The Purpose of Segmental Information - Essay Example

Segmental Information Segmental Information Introduction To begin with, a business segment refers to an exclusive component of an organization that is involved in offering a specific product or service, subjected to returns and risks that are dissimilar to those of other segments. Segment information refers to that information or data on the operating segments of an organization in the disclosures coming along with its financial statements. This information is however needed by public-held entities as opposed to private ones. The purpose of segmental information Segmental information is mainly aimed at giving reports to creditors and investors on the financial results as well as the positions of the most crucial operating units of a firm, which can be used as the basis for sound decisions within the firm. Giving separate accounts of a firm’s own subsidiaries, divisions, and segments helps to provide an exact picture of the performance of a public company to its potential shareholders. The information is also needed by the upper management to evaluate specific segment’s assets, income, liabilities, or expenses in order to assess profitability and risks. For example, a bank might utilize segment information to distinctly account for its credit card, banking, or its financial services segments (Elliott & Elliott, 2013:73-80) The IFRS 8 Operating Segments The accounting standards was issued in 2006, applying to yearly periods starting from 2009. They necessitate specific classes of entities; majorly those with publicly traded securities in order to reveal information concerning their operating segments and services, and their major customers in areas that they carry out their operations. IFRS 8’s information is determined by the internal management reports in both the measurement of disclosed segment reports and in the identification of operating segments. Reportable segments are aggregations or informative segments of those operating segments that concur with the specified criteria. The requirements of IFRS 8 in relation to segmental information and how they differ from other past and present accounting standards IFRS 8 specifies the way an entity ought to report information regarding its yearly financial statements. Due to the IAS 34’s amendments, IFRS 8 requires a unit to give information on its operating segments in temporary fiscal reports. The accounting standard also sets out necessities for related disclosures concerning products and services, potential clients, and areas of working. According to Sanyan & Danbolt, 2012: 27, the second requirement of IFRS 8 is that an entity ought to report descriptive and financial information concerning its reportable segments. These are aggregations or segments that achieve given criteria. They are elements of an entity on which fiscal information is accessible and is evaluated often by the main operating decision maker in establishing how to assess performance and allocate resources. In general terms, monetary information must be reported on a similar basis as it is used within, for evaluating operating segments progress and deciding how to distribute resources to the segments. The third requirement is for an entity to give information on a measure of the profit and loss of an operating segment as well as the segment assets. In addition, it requires an entity to account for a measure of segment liabilities and specific expense and income items in case such measures are often offered to the major operating decision maker. Reconciliations of the whole informative returns, liabilities, possessions, and total profit or loss and related amounts should be disclosed for segments to agreeing amounts in the financial statements of the entity. IFRS 8 states a requirement that an entity must present information on the revenues stemmed from its products and services, the nations in which it gets revenues and has its assets, and on the potential clients despite of whether the management uses that information in making operating decisions. Nevertheless, IFRS 8 does not require a unit to present information that is not prepared to be used internally if the essential information is not accessible and the expenses to develop it would be in excess. The last requirement by the IFRS 8 is that an entity is obliged to give descriptive information on the manner in which the operating segments were established, which products and services that the segments provided, the variety in the measurements used to give the segment information and the ones used in the fiscal statement of the entity, as well as the changes in the measurement of the amounts of the segment from time to time (Mehta et al, 2013: 76). From the above requirements, it can be noted that IFRS 8’s requirements in relation to segmental information differs with past accounting standards, such as the IAS 14. For instance, in terms of the type of information offered on the operating segments, IFRS 8’s reported information is originated on the data that the management puts in place to run the business. On the other hand, IAS 14’s reported information is founded on the monetary information given in the consolidated monetary statements. Another difference can be seen in terms of the measurement of segment information to be disclosed. For IFRS 8, segment disclosures are determined by the management information given to the major operating decision maker. This is regardless of if the information is not prepared according to the IFRS accounting regulations of the entity, which may lead to the differences between the quantities presented in segment information and those presented in the basic financial statements of the entity. For IAS 14, segment disclosures are determined by the IFRS-compliant monetary information and must be prepared according to the accounting policies of an entity in preparing the financial statements. Operating segments in IFRS 8 are regarded as activities that may bring in revenues or experience expenses, of which operating results are often reviewed and approved by the chief decision maker and whose discrete monetary information is accessed. In IAS 14, operating segments are geographically-focused on components or businesses that are subject to returns and risks that differ from those of other elements. Contrasting to IAS 14, IFRS 8 fails to define terms in segmental information, such as segment revenue, segment liabilities, segment profit and loss, and segment assets. Consequently, diversity of information giving will increase accordingly (Epstein & Jermakowicz, 2009:207). The requirements of IFRS 8 Operating Segments can reasonably be criticized as inadequate. Referring to the relevance of the documented segment information, Alali & Cao, 2010: 79-86, argue that this accounting standard seems not to place so much emphasis on the geographical breakdown of a unit. In reality, in a number of occasions such as in Russian and Asian crisis, it was noted that geographical information was the most crucial aspect. This means that IFRS 8 operating segments suppresses relevant information in is dealings. In addition to this, IFRS 8 can be criticized on the approach of handling information through its management. Presenting information through their specified management style can probably permit two companies with similar businesses to have dissimilar ways. Spotting out segments on the basis of undistinguishable risk and return should avoid such instances. It is believed that segments established on management vision unavoidably change more regularly segment definition as compared to segment definition established on same rewards and risks. IFRS 8 can be said to be inadequate because it does not guarantee comparability of segment information. With time, it is more likely that IFRS 8 operating segments will make analysts not so much comfortable with information reporting, thus leading to valuations with discounts (Extance, Helliar & Power, 2012: 23) As per the Governance of Owners letter dated June 2007, it is clear that the information given by IFRS 8 is not very understandable, comparable, or reliable when compared to that of IAS 14. This seems to misrepresent business operations. One can argue that the IFRS 8’s management strategy is desirable in a way but the standard permits too much discretion having too limited checks on the management activities of the executive. Inadequacy in the requirements of IFRS 8 operating segments can also be seen in the risk and reward criteria of presenting information. It removes the aspect of risk and return approach that are required in the IAS 14 for evaluating the sufficiency of information given or not given to the public markets and the shareholders as well as in the broader public interest (Alexander & Archer, 2008: 98). Conclusion There are many diverse views on the adequacy of information offered by the IFRS 8 operation segments. Some commissions argue that segment information presented by IFRS 8 is more useful and relevant for users of accounts. However, such positive views or the arguments for IFRS 8’s adequacy are limited as compared to the many who justify its inadequacy. Experiences from tracking U.S companies shows an extensive empirical research that proposes that IFRS 8 is inadequate in its segment disclosures. For example, the survey shows that geographical information in the standard’s operating segments is usually not disclosed. However, if exposure is discretionary, then in most cases the information is not given. In most of the requirement on segment information, reports should be given irrespective of whether or not information is available at that particular time. As shown in the survey carried out, 85% or respondents perceive that geographical information in the most required aspect of an entity. In the general view, segmental information given by IFRS 8 is far much inferior to and inadequate than the requirements and information that previously was provided by IAS 14. References Alali, F., & Cao, L. (2010). International financial reporting standards—credible and reliable? An overview. Advances in Accounting, 26(1), 79-86. Alexander, D & Archer, S (2008). International Accounting/Financial Reporting Standards Guide 2009. Chicago, CCH. Elliott, B. & Elliott, J. (2013), Financial Accounting and Reporting (16th edition), FT Prentice Hall, pp.73-80. Epstein, B. J., & Jermakowicz, E. K. (2009). IFRS converges to US GAAP on segment reporting. Journal of Accountancy, 207(4), 50. Epstein, B. J., & Jermakowicz, E. K. (2010). Wiley IFRS 2010: interpretation and application of international financial reporting standards. Hoboken, N.J., Wiley. Extance, H., Helliar, C., & Power, D. (2012). Operating segments: The usefulness of IFRS 8. ICAS. Mehta, K. J., Alkafaji, Y. A., Ghosh, T. P., & Ankarath, N. (2013). Understanding ifrs fundamentals international financial reporting standards. Hoboken, N.J., Wiley. http://rbdigital.oneclickdigital.com. Sanyan, M. and J. Danbolt (2012), Segment reporting in the UK. Working paper, University of Glasgow. Read More