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A Framework for decision making
MFRS 8 is important because It specifies how the firm should report their information about its
operating segments in the annual financial statements and interim reports and because its sets out
the requirements for related disclosures about products and services, geographical area and major
customers, therefore the firm can not include any segment in the annual financial statement, any
segment reported must have meet specified criteria.
Clear Identification of Financial Benefits
MFRS 8 is important because stakeholders can view the activities of the segments and see how
its adds to the development and growth of the firm, since MFRS 8 requires the firm to report the
profit or loss of the segments assets and also it requires the firm to quantify the segment
liabilities and also to disclose information about countries where its earns revenues and
information about the firms major customers, so by disclosing this information stakeholders are
able to make informed decisions about the firm
Entity Wide Disclosures
MFRS 8 is important because it facilitates entity wide disclosures because in doing the analysis
of a large firm there need to be a breakdown of the segments performance in order to properly
evaluate individual operating segments to determine how resources should be allocated to the
most effective segments and where to moves resources from the less performing segments to a
higher performing segment.
For example of a geographical resource allocation analysis: is if the Brazilian segment of a
company is not performing as much as their Singaporean segment, the assets can be transferred
to the Singaporean branch in order to facilitate additional improvement
Commercial Sensitivity
such circumstances the measure used in the segment report should be the one that management
believes is most consistent with those used to measure the corresponding amounts in the entity's
financial statements. Examples of disclosures :
Revenues - internal and external.
Interest revenues and interest expense. These must not be netted off unless the majority
of a segment's revenues are from interest and the chief operating decision maker
assesses the performance of the segment based on net interest revenue.
Aggregation of criterias
Basically, operating segments provides the long-term financial performance when they have
similar characteristics. For example, the similar long-term average gross margins for two
operating segments would be expected if their economic characteristics were similar. Two or
more operating segments may be aggregated into a single operating segment if aggregation is
consistent with the core principle of this MFRS, the segments have similar economic
characteristics, and the segments are similar. Therefore, this aggregation of criteria would
actually a very important and useful for users as it contains aspects such as:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and ,
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or
public utilities.
Stakeholders
Naturally, several market participants as well as the stakeholders will also be interested in the
disclosure of information about a firms operating segments. According to the MFRS, the
segment information is essential to help users of the financial statements in better understanding
the entitys past performance, directly gives the access more easily to the entitys risk and returns
and straight in making more informed judgments about the entity as a whole. It will be more
accurate to say that all the users will need disaggregated and consolidated information. As given
the fact that the large companies can have very multifaceted and diverse structures, segment
information that seems to be essential to users in order to understands a firms performance and
risks and to analyze the firms strategies and also the future potentials. Therefore, needs and
reasons of the importance of MFRS 8 Operating segments to accounting users :
Government: Information on country level
Shareholders : interested in the performance of the company as a whole, since their
investments concern the whole enterprise.
Group : to estimate fully the performance of the whole enterprise one has to take into
consideration the separate performances and prospects of each sector
Different segments : information about each segment of business
It is also can be argued that geographic segment disclosures indicate a companys international
diversification, giving a good indication to investors about the companys potentials. Therefore,
it helps them to conclude that revealing more segmental information should be beneficial not
only for investors but also for the company itself. Furthermore, according to Dave Nichols, Larry
Tunnel and Cindy Seipel (1995), a companys expected cash flows and also its value, may be or
could be affected by the economical and political environment in which it operates. Hence the
information about particular segments should therefore be of high
and importance to
stakeholders in order to assess the companys value through the prediction and exploitation if its
future cash flows.