Adequacy of IFRS 8 Operating Segments

Segmental Information

In general, IFRS 8 Operating Segments place a requirement on specific classes of entities (particularly those entities that have publicly traded securities) to disclose information concerning their respective operating segments, products and services, the geographical areas in which they compete as well as their major customers (IFRS 8 Operating Segments, 2014). The information that is provided by corporations pursuant to these requirements is based on internal management reports concerning the measurement of disclosed segment information as well as the identification of operating segments (IFRS 8 Operating Segments, 2014). Although its proponents argue that the IFRS 8 Operating Segments are adequate for their intended purposes, critics counter that they are inadequate for certain applications. To determine the facts, this paper reviews the relevant literature to provide a timely discussion concerning whether the requirements of IFRS 8 Operating Segments can reasonably be criticised as being inadequate followed by a summary of the research and important findings concerning these issues in the conclusion.

Review and Discussion

The current version of IFRS 8 was promulgated in November 2006 with applicability to annual periods beginning on or after 1 January 2009 (IFRS 8 Operating Segments, 2014). At present, IFRS 8 is applicable to the individual or separate financial statements of an entity (and to the consolidated financial statements of a group with a parent) in those cases:

1. Where an entity's debt or equity instruments are traded in a public market or

2. Where an entity files, or is in the process of filing, its (consolidated) financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market [IFRS 8.2] (IFRS 8 Operating Segments, 2014).

In those cases where consolidated as well as separate financial statements for the parent entity are consolidated into a single financial report, segment information is only required to be reported on the basis of the consolidated financial statements [IFRS 8.4] (IFRS 8 Operating Segments, 2014). The definition of an operating segment provided by IFRS 8 is being a component of an entity [IFRS 8.2]:

1. That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity);

2. Whose operating results are reviewed regularly by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and,

3. For which discrete financial information is available (IFRS 8 Operating Segments, 2014).

In addition, IFRS 8 Operating Segments contains a requirement for entities to report descriptive and financial information concerning its reportable segments which are defined as "operating segments or aggregations of operating segments that meet specified criteria [IFRS 8.13]" (IFRS 8 Operating Segments, 2014). Further, IFRS 8 Operating Segments permits the aggregation of two or more operating segments into a single operating segment in those cases where segments have similar economic characteristics, such aggregation is congruent with the fundamental principles of the standard, and the operating segments are comparable in various prescribed respects [IFRS 8.12] (IFRS 8 Operating Segments, 2014). In those cases where the entity's total external revenue reported by operating segments represents less than three-quarters (75%) of its revenue, additional operating segments are required to be identified as reportable segments until such point where a minimum of 75 per cent of the entity's revenues are included in reportable segments [IFRS 8.15] (IFRS 8 Operating Segments, 2014). Both qualitative and quantitative data and analyses are required in the management reports pursuant to IFRS 8 Operating Segments, including the following, among others:

1. General information concerning how the entity identified its operating segments and the types of products and services from which each operating segment derives its revenues [IFRS 8.22];

2. The judgements that were made by management in the application of the aggregation criteria to allow two or more operating segments to be aggregated [IFRS 8.22(aa)] (this disclosure requirement was added by Annual Improvements to IFRSs 2010 -- 2012 Cycle, effective for annual periods beginning on or after 1 July 2014) (IFRS 8 Operating Segments, 2014).

Taken together, it would seem reasonable to conclude that the IFRS 8 Operating Segments represent a comprehensive set of reporting guidelines that contribute to the transparency of the financial reports provided by organisational managers today. Not everyone is of a like mind when it comes to the adequacy of IFRS 8 Operating Segments, though. For example, Buthe and Mattli (2011, p. 100) report that, "Institutional investors and other users of financial reports from the United Kingdom and continental European countries expressed concerns that IFRS 8 would reduce comparability and generally lower the quality of financial reports, making them less useful for analyses of corporate financial and management performance -- and less helpful for the detection of tax avoidance through transfer pricing." In fact, strong objections to IFRS 8 Operating Segments were advanced just prior to the regulation's approval by the European Parliament but the administrative process had advanced to the point where changes were unable to be made and the regulations were published with all of its flaws intact (Buthe & Mattli, 2011). Indeed, Buthe and Mattli (2011) suggest that the convergence of IFRS and U.S. GAAP regulations has been at the expense of European investors.