By James Hamilton, J.D., LL.M.
IFRS 8, the international financial reporting standard for segment reporting, would have a positive effect on financial statements and should be quickly approved, said EU Commissioner for the Internal Market Charlie McCreevy in remarks to the European Parliament. IFRS 8 was adopted by the IASB as part of the Board’s joint convergence project with FASB. IFRS 8 adopts the management approach to segment reporting that is embodied in FASB Standard No. 131.
IFRS 8, the information to be reported would be what magement 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.
Referencing a recent Commission report, Mr. McCreevy said that the use of the management approach in IFRS 8 has an overall positive effect on the quality of segment information, whose usefulness and relevance would increase, which, in turn, will outweigh concerns expressed about the comparability of financial reports. IFRS 8 appropriately addresses the global needs of users of financial statements for geographical disclosures and, in practice, would not reduce this information by comparison with the old standard IAS 14.
The commissioner also emphasized that IFRS 8 does not create problems relating to corporate governance in the EU. The standard would also provide appropriate segment reporting rules for smaller listed companies. It is in the interest of smaller listed companies to provide the same information as larger companies, he reasoned, since the information needs of investors do not substantially differ according to company size.
Urging early approval by the European Parliament, the commissioner noted that IFRS 8 would remove uncertainty about the treatment of segment information in 2007 financial statements. He said that issuers are pressings for an early indication of the Commission’s intentions. An endorsement of IFRS 8 would also support the EU's overarching objective of IFRS as adopted in the EU being recognized in all jurisdictions, including the US, without requirement for reconciliation.
The European Parliament had earlier expressed its concern that an endorsement of IFRS 8 would imply moving from a regime which clearly defines how listed EU companies should define and report on segments to the FAS 131 approach that permits management itself to define operating segments as management finds suitable.