Accounting Standards for Segmental Information - Essay Example

This paper provides an analysis of why the setters of accounting standards believe that the provision of segmental information is beneficial. This paper further identifies and examines the current IFRS 8 standards on operations segmenting, and their usefulness. Furthermore, it examines how these standards differ from the present and past accounting standards. This paper also examines if there is evidence on whether the current requirements in segment reporting increases the quality of information that is available to its users. This paper takes a stand that segmental information is important to all the stakeholders of the organization, as it helps them in their decision making process. IFRS 8 normally applies to the individual and separate financial statements of a business organization, or consolidated financial statements of a group of business organizations managed by a company. Through this statement, we can denote that there is a need of carrying out financial reporting through operational segment reporting (Bragg, 2010). Segment reporting involves giving of separate accounts of the individual divisions or units of a company, its subsidiaries and other divisions. In an annual accounting report, the purpose of a financial segment reporting is to give an accurate picture of the performance of a public company to its shareholders and investors (Crawford and Helliar, 2010). Future or prospective investors will also use this financial statement for purposes of making a decision on whether to invest or not in a business organization. For the management of an organization, segment reporting is used for purposes of evaluating the assets, liabilities, expenses and income of each segment. This is for purposes of assessing how risky or profitable the business segment under consideration is. It is through this assessment that the managers of a business organization will develop policies aimed at meeting the objectives and aims of the business organization (Bragg, 2010). When it comes to the evaluation of large capitalized companies, carrying out an analysis of important financial information is the beginning point. On a general perspective, it is always difficult to understand the financial records and information of large capitalized business organizations (Bragg, 2010). To understand their operations and financial records, there is a need of analyzing every operation of the business organizations. This is individually. The segment data of a company is therefore an important place to begin an analysis of the operational and financial position of a company. By breaking an organization in segments, it is possible to analyze the operations of a company deeply, and provide an accurate analysis of its financial and operational activities (Crawford and Helliar, 2010). Through an analysis of the different segments of a company, it is possible to identify the operations that are not doing well, and the ones that are doing well. This means that the management of an organization will identify the profitable and less profitable units, and thereafter develop strategies aimed at improving the operations of the business under consideration (Bragg, 2010). This helps in instilling confidence amongst the shareholders of a company, and prospective investors. It is important to understand that investors and shareholders of a company are greatly concerned with the financial and operational position of a company. This is because a company with a good financial and operational position means that it is stable, and they would get returns for their investments. According to the agency theory, the managers of an organization are agents of the shareholders (Crawford and Helliar, 2010). As agents, they have the responsibility of catering for the interests of the shareholders of the organization. One of the interests is the provision of unbiased information concerning all the activities of the company. It is only possible to achieve this objective by dividing the operations of a company through segments, and hence providing a report on their financial and operational conditions. As principles of the organization, shareholders will use this information in making a decision on whether to hold on their shares, sale them, or continue investing in the company. It is based on the importance of providing segmented information that the IASB came up with IFRS 8, in the year 2006 (Crawford and Helliar, 2010). IFRS 8 are accounting standards that regulating reporting on operating segments. The IFRS 8 came because of a series of dialogues and negotiations, between IASB, and FASB. The reasons for the adoption of standards by the US authorities was for purposes of removing a reconciliation requirement, which every companies that seek to enlist in US capital markets had to follow (Holtzman, 2008). It was only possible to remove this requirement or clauses through segmented reporting. Furthermore, reconciliation of the entire records of a company was tedious, and it is prone to errors. This is because of the existence of complex accounting standards and principles that makes it possible for managers of a business organization to hide the true worth of a business. A good example of a company that manipulated inefficient accounting standards to hide its true value was Enron. Enron manipulated the GAAP standards of financial reporting to hide its true value, resulting to the bankruptcy of the company, and a loss of billions of dollars of shareholders money (Deloitte, 2014). The IFRS 8 standards on operational segmenting make it difficult to provide inaccurate data regarding the operations of the company (Crawford and Helliar, 2010). It helps in providing a framework, whereby a company can base the disclosures that it reports. According to this framework, business entities are required to provide general and accurate information on how the segments it reports are identified. Furthermore, it requires an organization to provide and identify the types of services and products that each segment offers to receive its revenue. This is beneficial because it identifies the types of businesses that an organization operates in (Fletcher, 2008). Furthermore, it is able to identify the assets, and liabilities of these segments. This helps in assessing the true value of the segments under consideration. The identification of the total assets, liabilities, losses and profits of business segments is an important standard established and recognized by the IFRS 8 (Greuning, 2006). The IFRS 8 denotes that it is necessary for a disclosure to be provided on assets, loss, and profits whereby an amount is included on the total loss, profit, or assets. The following are the information which should be contained in a operational segmented report, Revenues- external and internal revenues. Interest expense and revenue: These should not be netted off, until the operating officer is able to analyze the performance of the segment based on the interests accumulated. Amortization and Depreciation. Material items of expenses and income, which are disclosed separately. Profit share after taxation. Non-cash items, apart from amortization and depreciated. Additions to non-cash items, other than financial instruments. It is important to denote that the measurement of these items that are separately reported should be the ones which are used in providing the overall information contained in the segmented report. It is important to explain that the internal reporting system of an organization may use one or more measure of the operating segments assets, profits, liabilities, and loss (Elliott and Elliott, 2008). It is therefore important to use accounting standards and measures that are consistent with the ones used in measuring the corresponding amounts of the organizational financial statement. It is important to explain that the accounting standards and procedures that IFRS 8 replaced was the IAS 14. One notable similarity between IAS 14 and IFRS 8 is on the nature of organizations or companies that have to provide the report (IAS Plus, 2014). They are applied on companies that are public traded, or are in the process of introducing an IPO. Another similarity of these two accounting standards is that they identify the importance of providing the operational reports of an organization, based on its segments. This is for purposes of ensuring that the information presented represents the true value and worth of a business organization (IAS Plus, 2014). A difference exists on the definition of segments, under the principles of IFRS 8 and IAS 14. IAS 14 identifies segments as geography or business based components, which are subject to returns and risks that are different from other business components. IFRS 8 on the other hand identifies segments as business entities that incur revenues, or earn profits, and their operational results are regularly reviewed by a chief operating office. This person has an access to discrete information of the segments (Crawford, 2012). Furthermore, the information that is reported under IFRS 8 emanates from the information which the management uses for purposes of operating and running the business organization. The information reported under IAS 14 emanates from financial information that is derived from the consolidated financial statements of the organization. The IFRS 8 standards have been effective in providing the necessary information about the operations and financial position of business and corporate organizations (Deloitte, 2014). This is to all the stakeholders of the business organization. The major objective and aim of the IFRS 8 is found in its first paragraph, which states that, an organization should disclose information for purposes of enabling users of the information for purposes of evaluating the nature and financial effects of the different activities that a business organization engages in (Elliott and Elliott, 2008). The IFRS 8 is applicable to the financial records of an organization whose equity or debts are traded in the public market. It is also applicable to organizations that are in the process of filling their financial statements to get approval of their securities to trade in a public market. These are the same organizations that were subjected to the IAS 14, which was replaced by IFRS 8. Bibliography: Bragg, S. (2010). The vest pocket guide to IFRS. Hoboken, N.J.: John Wiley & Sons. Top of Form Bottom of Form Crawford, L., & Helliar, C. (2010). Politics or accounting principles: Why was IFRS 8 so controversial? London: Centre for Business Performance. Top of Form Bottom of Form Crawford, L. (2012). Operating segments: The usefulness of IFRS 8. Edinburgh: ICAS. Top of Form Bottom of Form Deloitte. (n.d.). IAS Plus. Retrieved November 28, 2014, from http://www.iasplus.com/en/standards/ias/ias14 Top of Form Bottom of Form Elliott, B., & Elliott, J. (2008). Financial accounting and reporting (12th ed.). Harlow: Financial Times Prentice Hall. Top of Form Bottom of Form Fletcher, C. (2008). Getting organized: Personal and financial records (Rev. Novemer 2008 ed.). Ames, Iowa: Iowa State University, University Extension. Top of Form Bottom of Form Greuning, H. (2006). International financial reporting standards a practical guide (4th ed.). Washington, D.C.: World Bank. Top of Form Bottom of Form Holtzman, M. (2008). Whats new in financial reporting financial statement notes from annual reports. Florham Park, N.J.: Financial Executives Research Foundation. Top of Form Bottom of Form IAS Plus. (n.d.). Retrieved November 28, 2014, from http://www.iasplus.com/en/standards/ifrs/ifrs8 Read More