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Financial Accounting Performance
AASB 114 is segment reporting. According to Deegan (2007), reporting entities gets involved in different activities therefore they provide aggregated results to financial statement users in their consolidated financial statements including some eliminations and adjustments derived from those different activities and locations (p.839). So, we are aggregating the results of many individual entities when we talk about reporting entity but among those individual entities, some might perform well or some perform poorly. Therefore, consolidated balance sheet is provided in order to hide those poor performances. Moreover, these combining balance sheets will have different financial structures and as a result there will be loss of information. Despite this, in the aggregation process profits and losses are out of sight.
AASB 8 is operating segment. According to AASB 8, an operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, 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 assess its performance; and for which discrete financial information is available.You can get expert help with your essays right now. Find out more...
1. The advantages of segment reporting
According to Deegan (2007), advantages of segment reporting are as follows:
- Segment reporting highlights performance of different segments at different levels of success and determines the overall business risk of an organization.
- It helps managers in decision making even if regulation is missing.
- Segment data provides managers to reveal accountability which in turn attracts additional investment funds.
- Even though if different segments in an organization are involved in different activities, it shows users of financial statements to forecast future profitability of an organization.
- It provides information to interested parties about operations of various sectors and locations of an organization (p.844-845).
2. The disadvantages of requiring the provision of segment information
According to Deegan (2007), disadvantages of segment reporting are as follows:
- Segment information increase costs for the organization where managers refused to take business risks in that particular segment which performs poorly.
- Due to segment reporting, competitors will get information about high profit segments of an organization. Thus, they will know how that organization is performing well than other organizations. As a result, competitors can further investigate into a particular segment.
- Segment reporting highlights poorly performing segments and therefore it provides competitors to takeover bids.
- Unwanted attention from government and interest groups is drawn towards high profit segments due to segment reporting (p.845-846).
3. The requirements of the Australian Accounting Standard including the changes required when AASB 8: Operating Segments’ is adopted in 2009.
According to Deegan (2007), changes required when AASB 8: Operating Segments is adopted in 2009 and requirements of the Australian Accounting Standard are as follows:
- AASB 8 does not apply to not-for-profit entities in common with AASB 114 whereas AASB 114 applies to broad range of for-profit entities.
Identification of segments
- AASB 114 provides information on a primary basis of segmentation and secondary basis of segmentation-business or geographical segmentation whereas separate identification of primary and secondary segments is not required under ‘new’ standard AASB 8.
- Operating segments would be identified by an organization on the basis of internal reports. These internal reports are reviewed by organization’s chief operating decision maker so as to make decisions about allocating resources to the segment and assessing their performance. On the other hand, AASB 114 requires identification of sets of segments based on related products and services; and geographical areas.
Measurement of segment information
- In AASB 8, as per the definition of operating segment, it allows a component of an entity to sell either primarily or exclusively to other operating segments of an entity, if the entity is managed that way whereas AASB 114 requires entity to be identified as reportable entity if majority of its revenue is earned from sales to external customers.
- AASB 8 requires financial information about operating segments’ revenues, profits, assets and liabilities in order to provide measurements for chief operating decision maker for internal decision making. By comparison, AASB 114 limits segment information to be adopted as per accounting policies for preparing and presenting the external financial statements.
- AASB 8 does not require the detailed definitions of segment revenue, segment expense, segment result, segment assets and segment liabilities. In contrast, AASB 114 requires defining these terms relatively in detail.
- AASB 8 requires reportable segments to provide a number of financial disclosures. In addition, it also requires the entity’s financial statements amounts to be corresponding to reconciliations of total reportable segment revenues, total profit or loss, total segment liabilities and total segment assets.
- AASB 8 requires all entity-wide disclosures which are related to the entity’s products and services, geographical information and information about major customers.
- Above all, AASB 8 is more principles-based than AASB 114 being rules-based (p.846-864).
- According to Accounting Handbook (2007), a business segment or geographical segment is identified as a reportable segment if: