. Comment deadline is 19 May 2006.
Special IAS Plus Newsletter on ED 8
Click to download a Special Edition of the IAS Plus Newsletter (PDF 69k) explaining ED 8.
Discussion at the July 2006 IASB Meeting
The IASB issued its Exposure Draft ED 8 Operating Segments for public comments on 19 January 2006. The comment period ended on 19 May 2006 and the IASB received 182 comment letters.
Management approach
Some commentators did not support the management approach (18%) proposed by the Board, instead preferring the IAS 14 approach as the more superior guidance (compared to SFAS 131). Others agreed with the management approach for the identification of segments but not for measurement of the various segment disclosures (19%). Some respondents agreed with the Boards exposure draft (51%). 12% did not comment on this issue. After some discussion, the Board agreed to proceed with the management approach adopted in SFAS 131 for both the identification and measurement of segments.
Scope of the standard - entities that hold assets in a fiduciary capacity for a broad group of outsiders
IAS 14 currently applies only to entities whose equity or debt securities are publicly traded and entities that are in the process of issuing equity or debt in public securities markets. The ED proposed extending the scope to cover also entities that hold assets in a fiduciary capacity for a broad group of outsiders.
Some Board members expressed concern that if the IAS 14 scope is used for the new Standard, entities that are not publicly listed will have competitive advantage over those that are listed as they will not have to provide segment information. Consequently, those Board members preferred to include a 'scope in' covering fiduciary capacity. Others noted that the issue was wider as it affected manufacturing entities as well, not just insurers, co-operatives and similar entities (generally those subject to prudential supervision).
The Board agreed that as a principle, all entities claiming compliance with IFRS should comply with all individual IFRSs, therefore there should be no scope exemption in the Segment Reporting standard. To achieve this, the Board decided to prepare a separate exposure draft to be released at the same time as the exposure draft of the SME standard which will consist of a definition of publicly accountable entities. That separate exposure draft will set out the consequential amendments to the scope of the Segment Reporting standard. Once finalised, all IFRS preparers that are not publicly accountable will be subject to the SME standard (unless they chose to apply full IFRSs) which it is believed, will not require Segment Reporting. By default, all other entities claiming compliance with IFRS will be required to provide segment information.
Scope of the standard - Exemption for separate financial statements
Legal entities within a consolidated group are often set up to comply with particular legal or regulatory requirements, yet the business can often be run on a cross-border/cross-entity basis. As a result, business performance is often not considered at a legal entity level, since it is a largely artificial distinction. Collecting segmental information for such entities, where it will typically not be readily available, is likely to be costly and of little benefit to users and because the information provided would not reflect how the business is run i.e. it is not conducted within the context of that single entity.
After considering the above arguments, the Board agreed to include in the final standard a scope exemption for separate financial statements similar to paragraph 6 of IAS 14.
Competitive harm
Some respondents were opposed to a standard that, in their view, would potentially destroy shareholder value in some instances. They recommended that entities should be exempt from aspects of the standard if disclosure could cause competitive damage. With this approach, they suggested that an entity would be required to explain the reasons on a 'comply or explain' basis.
The Board rejected these arguments and voted unanimously to proceed without a competitive harm exception.
Discussion at the September 2006 IASB Meeting
The Board continued its consideration of comments received from constituents on its proposals to align IFRS with US GAAP with respect to segment reporting, and its redeliberations of those proposals.
The Board confirmed the proposals in the ED with respect to the following matters:
- The draft IFRS should not define the measures of segment revenues, segment expenses, segment results, segment assets and segment liabilities that are required to be disclosed.
- Reconciliation at the individual segment level should not be required.
- Segment information by individual country should not be required.
- The Board should proceed with the consequential amendments to IAS 34 Interim Financial Reporting.
The staff also brought various minor matters to the Board's attention, none of which was discussed at the meeting. One item to note is that the effective date for the standard will be 1 January 2009 (not 2007 as exposed). Early adoption would be permitted.
The Board agreed to add a requirement that an entity should report a measure of liabilities for each reportable segment if those amounts are regularly provided to the chief operating decision maker. (This is a requirement additional to those in FAS 131.)
The Board discussed issues raised by the Publish What You Pay campaign related to disclosures at the individual country level. Many Board members were sympathetic to the campaign's objectives (transparency with respect to payments to governments in resource-rich countries, which are often less developed countries.) However, the Board noted that it was not appropriate to attempt to address their concerns in this project, which was a tightly-focused convergence project.
The Board agreed that the campaign's request was a legitimate and serious one, and one to which the Board should be responsive. The Board established a sub-group of the Board (Messrs Cope, Garnett and Gelard) to assist the staff in engaging the campaign and others that could be of assistance. As the matters raised by these constituents were political as well as technical, groups that should be involved include the IASCF Trustees, the International Public Sector Accounting Board, the International Monetary Fund and its agencies, the World Bank, IOSCO, and the Financial Stability Forum.
Discussion at the October 2006 IASB Meeting
The staff presented a paper addressing the two issues raised by Board members on the pre-ballot draft expected to become IFRS 8 Operating Segments.
Disclosure of information about major customers - entities under common state control
Paragraph 33 of ED 8 Operating Segments stated that an entity shall provide information about the extent of its reliance on major customers. Thus, if revenues from transactions with a single external customer exceed 10 per cent of an entity's revenues, the entity shall disclose that fact. In this connection a group of entities known to a reporting entity to be under common control shall be considered a single customer, and a national government, a local government, or a foreign government each shall be considered a single customer.
Some respondents to the ED argued that difficulties could arise in relation to entities that are state-controlled. They suggested that a group of entities under common control should be treated as a single customer for this purpose only when prices or other material terms of trade are negotiated on a group basis.
The staff agreed in principle with this comment, and the amendment is reflected in paragraph 34 of the pre-ballot draft of IFRS 8.
The staff also noted that in September 2006 the Board agreed that the wording in ED 8 should be consistent with that used for a similar issue arising on IAS 24 Related Party Disclosures. At its September 2006, meeting the Board tentatively decided that when an entity qualifies as a related party of another entity simply because of the existence of common control from the State, IAS 24 should provide relief from the requirement to disclose related party transactions between those two commonly controlled entities.
In comments on the pre-ballot draft, two Board members argued that the amendment reflected in paragraph 34 should not be made as the wording has not yet been exposed as part of the IAS 24 amendment. Although the Board did not say so explicitly in the meeting, it seemed to accept that this issue would have to be treated as a consequential amendment to the expected IFRS 8 as a result of the forthcoming proposed amendments to IAS 24.
Definition of listed companies
The staff recommended to changing the wording of the scope of IFRS 8. Thus, IFRS 8 shall apply to:
- a. the separate or individual financial statements of entities:
- whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets) or
- that file, or are in the process of filing, their financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market and
- b. the consolidated financial statements of groups with a parent:
- whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets) or
- that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
The Board agreed to the staff's recommendation.
