This essay is in lieu of 15% of our final coursework towards the module of Contemporary Issues in Financial Reporting and will Discuss the impact of IFRS 8 on reporting practices. The essay will not only throw light on what the International Financial Reporting Standards are but will also talk about the standards before IFRS 8, the need, advantages, disadvantages, the current state of this standard but also the impact on current reporting practices.
Accounting standards around the world have progressed over centuries of business and capital market expansion. In this manner, accounting standards historically were intended to meet the needs of each nation's capital markets. Those standards that were created to work well in the legal, cultural, political and economic context of each nation became the "universally accepted accounting principles," or GAAP, for that particular dominion. Logically, different norms in each nation led to different GAAPs in each nation. The growing changes of globalization offered a challenge to these "legacy systems." Global conventions for the Internet, electronic payments, software systems and cargo shipping established the potential value of uniform global systems. A discussion began among market contributors over whether the global capital markets were likely to benefit by having a single set of high-quality accounting standards that could be useful around the world. In order to create a constant global system for financial reporting, the IASB was formed to function as the global accounting standard-setting body. In 2001, the IASB propagated the first replication of IFRS, offering the possibility of a single set of high-quality accounting standards that can be utilized by all nations. The IFRS (international accounting standard) agrees upon certain ways in which transactions and events need to be reported in the financial statements. In contrast to the GAAP, IFRS is based upon principals rather than hard-set rules. It is essential for any listed company to follow international financial reporting standards for various reasons that will be discussed in this essay. In todays fast pacing world, it is necessary to comply with foreign reporting requirements for the reason that it will help modernize any companies financial reporting. Moreover, IFRS will aid the company minimize costs with the outcome of common reporting system, steadiness and uniformity in legal reporting matters. Secondly, adoption of IFRS would permit companies in creating benchmarks in comparison to foreign competitors. It would allow the corporations to have an edge over its opponent firms in the eyes of the investors. With the need for IFRS, it would be of ease to generate international mergers, acquisitions and joint ventures. Fourthly, the organizations can trade in securities and shares on the stock exchange throughout the world.
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With the convergence of IASB with the FASB board in the U.S, the standards have been shifted from the IAS14 to IFRS8 operating segments in November 2006. IFRS 8 defines operating segments as a component of an entity that participates in the business activities that generates revenue and incurs expenses. The operating segments are those constituent that give out discrete information of the financial statements of a firm. The different firms adopted IFRS8 from 1st January 2009. Different firms with separate financial statements use IFRS 8. It can also be applied to the firms consolidated financial statements whose debt or equity is traded in the public market. The implementation of IFRS 8 has brought about significant changes in the accounting and financial treatment of segments and their reporting. Despite, several qualms regards that surfaced at the time, the standard, contrary to these qualms has not affected the number of segments disclosed. Considering an average of 150 companies, the mean has increased from 3.30 to 3.56. On the basis of geographical location, this standard did manage to disclose much than its predecessor IAS 14. Many companies, which had previously not tended to disclose smaller segments, have also now started too, segments such as Non-current assets, tax etc. are also being disclosed. With regard to adherence to standards and laws, research after the implementation has concluded that only marginal number of companies rely on measures other than using IFRS, and infrequent. Hence, segmental reporting is prepared and reviewed more in accordance with IFRS, rather than other basis like GAAP. Essentially, many a times, discrepancies have arisen because of differences in reporting between FTSE100 and FTSE200, with regard to their recognising of CODM (Chief Operating Decision Maker). Through its ability to conduct interim audits, the standard also provides the benefit and flexibility to draw attention to the interim risks and their resolving, this in turn provided a better association between financial statements and the reports. . Nonetheless, it has been identified, the disclosures in terms of the word count is higher in the new standard. A quintessential advantage that this standard provides to companies is that the reports are prepared in accordance with the management's viewpoint. This has given both the users and prepares an opportunity look at the management perspective on reporting.
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The disadvantages of the new standard (IFRS 8) to the old standard (IAS14) can be understood. IFRS 8 is involved in the adoption of a US standard that was "vague and represented US requirements over European accounting methods" (Neveling, 2007). The new standard adopts the management approach in defining segments. The Management approach necessitates "identification of operating segments on the basis of internal reports that are regularly reviewed by the entity's chief operating decision maker in order to allocate resources to the segment and assess its performance" (IASB, 2006). The main limitation of IFRS 8 is that it obliges the revelation of information that is made and measures for management decisions. The financial information prepared by GAAP for external users. A groups segments and how the performances are measured and reported is what the IFRS 8 management approach depends on. Sukhraj (2007) points out concerns with regard to the chief of decision maker (CODM) in IFRS 8. He reveals that the standard is not specific of who should regularly review the operating segments. Under the new standard IFRS 8, it requires companies to recognize the operating segments on the basis of internal organizational structure rather than in terms of risks and rewards. The implementation of IFRS 8 could cause changes in operating segments in different companies. And this would lead to a lot of chaos and confusion in different companies. From the perspective of a company, to change from IAS14 to IFRS8 a company had to undergo through a lot of costs, which was considered unnecessary for the reason that IAS14 already had a mix of management approach in it. IFRS 8 does not give an explanation to the terms segment revenue, segment expense, segment result, segment assets and segment liabilities. On the other hand, this standard asks for segment profits and losses, segment assets and liabilities for each reportable segment.
Just like an every coin which has two sides, this standard has proved that it has both advantages and disadvantages. Obviously, the advantages outweigh and the IFRS is at the continued effort of modifying the standard to reduce the impact of its disadvantages. Ideally, one of the key concerns for the developers of the standard was to reduce the level of discrepancies, which arose as in the case between IAS 14 and the SFAS 131. The main intention was to provide a management's view of the reporting and implementation that would reduce the additional reporting expenses. In a post implementation scenario certain viewpoints have been raised and identified. The standard has seen better overall understanding of segmental reporting by both investors and preparers. While investors are concerned that the profit figures are manipulated, the preparers worry about the lost of vital information to the industry rivals. Many business organisations have also identified worry regarding the inability to evaluate or weight their companies' performance with that of others due to the adoption of the new IFRS. Furthermore, some companies haven't even adopted the new standard for fear of replication or doubling up of work.
This present research was designed to evaluate the standard of IFRS 8 segmental reporting. The study began by acquiring information of a pre IFRS 8 environment and how its predecessor IAS 14 functioned. It briefed about the key features of IAS 14 and then progressed in explaining about the current states of IFRS 8. The paper then discusses why IFRS 8 was needed and why it came into practice and moves on into understanding the disadvantages and advantages of the IFRS. Finally, the research discussed the current state of standard and how the standard has made significant implications of the reporting practices in amongst different companies.