IFRS Converges to U.S. GAAP on Segment Reporting

BY BARRY JAY EPSTEIN AND EVA K. JERMAKOWICZ
April 1, 2009

As part of the convergence effort between IFRS and U.S. GAAP, the International Accounting Standards Board published IFRS 8, Operating Segments, which became effective Jan 1. IFRS 8 supersedes IAS 14, Segment Reporting, and closely resembles the “through the eyes of management” approach of FASB Statement no. 131, Disclosures about Segments of an Enterprise and Related Information.

IFRS 8 applies to the individual financial statements of an entity and the consolidated financial statements of a group with a parent (a) whose debt or equity instruments are traded in a public market or (b) that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market. Reportable segments are operating segments, or aggregations of operating segments, that meet or exceed one of several quantitative thresholds; smaller segments may be optionally disclosed.

Under IAS 14, dual segment classifications were required—by both business and geographic area—with the primary typology determined by the predominant driver of the reporting entity’s risks and returns. Under IFRS 8, operating segments may be defined by product, geography or other attributes—consistent with management’s decision-making processes.

IFRS 8 allows for the discrete reporting of a component of an entity that sells primarily or exclusively to other op erating segments of the entity so long as the entity is actually being managed consistent with that strategy. This means that vertically integrated operations may be composed of several segments for the purpose of IFRS 8.

The principal mode of disclosure is governed by the concept of operating segments (a) that engage in business activities from which they may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), (b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance, and (c) for which discrete financial information is available.

This so-called “management approach” is so strictly interpreted under IFRS 8 that the amounts of each reportable operating segment item must be the same measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance. This requirement means that segment disclosures based on internal measures can diverge from IFRS.

The former product and geographical area disclosures have not been entirely forsaken. IFRS 8 requires the reporting entity to provide information about the revenues derived from its products or services, which can be grouped by similarity, about the countries in which it earns revenues and holds assets, and about major customers. The standard also requires disclosure of factors used to identify the entity’s operating segments, including the basis of organization and types of products and services from which each reportable segment derives its revenues.

IFRS 8 requires an entity to report a measure of segment profit or loss and of segment assets. It is also required to report a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker. It also requires disclosure, for each reportable segment (if the amounts are included in the determination of segment assets, or otherwise are reviewed by the chief operating decision maker), of the amount of investment in associates and joint ventures accounted for by the equity method, and the total expenditures for additions to noncurrent assets other than financial instruments, deferred tax assets, postemployment benefit assets and rights arising under insurance contracts.

IFRS 8 requires an explanation of any differences between amounts reported for segment purposes and those for the entity as a whole; the nature and effect of any changes from prior periods in the measurements used; and the nature and effect of any asymmetrical allocations (where bases vary) to reportable segments.

Finally, a series of reconciliations are potentially necessary for the total of the reportable segments’ revenues, total profit or loss, total assets, total liabilities and other amounts disclosed, to corresponding amounts in the entity’s financial statements. All material reconciling items must be separately identified and described.

Barry Jay Epstein, CPA, Ph.D., is a partner in Chicago-based Russell Novak & Co. LLP, and Eva K. Jermakowicz, CPA, Ph.D., is a professor of accounting at Tennessee State University, Nashville, Tenn. Their e-mail addresses are, respectively, bepstein@rnco.com and ejermakowicz@tnstate.edu.

 

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