The reasons of the importance of MFRS 8 for accounting users

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Corporate Accounting 2

The reasons of the importance of MFRS 8 for accounting users

Malaysian Financial Report Standard (MFRS) 8-Operating Segment is referring to an entity shall disclose that information to enable the financial and nature effects of business activities in which it is engages and economic environment in which it is operates.”

Operating segment report will be able for the company’s chief operating decision maker to make the decision and also allocation of resource for each department according to their performance. The chief operating decision maker can view the performance of each department from the segment report that prepared by the department manager. This is due to the department manager is the one who know everything clearly about the operating of the department so that they can clear all the queries of the entity’s chief operating segment decision maker.

From the segment report submitted to entity’s chief operating segment decision maker, they also can know how well for each department performance using those resources that has been allocated for them. But not every department is necessarily do prepare the segment report and reported to the entity’s chief operating segment decision maker and entity’s post-employment benefit plan is not consider as an operating segment.

In order for operating segment decision maker to analysis the segment report that submitted by those department that required to prepare the segment report, the report should be include the information about the products and services that provide, information about those geographical areas that products and services supplied, and information about the major customers that consume the products and services.

In order for entity’s chief operating segment decision maker make a decision about the allocation of the resources, the department manager shall disclose the basic of accounting information for any transaction between those reportable segments. Besides of that, department manager shall disclose the nature and effect of any asymmetrical resources allocations to the reportable segments. This is because the department manager might allocate depreciation expenses to a segment without allocating those related depreciable assets to the particular segment.

At another side, in order for entity’s chief operating segment decision maker have more understanding of the department’s performance, department manager should disclose more information that enable the entity’s chief operating segment decision maker to evaluate the financial and nature effect of the business activities of the department in the segment report. The operating segment information in the segment report is about the general information that reported in the segment profit or loss, assets, liabilities and the basis of measurement, and reconciliations of total for segment revenue, If the department manager judges than an operating segment has been identified as a reportable segment after the immediately preceding period, the information about that particular segment shall continue be reported separately in the current period.

When the department manager preparing the operating segment report to submit to the entity’s chief operating segment decision maker, there have a practical limit of then number of reportable segments for each department separately disclose beyond which those segment information may become too detailed.

Motivating factors for firms to report the segments results

The Operating Segment which was introduced in International Financial Reporting Standards (IFRS) 8 was meant for regulating the reporting especially towards the external reporting. Certain criteria were meant on the standards to be disclosed for the reports to the general public. The motivating part about this segment was that managers were induced by their strength of using it.

Given that the strength of IFRS 8, managers now can decide on their planning for company, forecasting the market for each segment throughout the globe. Through forecasting, they understand each country’s economy and based on that to get a better measure. If succeed, not only the company are able to survived from the harsh economy that would rain down upon country, people within the company gets to work happily and boost their morale for working it.

The segments has breakdown several understanding for the company to apprehend, these were analyze thoroughly for further improvement, such improvement are needed so that the employees of the company understand and realized their problem in the company. Managers would hope that through these problems, it will then invite new innovation for the company to gain competitive advantages.

Gaining competitive advantage is important for the company, hard works and efforts are poured into regional areas to best the competitors of the same field. Improvisation has to come into place by looking into the data analysis to measure further how the competitors worked so well in the particular region and try to come out with strategies to overcome the problems.

These reporting will indicates the results of the strategy that the company executed and would boost the faith of the investors and potential investors to pour in more investment into the company. Seemingly a good deal would bring up the market and will aid the company to achieve a greater height.

With the overflowing investment, company could work on to a newer fields and explore more alternatives. This would bring in more challenge to the company where they could compete in a bigger stage with other strong competitors. Companies that able to accept the challenge is able to strive in a bigger market. Since the given segment reports also indicates the customaries and the legalities of the country, by using the given data, efficiencies are able to achieve with minimal cost and greater value in return.

In addition, the result would be a better increment and increase of salaries for the employees. This will further increase the company’s loyalty and high quality work could be produced.

Demotivating factors for firms to report the segments results

What does operating segment does? Operating segment is an independent unit which analyse the business doing. It brings out the discriminate revenue which and for which separate books of transaction. Its information is actually used within the organization only but sometimes it will leak out which will cause a hoo-ha in the business organization.

Company have this information would ease the management as it is this detail about which help in financial planning as it would show the organization past performance. This information if misused by competitor will cause the company in trouble as it is the backbone of the company. The company will be expose to thread as the competitor know the weakness of the company. By having this information the competitor can come up with a new plan to over thrown the problem the company is facing. This not only brings thread to the company but as well as the shareholders as they are the one that investing the company, if the company fails the shareholders would also suffer lost as the investment in the company goes to vain. This has been truly demotivating the company to report this segment (IFRS 8).

Other that information about financial planning, the information in International Financial Reporting Standard (IFRS) 8 also consist of geographic segment which actually reveal the potential market to the competitor as well. This would give them a head start on the information on the out coming new strategy or places to venture. This will be a very convenient information for the competitor as they do not need to spend so much time on making research and survey on the upcoming places to venture. Instead of bringing advantage to our company this information about potential place for our business to start is actually being used for free and even had a head start before us. In the end, we not only losses a good potential place but also cost and money to even survey on the place which will ended up in other peoples benefit.

Last but not least, the information is so sacred that it is dangerous to even leak a little out. As I was saying, this operating segment is an independent unit as it needs new member and qualification people on doing it. It takes times and money to actually duplicate the existing information just because we want for a more convenient and easier understanding. Monetary fund is needed to set up an office, hired more qualification people as well as making a system so there is not easy for competitor to get the information will cause a burden for the company. This will get complicated as the people is not trustworthy, therefore it is hard to motivate the company to report this IFRS 8 operating segment.

Strength of MFRS 8

Operating segment has adopt the management approach, which is the amounts of that operating segment is disclosed based on the information presented to management but not prescribe the measurement policies for the information to be disclosed.

With the management approach, Malaysian Financial Reporting Standard (MFRS) 8 operating segment has strength in maintaining the consistency between the information reported to user as well as the management which benefits users to access to the way entity structured to reflect the risk and opportunities that management think are important.

The approach that MFRS 8 adopted also serves ability for users to predict the management’s actions and reactions that can significantly affect the entity’s prospects for future cash flow because they are able to viewing the entity’s operations from the same perspective as management. Because of this, it benefits investors as well by providing them with more relevant and reliable information about the entity’s performance

MFRS 8 has the ability to make the operating segment information consistent with the information reported elsewhere in annual report, for example in management commentary where management’s explanation of the entity’s financial condition, the changes in financial condition, the results of operations and also the causes of changes in material line items is set out.

Besides that, MFRS 8 idea in using management/internal reporting to disclose information will enhance the ability of entity to report more segment information in interim financial reports as a consequential amendment to the International Accounting Standard (IAS) 34 Interim Financial Reporting that requires entity to report selected financial information about its operating segment in interim financial reports. As a result of many information to be disclosed and it is based on management reporting, the frequency of interim financial report will also increases and the interim financial segment will be provided timely and without incurring substantial additional cost. MFRS 8 also specifies the way entity should report information about its operating segment in annual financial statements.

According to MFRS 8, the reportable segment that the entity determined from quantitative thresholds (revenue, profit or loss and assets) has to disclose specified amounts or information that enables users of entity’s financial statements to evaluate the nature and financial statement effects of the business activities in which it engages and the economic environments in which the entity operates.

Other than that, MFRS 8 will provide the ability in allocating resources to operating segment within the entity and evaluating the operating segments performance in an easier way as the financial information is required to be report on the same basis. This ability is also exist because entity will have the chief operating decision maker (CODM) responsible and making decision in the allocation of resources, evaluation of operating performance through the available financial information and correctly identify the reportable segments.

As MFRS 8 is consistent with International Financial Reporting Standard (IFRS) 8, hence they are treated in the same way. IFRS 8 has its strength because it has achieved the convergence with United States Generally Accepted Accounting Principles (GAAP). This convergence will helps in reducing the uncertainty among market participants, such as investors, users of financial reporting and the convergence also promote harmonization by aiding in developing a set of high quality global accounting standards that can be used to prepare financial statements for both domestic and international capital markets. IFRS 8 also has a short term convergence project with US Financial Accounting Standard Board (FASB), this helps to reduce the differences between IFRS and US GAAP that could be resolved in a relatively short time frame.

Weakness of MFRS 8 Operating Segment

The most common argument related to Malaysian Financial Reporting Standard (MFRS) 8 Operating Segment is the proprietary costs or patent fees that may occur for the company that decides to reveal the additional information in financial statement. In order to avoid the existence of proprietary costs, the company will choose not to disclose information that is not required by any regulation. Other than that, an increase in disclosure requirements may subsequently lead a company to the disclosure of less useful information.

Besides that, there are also some disagreements with adopting the management- perspective approach in the MFRS 8 Operating Segment as geographical analysis would not be available and without geographical disclosure, investor will not be able to assess correctly a multinational company’s risks, potentials and high amount of different economic environments in which it operates. Individual company’s internal reporting might also not comparable between companies that engage in similar activities and therefore the comparability of information across companies will be lost. Other than that, by using management information as a basis for segment reporting would dissociate the reported segment data from other reported MFRS financial statement information.

Segment reporting provides transparency to the public by reveal that which areas are profitable and which areas are drains on the bottom line. The profitable and non-profitable segment of the company were reveal to public will lead to investor to choose to invest in the area that profitable and competitors also able to access to the information concerning segment profitability of the company. Other than that, managers may also attempt to hide unprofitable ventures to ensure more investor will invest in the company.

In addition, operating segment may lead to the data manipulation if information is reported “through management’s eyes” style. This will gives the company leaders or managers more discretion in determines how operating segments are constructed to what metrics are reported. Entity’s managers may group together businesses with the different business models and choose to only disclose good reputation to shareholders and hide unprofitable information. For example, losses of A department could be grouped with an unrelated but profitable business department to paint a better picture of the department performance.

Other weakness of MFRS 8 Operating Segment would be inconsistent segments reported between companies. It is occurs where different company use different method to disclose information in the financial statements. This will make it difficult for the user to compare and analyze the financial statement of different company. Besides that, there is also lack of standardization of the required information where the company may structure internal reporting information in different ways for different decisions.

As MFRS 8 is consistent with International Financial Reporting Standard (IFRS) 8, hence they are treated in the same way. IFRS 8 required non-IFRS are to be treated same as other accounting principles of the financial statements and it should be measures in segment reporting. Since this is the new requirement by IFRS 8, it will cause the company to have confusion in preparing the financial statement as they might still not able to adapt to the changes. Besides that, it might also take time for the company to prepare financial statement because they are required to include both IFRS and non-IFRS measures in the segment reporting.


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