IFRS on Segment Reporting Hits Roadblock

The international accounting standard for segment reporting has run into strong opposition from industry groups as it awaits European Commission approval. Adopted by the IASB as part of the movement towards the convergence of US GAAP and IFRS, the standard (IFRS 8) embodies the management approach to segment reporting set out in FASB Standard No. 131. A failure to approve IFRS 8 would certainly be a blow to the US GAAP-IFRS convergence roadmap.

Generally, the information to be reported under IFRS 8 would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segments. Such information may be different from what is used to prepare the income statement and balance sheet. The standard therefore requires explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognized in the income statement and balance sheet.

In a letter to the European Commission, the UK Investment Management Association said that an endorsement of IFRS 8 would essentially be the unilateral adoption of a US standard that is completely different from the underlying legal framework of many EU nations. Further, IFRS 8 will not result in meaningful disclosure because the standard does not provide for an analysis of cash flows, which are important to an analysis of a financial statement.

In addition, the association criticized the standard’s management approach to segment reporting, arguing that the accounting policies management uses for segment information may differ from those used in the company’s financial statements since internal management reports tend to be prepared in accordance with national GAAP. Moreover, since IFRS does not require liabilities to be analyzed by segment, users of the financial statement will not be able to determine returns on capital for each segment.