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IFRS Primary and secondary format for segment information

IFRS Primary and secondary format for segment information

IFRS Primary and secondary format for segment information: The International Accounting Standards Board issued IFRS 8, ‘Operating segments’ in November 2006. The standard replaces IAS 14, ‘Segment reporting’. It applies to annual reporting periods beginning on or after 1 January 2009. Early adoption is permitted.

The key implementation issues are as follows:

  • The IASB did not intend to change the range of entities required to present segment information, but we believe IFRS 8 has a wider scope than IAS 14. It applies to entities whose equity or debt securities are publicly traded or that issue, or are in the process of issuing, any class of instrument in a public market. The scope also includes entities that file financial statements with a regulatory organisation for purpose of issuing any instruments in a public market. We believe this means that some entities whose equity and debt securities are not traded publicly and were not within the scope of IAS 14 will have to provide segment disclosures.
    • The standard introduces a ‘management approach’ to identifying and measuring the financial performance of an entity’s operating segments. Reported segment information will be based on the information used internally by management. This means that:
    • the way entities identify segments and measure and present segment information could change.
    • there will be more diversity in reported segment information.
    • segment information may not be measured in accordance with IFRS – entities are required to reconcile segment financial information to the consolidated financial statements.
    • entities will no longer need to prepare two sets of information for internal and external reporting.
  • Re-portable segments are no longer limited to those that earn a majority of revenue from sales to external parties, so entities may now be required to report the different stages of vertically integrated operations as separate segments.

IFRS Primary and secondary format for segment information

IFRS Primary and secondary format for segment information : The requirements of SFAS 131 are based on the way that management regards an entity, focusing on information about the components of the business that management uses to make decisions about operating matters. In contrast, IAS 14 requires the dis-aggregation of the entity’s financial statements into segments based on related products and services, and on geographical areas.

The requirements of SFAS 14 Financial Reporting for Segments of a Business Enterprise, the predecessor to SFAS 131, were similar to those of IAS 14. In particular, both standards required the accounting policies underlying the dis-aggregated information to be the same as those underlying the entity information, since
segment information was regarded as a dis-aggregation of the entity information. The approach to segment disclosures in SFAS 14 was criticised for not providing information about segments based on the structure of an entity’s internal organisation that could enhance a user’s ability to predict actions or reactions of management that could significantly affect the entity’s future cash flow prospects.

IFRS Primary and secondary format for segment information : Most of the academic research findings on segment reporting indicated that application of SFAS 131 resulted in more useful information than its predecessor, SFAS 14. According to the research, the management approach of SFAS 131:

  1. increased the number of reported segments and provided more information.
  2. enabled users to see an entity through the eyes of management.
  3. enabled an entity to provide timely segment information for external interim reporting with relatively low incremental cost.
  4. enhanced consistency with the management discussion and analysis or other annual report disclosures.
  5. provided various measures of segment performance.

The Board discussed segment reporting at several meetings with users of financial statements. Most of the users supported the management approach of SFAS 131 for the reasons mentioned in the previous paragraph. In particular, they supported an approach that would enable more segment information to be
provided in interim financial reports.

Consequently the Board decided to adopt the US approach and published its proposals as an exposure draft in ED 8 Operating Segments in January 2006. The deadline for comments was 19 May 2006. The Board received 182 comment letters. After reviewing the responses, the Board issued IFRS 8 in November 2006.

In the Basis for Conclusions on ED 8, the Board noted that the primary benefits of adopting the management approach in SFAS 131 are that:

  1. entities will report segments that correspond to internal management reports.
  2. entities will report segment information that will be more consistent with other parts of their annual reports.
  3. some entities will report more segments.
  4. entities will report more segment information in interim financial reports.

In addition, the Board noted that the proposed IFRS would reduce the cost of providing dis-aggregated information for many entities because it uses segment information that is generated for management’s use.

IFRS Primary and secondary format for segment information

IFRS Primary and secondary format for segment information : A respondent to ED 8 asked for clarification on whether the scope of the proposed IFRS included the consolidated financial statements of a group whose
parent has no listed financial instruments, but includes a listed minority interest1 or a subsidiary with listed debt. The Board decided that such consolidated financial statements should not be included in the scope and that the scope should be clarified accordingly. The Board also noted that the same clarification should be made to the scope of IAS 33 Earnings per Share.

The IFRS requires the entity to explain the measurements of segment profit or loss and segment assets and liabilities and to provide reconciliations of the total segment amounts to the amounts recognised in the entity’s financial statements. The Board believes that such reconciliations will enable users to understand and judge the basis on which the segment amounts were determined. The Board also noted that to define the measurement of such amounts would be a departure from the requirements of SFAS 131 that would involve additional time and cost for entities and would be inconsistent with the management perspective on segment information.

IFRS Primary and secondary format for segment information

IFRS Primary and secondary format for segment information : The Board considered an approach whereby any material operating segment would be required to be disclosed separately. However, the Board was concerned that there might be uncertainty about the meaning of materiality in relation to disclosure. Furthermore, such a requirement would be a significant change from the wording of SFAS 131. Thus, the Board was concerned that the change would be from an easily understandable and familiar set of words that converges with SFAS 131 to a potentially confusing principle. Accordingly, the Board decided to retain the quantitative thresholds.

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