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Written by: Dhaneletcumi Vijayakumar (MC1306BC3361)

Essay 2: The impact of adopting IFRS 8 Operating Segments


Accounting standards around the world have progressed over centuries of
business and capital market expansion. In this manner, accounting standards historically
were intended to meet the needs of each nation's capital markets. Those standards that
were created to work well in the legal, cultural, political and economic context of each
nation became the "universally accepted accounting principles," or GAAP, for that
particular dominion. Logically, different norms in each nation led to different GAAPs in
each nation. A discussion began among market contributors over whether the global
capital markets were likely to benefit by having a single set of high-quality accounting
standards that could be useful around the world. In order to create a constant global
system for financial reporting, the IASB was formed to function as the global accounting
standard-setting body. In 2001, the IASB propagated the first replication of IFRS, offering
the possibility of a single set of high-quality accounting standards that can be utilized by
all nations. The IFRS agrees upon certain ways in which transactions and events need
to be reported in the financial statements. In contrast to the GAAP, IFRS is based upon
principals rather than hard-set rules. In todays fast pacing world, it is necessary to
comply with foreign reporting requirements for the reason that it will help modernize any
companies financial reporting. 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, Opearting Segments. In this essay, I would to emphasis on the standard
developement and how the standard setting process goes on. Subsequently, I would
discuss on how IASB engaged with the stakeholders and a bit touch on how MASB role
played in the process. Furthermore, with the convergence of IASB with the FASB board
in the U.S, the standards have been shifted from the IAS14 to IFRS 8 operating
segments in November 2006. However, IFRS 8 defines operating segments as a
component of an entity that participates in the business activities that generates revenue
and incurs expenses. The operating segments are those constituent that give out
discrete information of the financial statements of a firm. It can also be applied to the
firms consolidated financial statements whose debt or equity is traded in the public
market. The implementation of IFRS 8 has brought about significant changes in the
accounting and financial treatment of segments and their reporting.
According to the Operating Segments, the standard have been developed even in
the late 1960s. On that time, the business organizations had become more complex and

the evaluation of management's operating and financial strategies regarding different


lines of businesses had become more difficult to evaluate. Therefore several national
accounting rule making bodies began to address this standard. 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 line-of-business information data in the annual reports issued to stakeholders. In
1976, SFAS 14, Financial Reporting of Segments of Business Enterprise, was issued
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 the International Accounting Standards Committee (IASC) issued IAS 14
Reporting financial information by segment with similar model to the United States
standard, SFAS 14. The IAS 14 suggested the disclosure of segment sales, results and
assets. In January 1996, Financial Accounting Standard Board (FASB) and Accounting
Standards Board of the Canadian Institute of Chartered Accountants issued an exposure
draft, "Reporting Disaggregated Information about Business Enterprise" that changed
the disclosures required by the US and Canadian Companies. This exposure draft was
the first to be developed jointly with a standard setter body from another country. It was
also the first standard to allow disclosures of accounting information that are not in
conformity with GAAP. After a number of changes of the standard the IASC issued a
revised IAS 14 Segment Reporting in August 1997. 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, Disclosures about segments of an enterprise and
related information. On 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 "Opearting Segments". On
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. IFRS 8 Operating Segments was published in its
final version by the IASB on 30 November 2006 and is effective for annual periods
beginning on or after 1st January 2009, superseding IAS 14 Segemnt Reporting. The
amended by Annual Improvements to IFRSs 2009 issued by IASB in April 2009, which
was effective on 1st January 2010. Subsequently IASB issued the amended Annual
Improvementsto IFRSs 2010-2012 Cycle in December 2013, which was effective on 1st
July 2014.

However, there is a significant difference between IAS 14 and SFAS 131 relates to
the process the standards prescribe for identifying reportable segments. Under IAS 14,
specific requirements governing the format and content of a reportable segment provide
the basis upon which all reportable segments are identified. An enterprise must comply
with those requirements regardless of the form and content of information provided by
an enterprise's internal financial reporting system (although IAS 14 presumes that the
enterprise's internal reporting system "normally" would provide the information
necessary to comply with IAS 14 requirements). In contrast, Statement 131 adopts a
management approach that relies on the form and content of information provided by an
enterprise's internal reporting system for identifying reportable segments. The
management approach requires an enterprise to report those segments whose operating
results are regularly reviewed by the enterprise's chief operating decision maker
(CODM). Segments reported under IAS 14 and Statement 131 would be comparable if
an enterprise chose to construct its internal information systems so as to comply with
both standards. Otherwise, significant non-comparability can result between the primary
segments identified under IAS 14 and the operating segments identified under
Statement 131.
Beyond identification of reportable segments, fundamental differences between the
IAS 14 approach and the Statement 131 approach have implications for the
measurement of reported segment information, even if the segments identified under
IAS 14 and Statement 131 are comparable. For example, IAS 14 requires that an
enterprise report "a measure of segment result" for each segment using the same basis
of measurement that is, accounting policies used in the consolidated financial
statements. Statement 131 requires disclosure of "a measure of profit or loss." The
measure of segment profit or loss disclosed in the financial statements is the measure
reported to the CODM, even if that measure is on a basis that differs from the basis used
in the consolidated statements. As a result, it is unlikely that the measure of profit or loss
disclosed for a particular segment by an enterprise following Statement 131 would be
the same as the measure of segment result that would have been disclosed had the
same enterprise followed IAS 14. As with identification of reportable segments, unless
internal information systems are designed to comply with both standards, segment
disclosures of enterprises following U.S. GAAP would differ significantly from those of
enterprises following IASC standards.
Furthermore, it is a known fact that the accounting development in Malaysia over

the last 15 years has been based on the accounting principles that MASB adopted while
recent

accounting

practices

has

seen

accounting

profession

exercising

its

responsibilities that are comply with MFRS. This marks the first time adoption of MFRS
for annual periods in Malaysia and is an effort by MASB to implement Malaysia's
accounting policy to be in line with the convergence project initiated and developed by
IASB and FASB. The previous FRS is then replaced by MFRS to place full convergence
on Malaysia accounting standard in order to cope with globalisation and to ensure
Malaysia's business is on the same field at international level. MFRS 8 is adopted from
IFRS 8 that has replaced IAS 14 of Segment Reporting. Any company in Malaysia that
adopted MFRS 8 will automatically be considered as adopting the international
accounting standard of IFRS 8.
The key advantage of operating segments is transparency. Analysts, potential
investors and other stakeholders need complete information to evaluate the
sustainability and growth of a company and to monitor the performance of its
management. The risk for investment in equity of a company that discloses complete
information is lower than a company that withholds information. Greater disclosure
should therefore bring down the cost of capital for a firm. Operating segments also
allows financial statement users to get a better sense of the fluctuations that might affect
overall numbers for each segment. If a business shows much higher earnings than
expected, for example, segment reporting shows where those earnings are coming from.
A stakeholder can look at the same report to determine if the numbers are sustainable.
Just like an every coin which has two sides, this standard has proved that it has
both advantages and disadvantages. Obviously, the advantages outweigh and the IFRS
is at the continued effort of modifying the standard to reduce the impact of its
disadvantages. Ideally, one of the key concerns for the developers of the standard was
to reduce the level of discrepancies, which arose as in the case between IAS 14 and the
SFAS 131. The main intention was to provide a management's view of the reporting and
implementation that would reduce the additional reporting expenses. In a post
implementation scenario certain viewpoints have been raised and identified. The
standard has seen better overall understanding of segmental reporting by both investors
and preparers. While investors are concerned that the profit figures are manipulated, the
preparers worry about the lost of vital information to the industry rivals. Many business
organisations have also identified worry regarding the inability to evaluate or weight their
companies' performance with that of others due to the adoption of the new IFRS.

Furthermore, some companies haven't even adopted the new standard for fear of
replication or doubling up of work.
This dissertation discuss on the standard of IFRS 8 operating segment. The study
began by acquiring information of a pre IFRS 8 environment and how its predecessor
IAS 14 functioned. It briefed about the significant differences between IAS 14 and SFAS
131. Subsequently, progressed in explaining about the benefits and disadvantages of
IFRS 8. The paper then discusses why IFRS 8 was needed and why it came into
practice. Finally, it is important to know that the financial reporting always depends on a
firm's situation and at last there are always people making decisions and providing the
information according to their individual motivations and incentives. A trifle touch in para
7, there are certain companies are not complying the full requirement that should be
disclose in their annual report such as family businesses. The standard setters need to
overcome this problem perhaps in the future. Consequently, the system should be
designed to provide applicable information to all stakeholders.