some crucial information, normally discrete in nature. The type of information referred to here is regarding their operating segments, their products and services, their major customers and the geographical areas in which they operate. This requirement is especially applicable to those business entities operating in public traded securities (Nancy & Street, 2013, p. 1).This differs slightly from the previous IAS 14 requirements, which only required these business entities to inform their financial statement users and a few of the facts. For example, it was considered relevant and important for the financial statements users to only know the operating segments and their products and services. Information with regard to geographical area of operation and major customers was never deemed important for the stakeholders. The other requirement is that the affected business entities are to provide a descriptive explanation of how determination on the operating segments are done, together with the products and services under them (Christian & Ludenchach, 2013, pp. 450-457). For example, if one of the operating segments of an entity is financial lending, the management is to explain how the determination of the same was done, and what kind of services are under the same. This differs from the previous reporting standards, which only required the management to state the operating statements, and not necessarily the specific products and services under the same. The other expectation is for these entities to report on the revenues earned and expenses incurred on each product or service, or regarding groups of similar products and services. This is a deviation from the old ways, where revenues and expenses were generalized as opposed to the presentation of each regarding different groups of products and services. In addition to this, the management should report on the major countries in which such products and services are bought or sold (Mackenzie & Coetsee, 2013, p. chap.28). This means, for example, that it is no longer just enough to state that XYZ Company made $ 50,000 from its sales. Additional information of the specific products/services together with the specific geographical areas of operation is required. Another new requirement under IFRS 8 operating segments is to the effect that business entities are to report interest revenues and interest expenses separately for each reported operating segment (Mackenzie & Coetsee, 2013, p. chap.28). The norm has always been that interest revenues and expenses are merged and reported as net interest. The net interest is usually the difference between revenue interest and expense interest. Moreover, as much as the net figure represented all the operating segments, the new requirements are to the effect that the same information is to be provided separately for each reportable operating segment. Conclusion One would therefore remain to ask one question; do the new requirements and provisions in any way enhance the quality of information supplied to financial statements users (stakeholders)? As much as there are tentative answers and presumptions regarding this, there is no conclusive evidence to any response. This is mainly because not many business organizations have implemented the new reporting standards in their operating segments reporting culture. There are ongoing deliberations and reviews regarding how the same will be implemented, as some classes of people feel that they will deliver worse results (Ernst & Young, Nd, p. 1). More so, many business entities are still in transition from the old ways to the new ways, and therefore it is difficult to find any evidence regarding how effective these new requirements are. However, it is quite easy to formulate what was in the mind of International Accounting Standards Board as they were coming up with these new requirements. First and foremost, the new requirements will increase transparency in business entities. During the operation of the old requirements, the management only reported what they wanted the stakeholders to know and believe. There is some information that was considered not relevant to the statements users. However, with the new rules in operation, stakeholders will be made to know almost everything regarding their business. This therefore would assist in better decision making. Another aspect that will be enhanced is the truth of the concerned statements. The norm has always been that the management could play around with figures in present values in the statements, of which the stakeholders would not question so much. However, the new requirements would encourage the management to refrain from any kind of fraud, as the ways of value determination are to be described and explained to the statements users vividly. This is also enhanced by the fact that the management will be forced to inform the stakeholders of any approximations, assumptions and judgments made in their reports. It can therefore be seen that some benefits of the new IFRS 8 operating segments were envisaged by the accounting board. However, the full benefits of these new standards can only be evaluated after a full transition and implementation of these standards in organizations worldwide. References Alexander, D., & Archer, S. (2008), International Accounting/Financial Reporting Standards Guide 2009. Riverwoods: CCH. Christian, D., & Ludenchach, N. (2013), IFRS Essentials. Hoboken: John Wiley & Sons. Collings, S. (2012), IFRS For Dummies. Hoboken: John Wiley & Sons. Conolly, C. (Nd), IFRS 8 Operating Segments. Retrieved November 29, 2014, from CPA: . http://www.cpaireland.ie/docs/default-source/Students/Study-Support/P2-Advanced- Corporate-Reporting/ifrs-8-operating-segments.pdf?sfvrsn=0 Ernst, & Young. (Nd), Implementation guidance. Retrieved November 29, 2014, from IFRS 8 Operating Segments: http://www.ey.com/Publication/vwLUAssets/IFRS_8_Operating_segments_Implementati on_gui dance/$FILE/IFRS_8_Operating_Segments_IG.pdf Mackenzie, B., & Coetsee, D. (2013), Wiley IFRS 2013: Interpretation and Application of International Financial Reporting Standards. Hoboken: John Wiley & Sons. Melta, K., & Ankarath, N. (2010), Understanding IFRS Fundamentals: International Financial Reporting Standards. Hoboken: John Wiley & Sons. Nancy, N., & Street, D. (2013), The Impact of Segment Reporting Under the IFRS 8 and SFAS 131 Management Approach: A Research Review. Journal of International Financial Management and Accounting . Read More