Post-implementation review of IFRS 8 'Operating Segments'
The IASB request for information (RFI) Post-implementation review: IFRS 8 Operating Segments was published for public comment in July 2012. The IASB received 62 comment letters in response to the RFI. In addition the IASB and staff took part in more than 60 outreach activities in order to plan and implement the post implementation review (PIR) process and gather information about issues identified for investigation.
During this meeting, the staff provided a summary of their analysis of the comment letters received and the information received from their outreach activities. The staff presented three papers to the IASB:
- Comment letter analysis and summary of outreach conducted
- Review of academic literature to December 2012
- Appendices: Summary of relevant literature to December 2012
The IASB members were not asked to make technical decisions during this session.
The staff noted that a diverse range of respondents responded to the RFI from preparers to regulators in a range of geographical locations. Six questions were asked in the RFI.
- Q1 — A request for information about the respondent.
- Q2 — What is your experience of the effect of the IASB’s decision to identify and report segments using the management perspective?
- Q3 — How has the use of non-IFRS measures affected the reporting of operating segments?
- Q4 — How has the requirement to use internally-reported line items affected financial reporting?
- Q5 — How have the disclosures required by IFRS 8 affected you in your role?
- Q6 — How were you affected by the implementation of IFRS 8?
The staff noted that the preparers generally thought that the standard worked well while the views of investors were mixed. The staff noted that auditors, accounting firms, standard setters and regulators were generally supportive of the standard but had made some suggestions for improving its application.
The staff noted that feedback from outreach and the comment letter process highlighted that:
- Information about operating segments is important to investors. It provides analysis that is fundamental to their understanding of the entity’s performance and their ability to predict future cash flows and profits.
- Many participants support the use of the management perspective. However there were some concerns expressed on the management approach particularly with participants noting that IFRS 8 results in a reduction of geographical information compared with IAS 14. Some participants did note that they thought that adequate geographical information was provided as a result of the implementation of IFRS 8.
- When the management commentary, the segment analysis and investor presentations align, the basis of segmentation is validated for all three. The alignment of segment information boosts investor confidence in the information presented and increases the value that investors place on each set of data.
- Some participants think that non-IFRS measures can be helpful in communicating information about operating risks and performance and in providing a useful link between the IFRS results and non-IFRS measures used in the management commentary. However investors were concerned at the number of different, non-IFRS bases used for reporting operating results because this greatly reduced comparability between entities. This view was also shared by some preparers that did not think that using non-IFRS measures was helpful. Participants were of the view that if non-IFRS measures are used they needed to be clearly explained.
- Investors were also concerned that some entities no longer report particular key line items, such as depreciation and cash flow, by segment.
- The concept of the CODM was difficult to understand and to implement.
- Many think that the aggregation guidance is complex and difficult to apply. In addition, many are concerned that it results in the aggregation of dissimilar operating segments. Many noted that the aggregation results in operating segment information that is not detailed enough to allow investors to fully understand the business and predict future results and cash flows.
- The incremental costs of applying IFRS 8 were generally low. Some preparers reported significant on-going costs savings because of increased efficiencies in merging internal and external processes and systems. Some noted that they had incurred additional costs in strengthening controls over internal reporting to ensure they could report robustly, training staff and education investors.
- Generally preparers think that the disclosure requirements of IFRS 8 are not burdensome except for the entity wide disclosures which are difficult to understand and apply. It was noted that such disclosures were inconsistently applied.
- Some participants (regulators) complained that the reconciliation requirements of IFRS 8 (i.e., reconciliation between the segment information prepared on a management perspective basis to the financial statements) are easy to comply with. Some think that the reconciliation requirements are too complex and not clear with some unclear how to show the different elements of the reconciliation separately.
The staff noted that messages from literature were consistent with those received from the outreach and comment letters. The staff noted that academic research (this consisted mainly of studies of listed companies’ financial statements before and after the application of IFRS 8) and other available literature highlighted:
- The early application of IFRS 8 does not appear to be common
- Fewer entities reported only one segment after the implementation of IFRS 8.
- Most companies reported no change in the number of reported segments under IFRS 8. Those companies that did report a change generally reported an increase in the number of reported segments.
- On average, the number of reported segments has not decreased under IFRS 8 However; there has been a decrease in the number of some key reported line items, especially in relation to segment liabilities and capital expenditure.
- There is mixed evidence about whether entity-wide disclosures have provided sufficient transparency to reduce concerns about a lack of geographical disclosures.
- Segment reporting (i.e., number of segments) may not have changed for many entities because the reporting structure adopted under IAS 14 was used for internal decision making. Thus no change was required when companies applied IFRS 8.
- There has been a decline in the number of items disclosed by segment, most prominently in relation to segment liabilities and capital expenditure
The staff noted that all respondents supported the IASB’s PIR initiative as the process provides an opportunity to assess the effect of the Standard on all types of stakeholders. The staff were of the opinion that they had received enough information to prepare a preliminary effects analysis including staff recommendations of areas for which agenda proposals should be prepared (which would be brought to the IASB at a subsequent meeting).
The staff asked the IASB whether they were of the view that there was enough information for the staff to prepare an effects review and whether the IASB members had any comments aside from those presented by the staff.
One Board member asked whether the comment in relation to the aggregation guidance resulting in the aggregation of dissimilar items was an inherent problem with the standard of whether it was a result of users misinterpretation of the standard – he cited that paragraph 12 of the standard did not allow the aggregation of dissimilar operating segments. He questioned whether users were not applying the standard as they should or whether the standard was not currently clear enough. This view was shared by another Board member. The staff noted that the answer was a combination of both – misinterpretation and incorrect application. One Board member noted that this could be addressed through educational material. The staff noted that there was an Annual Improvement proposing an amendment to the guidance in IFRS 8 regarding aggregation of segments that will be brought back to the Board in the February Board meeting.
Another Board member asked how many regulators/government agencies provided a response. He noted that the staff paper mentioned that this was quite high. He wanted to know what the key messages from the regulators/government agencies were in relation to IFSR 8. The staff noted that the regulators did provide formal comment letters and their view was that as the standard is based upon management’s perspective it is difficult to enforce. The staff also noted that a number of the regulators were particularly concerned where there was a disconnect between the management commentary and the operating segments. These regulators were challenging where this was the case and the staff noted that this has led some to believe that there is now greater alignment between the two.
Another Board member noted that any issues identified should be addressed in a focused manner by the Board if they are considered fundamental to the Board. However, she noted that even though there was a PIR, this did not necessarily mean an amendment to the standard and could be addressed through educational materials as mentioned by another Board member. She noted that the PIR exercise should also be used as a “lessons learnt” exercise for the Board for future standard setting.
One Board member asked whether the low number of comments received was representative and sufficient for the staff to prepare the effects review. He asked whether the low number of comment letters (compared to other standards) was because most users were not interested in the Standard or they were in agreement with IFRS 8. The staff noted that, for instance, few preparers did not comment as there was felt no need as the standard worked well for them.
Some Board members expressed concern about the timing of the PIR and that the effects review is too soon. The staff noted that the review needed to be timely to ensure that views are current and relevant.
On Board member noted an inconsistency between paragraphs 67 – 69 of the staff paper 6B. The staff noted that they would look into this inconsistency.
Notwithstanding the above comments, all IASB members tentatively agreed that there was enough information for the staff to prepare an effects review of IFRS 8 that would be presented at a future meeting.