Essay 2 Redo: IFRS 8 Standard setting process

by Dhaneletcumi Vijayakumar

Introduction
In every organization, from the government, to non-profit companies to small businesses
to corporations, accounting is being used for recording daily transactions and financial
report. As it is also a major part of their corporate decision making or investment
decisions. Difficulties might be faced when comparing financial statements between
companies, because there are different methods being used for each. That is why
accounting policies were made. Subsequently, with new financial issues continually
arising in the US, regulators and standard setters have requested for improved corporate
transparency and presented significant changes to accounting standards and
regulations. The International Accounting Standards Committee ("IASC") is still
struggling to develop a core set of international standards that provide reliable, high
quality information for the world's capital markets. I have given a task to write an analysis
essay based on the various research that I have read through regarding on the specific
standard which is on IFRS 8, Operating Segments. In this essay, I would to emphasis on
the standard setting process. Subsequently, I would discuss on how IASB engaged with
the stakeholders and a bit touch on how MASB role played in the process.
Why IFRS 8 are so important?
The main purpose of IFRS 8 Operating segments is about transparency. It provide more
detailed disclosure of information about any entity's operations in different industries, its
foreign operations and export sales, and its major customers. The need for IFRS 8
occurred when the growth of complex companies with operations in different industries
and geographic markets made the entity-level financial statements less useful to predict
the future earnings and cash flows unless further detailed information was provided. It
became a need for the investor to understand which of an entity's major operations were
making the most positive contribution to the entity's results in order to make intelligent
decisions.
The standard setting process
Since the 1960s, the issue of disclosing segment information has been debated widely
as companies increasingly adopt corporate diversification strategies. Therefore several
national accounting rule making bodies began to address this topic. Therefore, the

United States, Securities and Exchange Commission, (SEC) were the first to make
Segment Reporting disclosure. In 1970, SEC began requiring line-of-business
information in registrant's annual filings. The need for Segment information was one of
the first agenda items identified upon the FASBs formation in 1973. In 1974, SEC made
it a requirement to include this data also in the annual reports issued to stockholders. As
we know SEC are regulators but why do they concerned more about the disclosure?
Their mission are to protect investors, maintain fair, orderly, and efficient markets so that
the investors understand the results of reporting to make an intelligent decisions.
Consequently, many financial statement users (particularly financial analysts) have said
that consolidated financial information, while important, would be more useful if
supplemented with disaggregated information to assist them in analysing the
uncertainties surrounding the timing and amount of expected cash flow and, therefore,
the risks related to an investment or a loan to a company that operates in different
industries or areas of the world.
The US, Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No.14, Financial Reporting for Segments of a Business
Enterprise in December 1976, which established specific requirements for the disclosure
of segment information. Later this requirement was declined for interim reports and for
non-publicly-held companies. In August 1981, International Accounting Standards
Committee (IASC) came out with IAS 14 with a similar model to the United States
standard. Whereby IAS 14 has become mandatory in Malaysia only in 1987. The
Malaysian Institute of Accountants (MIA) together with the regulator accounting body in
Malaysia has approved IAS 14 in 1987. In December 1995, International Accounting
Standards Committee (IASC) issued an ED of a proposed IAS 14, Reporting Financial
Information by Segment.
Why do they came out with IAS 14 rather than stick with SFAS 14?
SFAS 14 had some major issues which required to be solved since it was creating
inconvenience for the preparers and investors. One of the issues it had was, it did not
provided any guidelines for the disclosure of the information regarding different
segments. Susanne Homolle did a research on Segment reporting in the Banking
Industry; they determined that the descriptive headings of Segment reporting were
different including the position where it was disclosed. They found nine different
headings used by 10 homogeneous companies within the same industry. The other
problem with SFAS 14 was the proper definition of the segment. The 10 sample firms

chose to group geographic regions but with different segments consisting of different
regions. For example one company grouped as one segments all of its business
operations in Asia, the Middle East and North Africa. The other company split the
geographic region into two segments, Asia/Pacific and "other regions". With SFAS 14
there was lack of reliability, verifiability and neutrality. The lack of such primary
characteristics of financial information according to the conceptual framework project,
specifically SFAC No. 2 Qualitative Characteristics of Accounting Information, occurred
preparers discretion and the many ways disclosures presented by group of firms,
resulting in lack of comparability and also understandability and decision usefulness.
Further what are the main deliberation that IASC revised the IAS 14?
In 1991, the AICPA formed the Special Committee on Financial Reporting ( the Special
Commitee) to make recommendations to improve the relevance and usefulness of
business reporting. The Special Committee, which comprised financial statement
auditors and preparers, eatablished focus group of credit analyst and equity analyst to
assist in formulating its recommendations. Whereby, the Canadian Institute of Chartered
Accountants (CICA) published a Research Study, Financial Reporting for Segments, in
August 1992. An FASB Research Report, Reporting Disaggregated Information, was
published in February 1993. In March 1993, the FASB and the Accounting Standard
Board (AcSB) of the CICA agreed to pursue their projects jointly. In May 1993, the FASB
and AcSB jointly issued an Invatation to Comment, Reporting Disaggregated Information
by Business Enterprises. That Invatation to Comment identified certain issues related
disclosure of information about segments, solicited comments on those issues and
asked readers to identify additional issues. The board received 129 comment letters
from US and Canadian respondents.
In late 1993, the FASB and the AcSB formed the Disaggregated Disclosures Advisory
Group to advise and otherwise support the two boards in their efforts to improve
diasggregated disclosures. The members of the group included financial statement
issuers, auditors, financial analysts, and academics from both the US and Canada.
In September 1994, the American Accounting Association Financial Accounting
Standards Committee responded to the FASB discussion memorandum "Reporting
Disaggregated Information by Business Enterprises" mentioned that "the criteria set forth
in SFAS No. 14 for identifying reportable segments are too vague and general. The
notion of an "industry segment" lacks precision." The committee recommended defining

segment reporting as "Operating Segment." The first time this was referred was in the
position paper, "Financial Reporting in 1990s and beyond" by the Association for
Investment Management and Research. The advantage for using "Operating Segment"
approach was that the entities would organize themselves into operating sub-units to
represent risk, growth factors and expected return. The entities would also manage the
component operations in different ways depending on the economy and competition in
the market which would identify the risk and return profile of each market segment.
External data sources for the investors to analysis an industry risk and future return
prospects such as Standard Industrial Classification (SIC) codes, which helps to compile
the industry and trade statistics, also required the Committee to take actions towards the
disclosure requirements of operating segments so that the data is compatible and
enhance usefulness to assess current market conditions. The Committee also supported
information of segmental data to be reported in interim basis.
In February 1995, the staffs of the FASB and the CICA distributed a paper, "Tentative
Conclusions on Financial Reporting for Segments" to selected securities analysts, the
FASB Task Force on Consolidations and Related Matters, the Disaggregated
Disclosures Advisory Group, the FASB's Emerging Issues Task Force, the Financial
Accounting Standards Advisory Council, the AcSB's list of Associates, and memebers of
representative organizations that regularly work with the boards. Board and staff
members discussed the Tentative Conclusions with various analyst and preparer groups.
Approximately 80 comment letter were received from US and Canadian respondents.
In January 1996, issued the FASB and the AcSB issued virtually identical Exposure
Drafts, Reporting Disaggregated Information about a Business Enterprise. The FASB
received 221 comment letters and the AcSB received 73 comment letters in response to
the Exposure Drafts. A field test of the proposals was conducted in March 1996. A public
meeting was held in Toronto in October 1996 to discuss their concerns about the
proposals in the Exposure Drafts. The FASB decided that it could reach an informed
decision on the project without holding a public hearing.
As I discussed in para 3, IASC issued an ED of a proposed IAS that would replace IAS
14, in December 1995. In August 1997, IASC revised this standard by changing the
method of determining reportable segments to include how a reporting entity is internally
managed. In 1998, United States adopted the same approach of IAS 14 by revising
SFAS 14 and establishing a new standard on Segment reporting as SFAS 131,
Disclosure about Segments of an Enterprise and Related Information. During March

2000, Malaysian Accountants Standard Boards (MASB) has issued Exposure Draft in
relation to Segment Reporting namely called as MASB ED 22.
However, In the fall of 2002, FASB and IASB issued memorandum of understanding
called "The Norwalk Agreement", a commitment for developing a high quality standards
that could be used for both domestic and cross-border financial reporting. Most of the
major differences between the two Boards have already been resolved for IAS 14,
Segment reporting. FASB has undertaken six initiatives to further the goal of
convergence of United States Generally Accepted Accounting Principles (U.S. GAAP)
with International Financial Reporting Standards (IFRS). Short term convergence project
is one of the initiatives. Segment Reporting falls under Short term convergence project
which has been in the agenda for almost four decades between the two standards. The
differences of Segment Reporting is still an unresolved issue and the two boards are
continuing to remove the differences so that convergence could be obtained, the
exposure draft on this issue has been released as expected in the 4th quarter of 2005.
In January 2005: The Board considered reviewing the differences between IAS 14,
Segment Reporting and SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. Before SFAS 131 was introduced the United States (US) standard
was based on similar principles as laid down by IAS 14. But SFAS 131 was given more
preference by the analyst because it provided more useful information reflecting the
manner in which the entity manages the business. But one concern about SFAS 131 is
that it does not require consistent accounting policies to be used between segment
information and other financial reporting information. The SFAS 131 was also developed
in conjunction with the Canadian standard setter and therefore it is already consistent
with IFRS than most US pronouncements. The Board has agreed to make few changes
to the updated pronouncement of SFAS 131.
In March 2005: The staff recommended including non-public entities in the new
proposed statement for segment reporting but it was denied because the issue of nonpublic entities would be considered when the boards deal with the Non-Publicly
Accountable Entities (NPAE) project.
In June 2005: The Board considered adding guidance similar to the standard issued by
the Canadian Emerging Issues Committee. But this was also denied by the Board and
no conclusion was made at this point.
In November 2005: The Board agreed to use the term "Operating Segment" through out

the exposure draft on amendments to IAS 14, Segment Reporting. Therefore the
exposure draft would also be titled "Operating Segments."
In January 2006: The Board issued the Exposure Draft ED 8 Operating Segments. The
new proposed exposure draft adopts the "management approach" for reporting the
financial performance of its operating segments.
What are the minor differences from SFAS 131?

The FASB Guidance on Applying Statement 131 indicates that the FASB staff
believe that 'long-lived assets', implies hard assets that cannot be readily
removed, which would appear to exclude intangibles. Non-current assets in the
IFRS include intangibles.

SFAS 131 does not require disclosure of a measure of segment liabilities. The
IFRS requires disclosure of segment liabilities if such a measure is regularly
provided to the chief operating decision maker (CODM).

SFAS 131 requires an entity with a matrix form of organisation to determine

operating segments based on products and services. The IFRS requires such an
entity to determine operating segments by reference to to core principle of the
IFRS.

These differences were resolved by the Boards by revising IAS 14. The IASB released
the latest exposure draft on 19th January, 2006 Exposure Draft ED 8 "Operating
Segment", the comment period ends on 19 May 2006. The Board received 182 comment
letters. After reviewing the responses, the Board issued IFRS 8 in 30 November 2006,
which effective on 1 January 2009. In 2 July 2007, another proposed Standard ED 57
issued by MASB is on operating segments which requires management to report how it
has used its resources to manage the entity. MASB urges the professional accounting
bodies, regulators, users and any other interested parties to review the proposed
Standards and send their comments to the MASB before 28 September 2007.
Other challenges relate to endorsement, enforcement and implementation issues. This is
the case in virtually all jurisdictions that have adopted IFRS, and specifically in the
European Union as a consequence of its unique internal diversity. From this perspective,
IFRS 8 would arguably lead to larger difficulties if adopted in the EU than SFAS 131
does in the US, because the US have relatively homogeneous national business
practices and a single, authoritative financial reporting enforcement agency, the SEC. By

contrast, EU member states have widely diverging traditions of financial reporting and no
unity of accounting enforcement, which may lead to severe inconsistencies in the
content of segment information given the low level of safeguards provided by IFRS 8.
The risk is to end up with ad hoc segment information which conveys much less
understanding about performance and risk than what is currently provided under IAS 14.
On IFRS 8 does not provide an adequate basis for informed decision, due to severe
methodological flaws and insufficient disclosure of feedback received by the
Commission during the consultation phase. The current process which may lead to IFRS
recognition in the United States does not provide a convincing argument to adopt IFRS 8
in view of the standards shortcomings. Those issues make EU to protest IFRS 8.
Conclusion
Standard setting process should be seen as a critical aspect of the test development
process best carried out in concert with all other aspects of the development process.
Far from being a purely methodological process, standard setting ideally involves policy
makers, test developers and measurement specialists early on to ensure that the test
results will be useful and defensible. As discussed, in following the accounting standardsetting process, the material differences in IFRS 8 was stretching the process. The
discussion of the IFRS 8 in particular, and the standard setting process, revealed that
there are many actors involved in the standard setting process and certain country
protest the standard such as European due to insufficient disclosure.