IFRS Adequacy or Inadequacy Essay

IFRS 8 Operating Segments was to a certain degree a ground-breaking law since it represented the first foray of the International Accounting Standards Board into the area of requiring companies and business to disclose information through their management. The regulation requires certain categories of business, especially publicly traded companies to disclose information regarding their products and services, operating segments, and geographic areas where they operate. In addition to the information being based on internal management reports, these entities should also disclose information about their major customers. This requirement has generated several concerns and contentions that have become common characteristics of the implementation of IFRS 8 Operating Segments (Crawford, Extance, Helliar & Power, 2012). This has in turn resulted in the emergence of concerns on whether the requirements of this regulation can be logically criticized as inadequate.

Requirements of IFRS

As previously mentioned, IFRS 8 Operating Segments requires certain categories of business, particularly publicly traded companies to disclose information regarding their operating segments, goods and services, geographical areas of operations, and their major customers (Deloitte Global Services Limited, 2014). The disclosure of financial information is based on internal management reports in the recognition of operating segments and weighed of disclosed segment information.

IFRS 8 Operating Segments applies to distinctive or individual financial statements of a company. These requirements are applicable to an entity that publicly trades its debt or equity instruments and those that files or are filing financial statements in a public market. In essence, IFRS 8 requirements are applicable to separate or individual financial statement of a company and the combined statements of a group with a parent (IFRS Foundation, 2014). The regulation stipulates how a business entity should report information regarding its operating segments in end-of-year financial statements and requires reporting certain information about operating segments in interim financial reports. Secondly, the regulation requires an entity to provide financial and descriptive information regarding reportable segments, which are operating segments that suit certain pre-determined criteria. Third, an entity should also report profit or loss of operating segment and segment assets in addition to reporting part of segment liabilities and certain income and expense items if they are usually given to the chief operating decision maker. Fourth, an entity is required to provide reports regarding revenues generated from goods and services and countries or regions where it possesses assets and earns revenues. The final reporting requirement is descriptive information about segments' products and services, criteria for determining operating segments, and differences in reporting measures.

Purpose of Segmental Information

An operating segment in IFRS 8 is a component of an entity that engages in business activities through which it may incur expenses and generate revenues. These expenses and revenues are likely to be generated in transactions with other components of the same company. An operating segment can also be described as a component of an entity whose results of operations are evaluated consistently by the chief operating decision maker of the entity. This individual conducts the review in order to make decisions regarding resources to be assigned to the segment and analyzes its performance. In addition, an operating segment can be defined as an element of an entity that contains discrete financial information (Deloitte Global Services Limited, 2014). Consequently, an operating segment can be considered reportable if it yields very minimal external revenue (Price Waterhouse Coopers, 2009).

IFRS 8 standard basically requires entities to disclose segmental information in a way that is consistent with internal management reports. However, the disclosure of segmental information requires the entities to identify the purpose of segmental information and identifying its chief operating decision maker suitably. The identification of the chief operating decision maker plays a crucial role in the implementation of this standard as well as development of segmental information. In this case, the entity should examine who is the chief operating decision maker, the information he/she is reviewing, and the information it provides to external parties like investors and creditors.

The purpose of segmental information is to offer information to help the users of financial statements to recognize more thoroughly the monetary results and financial position of the company though promoting a better understanding of the firm's previous performance and better evaluation of future prospects. Secondly, segmental information helps users of financial statements to have knowledge of the effect that changes in important components of a company may have on the entire company (The Institute of Chartered Accountants, n.d.). These objectives are based on the fact that many businesses have various categories of people and function in different geographical areas. Consequently, they have varying levels of profitability, growth opportunities, and degree of risk. These factors make it difficult for the users of the entities' financial statements to make sound judgments regarding the nature of the various business activities and contribution to the firm's overall success. Segmentation information enables these users to conduct adequate analysis of financial statements. Adequacy or Inadequacy of IFRS 8 Requirements IFRS 8 Operating Segments was the first financial regulation or standard to undergo a post-implementation review because of concerns regarding its adequacy (IFRS Foundation, 2013). Generally, the implementation of IFRS 8 Operating Segments has been characterized by concerns on whether it is adequate or inadequate in improving the quality of information available to users of financial statements. The concerns have partly been attributed to the fact that the requirement for identification of operating segments in IFRS 8 standard based on management internal reports and internal measures of segmental items vary from international Generally Accepted Accounting Practice (Crawford, Helliar & Power, 2010). Moreover, segmental information has always been associated with numerous problems for standard setters, particularly with regards to disclosure of financial information. The adoption of IFRS 8 has been considered to be fueled by politics of accounting standards that seeks to promote vested interests that generates certain economic consequences. However, the main issue that has attracted concerns on the adequacy of IFRS 8 to improve the quality of information available to users of financial statements is whether the quality of information provided would be lessened when compared to IAS 14. In essence, the adequacy or inadequacy of this standard has been associated with the belief that it would reduce the quality of information provided compared to the requirements of IAS 14. IAS 14 basically requires reporting of financial information by an entity or geographical area through disclosures for primary and secondary segment formats (Deloitte Global Services Limited, 2014). The primary segment reporting format is dependent on whether the risks and returns of the entity are affected largely by its goods and services or by its operations in varying geographical areas. The variances in IFRS 8 Operating Segments and IAS 14 have resulted in the assumption that the former is inadequate in enhancing the quality of information available to users. The other potential pitfalls of IFRS 8 in enhancing quality of information include the likely disclosure of information that has been prepared and evaluated for internal management decisions instead of for external user decisions and stewardship based on IFRS. IFRS 8 does not stipulate who the chief operating decision maker is given his/her significance in the reporting process, which may affect the quality of information (Perrin, 2012). The quality of financial information in IFRS is also affected by the fact that its requires disclosure of geographical operating segments if they are prepared for internal reporting reasons unlike IAS 14 that mandates unconditional disclosure of such information. While the post-implementation survey conducted by the International Accounting Standards Board demonstrates that the standard has accomplished its objectives and enhanced financial reporting, it can be reasonably be criticized as inadequate. The concerns raised by various stakeholders in the industry have not been taken into account though they clearly demonstrate the inadequacy of the standard in enhancing the quality of information available to users of financial statements. The inadequacy is evident in various ways including the fact it is so ambiguous in practice and does not fully portray significant businesses or business substance (Bush, 2007). The standard is reasonably inadequate since it portrays performance without considerable clarity on business risk, which in turn misleads investors, contributes to mispricing, and may harm the wider public. Conclusion IFRS 8 was a ground-breaking standard that was enacted to enhance financial reporting standards and practices by entities, especially publicly traded companies. The implementation of this standard was characterized by the emergence of several concerns from various stakeholders in the accounting sector. An analysis of these concerns shows that the regulation has various weaknesses related to disclosure of segment information. Even though a post-implementation survey concludes that it is beneficial and achieves its objectives, IFRS 8 can reasonably be criticized as inadequate since it is ambiguous in practice and generates significant risks that may harm investors and the wider public. References: Bush, T 2007, IFRS 8: What is it Good for? Accountancy Age, viewed 26 November 2014, Crawford, L., Extance, H., Helliar, C. & Power, D. 2012, Operating Segments: The.....