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see
no
evil
F
or a disclosure standard, IFRS 8,
Operating Segments, caused an
unusual amount of fuss at its inception.
A few years on, the International
Accounting Standards Board’s (IASB)
post-implementation review of IFRS 8, launched
in July, has provided an opportunity for opinions
on its impact in practice to be shared.
IFRS 8 requires disclosure of segmental
information which has been prepared
and measured for internal reporting to a
chief operating decision maker (CODM) –
often described as a ‘through the eyes of
management’ approach. Effective since 1
January 2009, the requirements marked a
significant shift from those of its predecessor
IAS 14, Segment Reporting. IAS 14 required
segments to be identified on the basis of
differences in the risks and returns of either
the products and services provided (business
Concerns
remain
about the
reporting
of IFRS 8,
Operating
Segments,
but do critics
have enough
passion to
mount a new
fight, asks
Sarah Perrin
August
International standard
IAS 14, Segment
Reporting, issued
June
US regulator issues SFAS 131,
Disclosures about Segments
of an Enterprise and Related
Information standard
August
IAS 14 revised
January
Exposure draft
IFRS 8, Operating
Segments issued
November
IFRS 8, Operating
Segments issued
February
EC Accounting
Regulatory
Committee issues
recommendations
on IFRS 8
April
Opposition to
IFRS 8 in European
parliament
timeline:
IFRS 8
2007200619971981

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The ‘through
the eyes of
management’
approach
creates an
incentive for
companies to
‘see no evil,
hear no evil’
segment approach), or the economic
environments in which the company operated
(geographic segment approach).
‘There was huge controversy surrounding the
adoption of IFRS 8,’ says David Hijar, a graduate
of ESSEC-KPMG Financial Reporting Centre,
based at the ESSEC business school in France,
who wrote his dissertation on the standard. ‘Most
representatives of users of financial information,
during the public consultation by the IASB in
2006, expressed doubts about IFRS 8.’
There were concerns about the risk of lower
quality disclosures, the lack of consistency in
reporting formats for operating segments and
the potential for companies to restrict their
disclosures on geographical segments.
‘Once the standard was issued by the IASB in
2006, the European parliament exercised its right
to oppose it – the only time it has taken such a
stance,’ Hijar adds. Though the parliament did
finally endorse the standard in November 2007, it
expressed regret that the European Commission’s
impact assessment ‘did not sufficiently take into
account the interests of users’.
‘We had concerns when IFRS 8 was
introduced,’ says Liz Murrall, director of
corporate governance and reporting at the
Investment Management Association (IMA).
‘First of all, it was based on the US standard
SFAS 131, Disclosures about Segments of
an Enterprise and Related Information.’
The IASB seemed to be prioritising its
desire to achieve the convergence between
international and US standards at the risk
of ‘compromising high quality accounting
standards’, Murrall recalls.
Murrall also had concerns about the CODM,
and still does. ‘It’s not clear who that person is,
and this gives management a lot of flexibility in
terms of what they report,’ she explains. ‘They
could mask a poorly performing segment.’
A further weakness in IFRS 8 is that it
does not require liabilities to be analysed on a
segmental basis. ‘Therefore users are not able to
determine returns on capital for each segment,
because you only have information on the asset
side,’ says Murrall. ‘Another concern is that the
information is not comparable.’ Overall, she finds
it ‘difficult to identify any benefits for users of
accounts from the introduction of IFRS 8’.
Tim Bush, head of governance and financial
analysis at corporate governance consultancy,
PIRC, also has strong feelings about IFRS 8 –
and not positive ones. ‘It’s what I would call a
“starting at the answer model”,’ Bush says. ‘As
an auditor, you wouldn’t be able to argue with
what management were showing you. They
would say they were showing you what they
usually looked at.’
Eyes of management’approach
For such critics, the ‘through the eyes of
management’ approach creates an incentive
for companies to ‘see no evil, hear no evil’. This
could not only give management and board
members a false sense of security, but also
weakens the ability of investors to understand
risk, assets, liabilities and revenue streams within
separate business segments. Even the banking
crisis could, some argue, in part be linked to the
flaws within IFRS 8.
The IASB disputes this, however. A
spokesman says: ‘Banks had run into trouble
before IFRS 8 was introduced in 2009. The
“through the eyes of management” approach
was intended to make it easier for users to
identify risks because that approach highlights
to investors what risks the management are
focusing on in their internal reporting.’
There are supporters of the new approach
taken by IFRS 8. ‘We were fairly comfortable
that the “through the eyes of management”
approach, which is the central idea behind
IFRS 8, would give better information,’ says 66
November
European
parliament
endorses IFRS 8
September
EC issues analysis of potential
effects of the introduction of
IFRS 8 in the EU
July
IASB announces
plans for IFRS 8
post-implementation
review
November
IFRS 8 review
period ends
Q1
IASB to
analyse
comment
letters
May
EC begins
impact
analysis
1 January
IFRS 8
effective date
201320122009

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louise crawford
Lecturer of accounting,
School of Business,
University of Dundee
A number of companies took the
opportunity provided by the flexibility
of IFRS 8 not to disclose segmental
information on capital expenditure
david hijar
ESSEC-KPMG
Financial Reporting
Centre
Once the standard was
issued by the IASB in 2006,
the European parliament
exercised its right to oppose
it – the only time it has taken
such a stance
John Boulton, corporate reporting manager in
ICAEW’s financial reporting faculty. He notes
that although the drive for convergence was an
important factor behind the development of IFRS
8, that doesn’t necessarily invalidate its value.
Preparers of accounts were also generally
satisfied with IFRS 8 after its first year of
application, according to research commissioned
by ICAS, Operating segments: the usefulness
of IFRS 8. ‘It was easy for companies to
implement because the information was being
prepared internally anyway,’ says Dr Louise
Crawford, lecturer of accounting at the University
of Dundee’s School of Business and one of the
report’s authors.
The research did, however, find that users
of accounts were generally less comfortable
with IFRS 8. ‘They were slightly suspicious
that preparers could choose not to include
information,’ says Crawford. In year one at
least, the researchers found no evidence of
this occurring, though she notes: ‘One or two
companies had changed their internal reporting
structures, so there was a slight question
over whether some were trying to manage the
message rather than to manage the organisation,
changing external reporting lines so they didn’t
have to disclose certain information.’
First-year application
As part of the ICAS research, the annual reports
and accounts of 150 UK listed companies were
reviewed to see how they had applied the new
standard in its first year. The researchers found
that applying the management approach had not
resulted in a decline in the number of segments
reported: the average increased from 3.3 to
3.56 segments. However, items per segment
did fall. ‘A number of companies took the
opportunity provided by the flexibility of IFRS 8
not to disclose segmental information on capital
expenditure, liabilities and the total carrying
amount of assets by location of the assets,’ says
Crawford. She finds this ‘interesting’, given that
it would seem to be information likely to be ‘of
interest to the decision maker’.
Based on initial responses and feedback
sessions, the IASB suggests there are varying
investor views. Supporters are satisfied when
the management perspective forming the basis
for the segment disclosures agrees with the
management commentary and presentations
made to investors. But some investors do
question whether they are seeing the ‘real’
segments, which can happen when investors
view the business in a different way from
management. The IASB gives the example of
the telecoms industry: some companies manage
their business by geography and acquiring
customers is their main driver, but investors want
to know about product.
While opinions clearly do vary, the IASB is
likely to face pressure for at least some tweaks
to IFRS 8. Crawford, for example, recommends
that the international standard-setter could issue
guidance on materiality thresholds for defining
and aggregating segments, and consider

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john boulton
Corporate reporting
manager, ICAEW
We were fairly comfortable
that the “through the eyes of
management” approach, the
central idea behind IFRS 8,
would give better information
TIM BUSH
Head of governance and
financial analysis, PIRC
It’s what I would call a “starting
at the answer model”. As an
auditor, you wouldn’t be able to
argue with what management
were showing you. They would
say they were showing you
what they usually looked at
liz murrall
Director of corporate
governance and
reporting, Investment
Management Association
One concern is that
information is not comparable.
It is difficult to identify any
benefits for users of accounts
from the introduction of IFRS 8
their segment reporting disclosure in order to
enhance clarity and transparency’.
User acceptance
A major rewrite of the standard is highly unlikely,
however. Participation in various feedback
events has been lower than perhaps expected.
The Financial Reporting Council (FRC) cancelled
a September feedback meeting dedicated to
preparers of accounts due to low demand.
ICAEW, despite publicising the IASB’s review
and being willing to act as a channel for
providing feedback, had (as of late October)
received relatively little response. ‘If there is a
strong enough pool of residual discontent, you
generally get a few people coming forward to
share their concerns,’ Boulton says. ‘But there
hasn’t really been that response.’
Perhaps some critics of IFRS 8, despite
strong sentiments about its flaws, do not think
any significant amendments are likely and hence
see little point in making official representations.
As for preparers, they may be unwilling to share
any problems they have had in such a public
review forum. Or they may simply be satisfied
with IFRS 8. ‘Our sense is that preparers think
the standard works well, and don’t feel the need
to contact us,’ says the IASB’s spokesman.
changing disclosure requirements to force
companies to reveal the identity of the CODM in
the annual report.
Similar conclusions were reached by the
European Securities and Markets Authority
(ESMA), which published its own IFRS 8
implementation review in November last year.
ESMA encouraged issuers to ‘further improve
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