Amendments in International Financial Accounting Standards - Essay Example

Operating Segment Introduction The aim of this paper is to analyze the impact of international financial reporting standards 8 in improving or increasing the quality of financial information that s available to financial statement users and positive impact has been observed during analysis. For the achievement of this objective usefulness of segmental information has been assessed, differences between the current requirements of IFRS 8 and international accounting standards (IAS) requirements has been presented. IFRS 8, requirements demands detailed segmentation information that contributes in better decision making. Main body It has been analyzed that financial statement users required consolidated information and it has been recognized that financial statements do not sever all the information that is required and companies working on larger basis required more detailed information. Businesses are of different types and the operating geographical areas are different of each with the diverse rate of growth opportunity, profitability and risk. The analysis of financial statement provides management an idea and allows them to judge the nature of entities and importance of their overall role in financial outcome until the realization of segmentation analysis. The aim of segmental analysis is to provide the assistance to financial statement users. Accounting standard setters believes that this information is worthwhile because through this information it is easy for owners and decision makers to have in-depth results, through the in-depth analysis companies are able to make better decisions. Financial information allows companies to have the assessment of entity’s past and future performance. They are able to evaluate the result of changing a single component on overall business. Segmental reporting breaks down the activities of enterprise in to segments and provide financial reporting for each segment separately. Segmentation of operations can be done in multiple ways but the most common ways in which companies do segmentation are by business type or by geographical areas. For example if company have operations inside the country and outside as well, company will disaggregate its net property, sales, equipments and plans in to two segments such as outside united kingdom and inside united kingdom. For example a company Vodafone runs its operations in different geographic areas so the information will be presented according to the segments and each segment will represent the net revenue. Through this detailed analysis company will be able to realize that from which area they are making significant profits and what plants are requires closing if necessary (See figure 1). Through the provision of segmental information companies are able to have looked on particular segments rather to have information of overall business activities. This information is prioritize by accounting standard setters because they know that the small parts play immense role in the success or failure of business as whole therefore, it is essential to realize that what segment is going to affect business negatively and requires more attention to run operations appropriately. The objective of this information is to provide the information related to different types of business activities and economic environment in which enterprise engaged and performs its operations. Through segmental information financial users are able to understand the performance of organization in better way, they can better analyze the prospects of enterprise for the net cash flow of future, they are able to make better assessment on risk and returns of enterprise, and they can make more knowledgeable decision about the business as whole. Segmentation information can serve organization with several benefits, but the most common have been discussed in short in order to communicate the importance of segmental information (Roberts 2005). IFRS 8 requires the reporting and identification of different operating segments with the reporting of internal management. All measures and information that is considered important and required or essential to make core decisions is necessary to highlight. IFRS 8 requirements include that organization must provide link between the information that has been reported in commentaries of management and financial statement. Management commentaries information includes financial and operating reviews or management analysis and discussion. Company must disclose the factors that have been used to report the segment, types of products, measures of total assets, loss and profits, disclosing the revenue of external clients, disclose the basic accounting for transactions, total revenue, profit, loss of business as whole, nature of differences between the items that are comparable in the financial report of entity and segment measurements, and entity wide disclosure; all these comes under the current requirements of IFRS 8 (ACCA, 2014). Some major amendments have been made in these requirements (IFRS, 2013). There is a difference between IFRS 8 and current accounting standards that are also known as international accounting standards 14. The approach that is adopted by IFRS 8 is management reporting approach in order to identify the operating segments of an enterprise in multiple cases the structure of IFRS 8 and IAS 14 will be same for operational reporting. In IFRS 8 the management reporting system is based on geography or on the line of product but in current accounting standards management reporting system is nit based in particular geographic region and product line. In accounting standards entity is chosen as primary segment in contrast of IFRS 8. In IFRS 8, operations that are vertically integrated are composed of several segments however, in accounting standards, if the majority of profits are earned by the customers that are external then the geographical segment are reported otherwise not; and this is the major difference between the two that in IFRS 8 additional segmentation is done or additional segments are disclosed. In standard accounting terms for reporting are defined but in IFRS 8 terms are not defined for the disclosure of particular segment. In IFRS 8, if any entity receives 11% revenue from a single consumer then the disclosure is required but in accounting standard this is not required (EY, 2009). The information that is provided under accounting standards and IFRS 8 is different; in international accounting standards plant or equipment, results, revenue, cost of property, assets, acquisition of intangible assents, and liabilities all are required to be shown but the requirements of IFRS 8 are different, this demands more detailed disclosure of information that is provided to the chief operating decision makers on regular basis (Brussels 2007). The major purpose of IFRS 8 is to enhance the reporting quality of financial information. This is used by multiple countries in the world and according to the United States Securities and Exchange Commission 100 countries require IFRS reporting and 85 demands IRF reporting for all listed companies that are operating on domestic level (U.S security and exchange commission 2008). The application of IFRS will be beneficial for those who are making investments and for other users of financial investment through increasing the quality of information and through the reduction of the alternative investment cost. Companies are expecting that investors will be interested in making investments. However, in multiple literatures it has been identified that IFRS is not able to provide higher quality of information as compare to international accounting standards, but some respondents do believe that current requirements of international financial reporting standards 8 are beneficial for the users of financial statements because this increase the quality of information through providing the in depth analysis of each and every activity. It has been encountered that the utilization of internal approaches of measurement increases the relevancy of information and provide the better representation of business’ general economic performance. Through the international financial reporting standard 8, companies can present their outweigh concerns on comparability basis (Brussels 2007). It has been encountered that multiple commentators believe that the IFRS 8 requirements such as geographical disclosure are satisfactory and provide organizations an opportunity to have look into the activities of each segment separately. It has been observed that utilization of management approach has optimistic impact on the quality of information and increase the quality of information that is useful and relevant (Tarca 2013). This also increases the quality of qualitative information. It has been encountered that if the corporate governance is poor then the IFRS 8 will not contribute in the enhancement of quality if information. IFRS 8 provided multiple improvements as compare to international accounting standards 14 (Brussels 2007). Hortan et al (2012) explored in their study that IFRS improves the information quality and contributes positively. Conclusion: It has been analyzed that multiple amendments has been done in international financial accounting standards 8 that helped in improving the quality of financial reporting. It has been observed that many of applications of IFRS are same as international accounting standards. In IFRS, detailed reporting is done on the basis of type of business and on the basis of geographical segment that allows financial statements users to have in depth looked over the performance of entity. Investors are able to make better decisions and organizations are able to analyze the performance of each unit; this benefit cannot be attained when reporting is done according to international accounting standards. The role of IFRS 8 requirements in increasing the quality of information has been evident from researches and commentators views. References: ACCA. (2014). IFRS 8 Operating Segments. ACCA Global. Available from: < http://www.accaglobal.com/pk/en/discover/cpd-articles/corporate-reporting/ifrs8-operating.html> [Retrieved on 27 November 2014]. Brussels. (2007), Endorsement of IFRS 8 Operating Segments Analysis of Potential Effects – Report. Available from: http://ec.europa.eu/internal_market/accounting/docs/ifrs8-operatingsegments-report.pdf [Retrieved on 27 November 2014]. EY. (2009), IFRS 8 Operating segments Implementation guidance. Available from: < http://www.ey.com/Publication/vwLUAssets/IFRS_8_Operating_segments_Implementation_guidance/$FILE/IFRS_8_Operating_Segments_IG.pdf> [Retrieved on 27 November 2014]. Horton, J., Serafeim, G., & Serafeim, I. (2012). Does mandatory ifrs adoption improve the information environment? Contemporary Accounting Research, forthcoming. IFRS. (2013). Post-implementation Review: IFRS 8 Operating Segments. Available from: < http://www.ifrs.org/IFRS-Research/Get-started/Documents/PIR-IFRS-8-Operatihg-Segments-July-2013.pdf> [Retrieved on 27 November 2014]. Roberts, C. B. (2009). Segment reporting. Available from: < http://ebooks.narotama.ac.id/files/Comparative%20International%20Accounting%20%2810th%20Edition%29/Chapter%2019%20%20Segment%20Reporting.pdf> [Retrieved on 27 November 2014]. Tarca, A. (2013), The Case for Global Accounting Standards: Arguments and Evidence. Available from: http://www.ifrs.org/Use-around-the-world/Documents/Case-for-Global-Accounting-Standards-Arguments-and-Evidence.pdf [Retrieved on 27 November 2014]. U.S security and exchange commission. (2008). SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily. Available from: < http://www.sec.gov/news/press/2008/2008-184.htm> [Retrieved on 27 November 2014]. Appendix Read More