Success in segments
1 Feb 10
The Financial Reporting Review Panel (FRRP) of the Financial Reporting Council is concerned about how companies are reporting the performance of key parts of their business in the light of the introduction of IFRS 8, Operating Segments
The Financial Reporting Review Panel (FRRP) of the Financial Reporting Council is concerned about how companies are reporting the performance of key parts of their business in the light of the introduction of IFRS 8, Operating Segments.
IFRS 8 requires companies to provide an analysis of profit, assets and liabilities so that investors can see the performance of the principal operations or “segments”. The new standard requires management to define the company’s operating segments in accordance with how its operations are managed in practice.
In this way the IASB sought to respond to criticisms of IAS 14 (the previous standard), to reduce the ability of management to disguise poor performance of a part of the business, and to enable investors to review a company’s operations from the same perspective as management.
The FRRP has reviewed a sample of 2009 interim accounts and 2008 annual accounts (when they had earlier applied the standard) and has asked a number of questions about the implementation of IFRS 8.
Some common themes have emerged. In particular, the FRRP has asked a number of companies to provide additional explanations where:
• only one operating segment is reported, but the group appears to be diverse with different businesses or with significant operations in different countries
• the operating analysis set out in the narrative report differs from the operating segments in the financial statements
• the titles and responsibilities of the directors or executive management team imply an organisational structure which is not reflected in the operating segments
• the commentary in the narrative report focuses on non-IFRS measures whereas the segmental disclosures are based on IFRS amounts.
The FRRP encourages boards of directors to test their initial conclusions about their segmental reporting by considering the following questions:
• What are the key operating decisions made in running the business?
• Who makes these decisions?
• Who are the segment managers (as defined in the standard) and who do they report to?
• How are the group’s activities reported in the information used by management to review performance and make resource allocation decisions between segments?
• Is any proposed aggregation of operating segments into one reportable segment supported by the aggregation criteria in the standard, including consistency with the core principle?
• Is the information about reportable segments based on IFRS measures or on an alternative basis?
• Have the reported segment amounts been reconciled to the IFRS aggregate amounts?
• Do the accounts describe the factors used to identify the reportable segments including the basis on which the company is organised?
As a final question, management should ask themselves whether the reported segments appear consistent with their internal reporting and, if not, why not?
The FRRP draws attention to the fact that no exemption is given from any aspect of IFRS 8 on the grounds that disclosure would be commercially prejudicial.