The Current Requirements of IFRS 8 - Essay Example

The Current Requirements of IFRS 8 are Inadequate Insert (s) The Current Requirements ofIFRS 8 are Inadequate Introduction Segmental reporting involves disclosing the operating segments of a company including its divisions or subsidiaries alongside its financial statements. The primary purpose of segmental information is to provide an accurate picture of the performance of a public company to the investors, creditors and other stakeholders who may need to use the information as a basis for making important decisions related to the company. In addition, segmental information is also often required by the top management of business organizations to help in the evaluation of the income, assets, expenses and liabilities of a given segment in order to assess the profitability or riskiness of the business (Crawford, Helliar and Power, 2010, p.36). The current requirements of the financial standards IFRS 8 operating segments can reasonably be criticized as inadequate due to a number of their limitations. Although IFRS 8 was widely considered to be a ground breaking standard, its implementation was soon marred in controversies due to a number of inadequacies of the system some of which include the absence of consistency in reporting formats and the risk of lower quality disclosures among others. This paper critically discusses whether the current requirements of IFRS 8 Operating Segments can reasonably be criticized as inadequate in relation to reporting of segmental information. The requirements of IFRS 8 The new international accounting standard IFRS 8 Operating Segments that have been effective since January 2009, specifically requires the disclosure or reporting of the segmental information that has been measured and prepared for internal reporting to a company’s chief operating decision maker (CODM), a process commonly referred to as the through the eyes of the management approach (Elliott and Elliott, 2013). This marked a significant shift from the previous standards such as IAS 14 segment reporting which only required segments to be identified on the basis of either the economic environment of the operational location of the company (geographical segmental approach) or on the returns and risks of the products and services that are provided (business segment approach) (Aleksanyan and Danbolt, 2012, p.9) In addition, IFRS 8 operating system also requires a presentation of the consolidated fiscal statements of a group with an apparent one. For example, the IFRS operating segments particularly stipulates the reporting particular classes of financial entities specifically the entities with publicly traded securities (Kvaal and Nobes, 2012, p.344). These entities are normally concurrently used in the books of financial entries to disclose information regarding their operating segments, products and services, geographical areas information, and the business’s major customers. Generally, the information acquired through this system is based majorly on the internal management reports as well as from both the identification of operational segments and measurement of disclosed segment informational reports (International Accounting Standards Board, 2006). The process of segmental information refers to the overall consolidation of debt or equity instruments used in public market trade. The extracted and consolidated information is stored in files with inclusive of financial statements with securities commissioned at this IFRS 8 stage. Other regulatory organizations are also included in the informational segmentation for the sole purpose of issuing classical instruments in the public market structure in the future. On the other hand, if information segmentation of both a separate and consolidated financial reports for the parent is presented in a single fiscal report, in such a case segmented information needs only to be presented on the basis of a consolidated financial avowal. Another process of information segmentation is the keeping of business engagement activities under which it may earn revenues or incur expenses. This segmented information is inclusive of all the revenues and expenses related to transactions inclusive of the other components of the same premise entity. Lastly, information segmentation process is overly reliant on the tangible financial information available. Reportable segment and disclosure requirements by IFRS 8 are one of the key guidelines of this fiscal management scheme. IFRS needs an entity to open-up and report its financial and descriptive information about its reportable segments. Per se, reportable segments are the operational segments or even the aggregations of operational segments that meets specified standards and criteria of IFRS 8 operating section. IFRS 8 in the past based its segmentation reports on interim reporting dates which were compelled annually. Currently, corporate world is more technologically advanced with IFRS 8 reports being done as fast as in the first quarter reports within the year (IASB, 2013, p.104). These IFRS 8 information segmentations are currently done in the first, second, third and last quarters of the fiscal years annually. IFRS 8 requires a well-organized segmentation reports at the information segmentation stage in order to set objectives as per the reported revenues from both the external and intersegment sales and transfers. The swift application of the financial reports currently though IFRS 8 makes this system an adequate one especially in the management of internal and external combined revenues. Lastly, the presented evidences in the current business informational segmentations solely presents adequacy of IFRS 8 operating segments. IFRS 8 adequately ensures a better disclosure in relation to how the general segmentation information is concerned. This entity identifies the operating segment and the types of services and products which are necessary in the segmentation closure process. This business scheme additionally ensures adequacy in the presentation of judgments made by the management in the aggregation application of two or more segments operation. Inadequacies of IFRS 8 Standard One of the limitations of the IFRS 8 Operating Segments that justifies its criticism as being inadequate is IFRS 8 does not define segments as geographical or business segments and does not even require measurements of the amounts of segments based on the IFRS accounting policies of an entity. This significantly increases the likelihood that sensitive information can be disclosed thereby compromising the company operations. According to Nobes and Parker (2008,p.48), this weakness may be particularly attributed to the fact that the IASB may have placed priority in achieving convergence between the international and the US standards even at the risk of lowering the quality of the accounting standards. In addition, although IFRS 8 specifically requires the disclosure of the segmental information to the Chief Operating Decision Maker (CODM), the standard does not provide any guidance as to who should be regarded as the CODM of a company. According to European Securities and Markets Authority (2011, p.88), the lack of clear definition of who is a CODM is a major concern and can compromise the quality or adequacy of the segmental reporting due to the amount of discretion and flexibility the standard gives to the management with regard to what they report or do not report. This weakness particularly contradicts the primary purpose of segmental information which is generally, to provide an accurate picture of the performance of a public company to the investors, creditors and other stakeholders who may need to use the information as a basis for making important decisions related to the company. A further limitation of IFRS 8 is that it does not require the analysis of the liabilities on a segmental basis. As a result, users of the accounting system are not often able to effectively determine the returns on capital of each of the segment since only information on the asset side is available. Generally, the “through the eyes approach” provided by IFRS 8 particularly creates an incentive for the management of companies to report only what they want thereby creating a false sense of security (Elliott and Elliott, 2013). In some cases, this may also weaken the ability of the investors to properly understand the risks, liabilities and assets within the separate business segments of a company. However, despite the numerous shortfalls of IFRS 8 in relation to segmental information, supporters of the new standard argue that IFRS 8 segmentation guarantees a well-planned corporate operational activity. It clarifies reports regarding profits or losses each and every reportable segments inclusive of specified revenues. According to the proponents of the standard, this aspect of IFRS 8 makes it adequate for booking-keeping in many corporate organizations. Conclusion In conclusion, numerous evidences indicate that the current requirements of IFRS 8 are inadequate in effectively enhancing the quality of segmental information available for company stakeholders. Although the launch of IFRS 8 was to some extend viewed as ground, the implementation of the standard has faced a number of challenges some of which include the absence of consistency in reporting formats and the risk of lower quality disclosures among others. Based on the highlighted inadequacies of the IFRS 8 operating segments one of the major recommendations is that the International Accounting Standards Board (IASB) should consider changing the disclosure requirements of the IFRS 8 to include disclosing the identity of the CODM in all the annual reports and explanation of the differences between the number of segments in the business or geographic units. Bibliography Aleksanyan, M. & Danbolt, J. 2012. Segment reporting in the UK. Working paper, University of Glasgow. Crawford, L., Helliar, C., Power, D.M. 2010. IFRS 8: Exploring stakeholder perceptions of the new standard and its EC endorsement process. London: ICAEW . Crawford, L. et al 2012. Operating Segments: The Usefulness of IFRS 8. ICAS Insight Report. Retrieved on November 20, 2014 from http://icas.org.uk/crawford/  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 IASB. (2013) Report and Feedback Statement. Post-implementation Review: IFRS 8 Operating Segments. Available at International Accounting Standards Board. 2006. International Financial Reporting Standard 8 Operating Segments, International Accounting Standards Committee Foundation. London: IASB. Kvaal, E. & Nobes, C. 2012. IFRS Policy Changes and the Continuation of National Patterns of IFRS Practice. European Accounting Review 21(2), pp.343-371. Nobes, C. & Parker, R. 2009. Comparative International Accounting. Harlow, England: Prentice Hall. Read More