Segment Reporting: Is IFRS 8 Really Better?

Abstract

This paper contributes to the debate on segment reporting standards in the UK and Europe and, specifically, the merit of International Financial Reporting Standard (IFRS) 8 relative to predecessor standards (Statement of Standard Accounting Practice (SSAP) 25 and International Accounting Standard (IAS) 14R). We carry out a longitudinal analysis of segment reporting practices of a large sample of listed UK companies, covering all three reporting regimes. Using the proprietary cost theory (PCT) as our theoretical lens, we present evidence consistent with PCT, that proprietary costs considerations influence companies’ segment disclosure choices. We show that when companies are required to disclose more detailed accounting information for geographical segments (e.g. when geography is the basis of operating segments, under IFRS 8, or primary segments, under IAS 14R), they choose to define geographical segments in broader geographic areas terms than was the case under SSAP 25. We find that although companies disclose greater quantity of segmental information under IFRS 8 and IAS 14R (than SSAP 25), the more recent standards brought about a notable reduction in (i) the level of specificity of the disclosed geographical segments, and (ii) the quantity of disclosed geographic segment profit data – one of the most important data types for users. While this may have reduced the proprietary costs of segment disclosures, the reduction in disclosure of segmental performance data may have reduced the usefulness of segment reports to investors.

Keywords:

• segment reporting
• IFRS 8
• IAS 14 revised
• SSAP 25
• geographical disclosures

Acknowledgements

We are grateful to Gillian Maciver for help with the data collection. We are grateful to Clive Emmanuel, Claire Roberts, Vivien Beattie, Günther Gebhardt, Pauline Weetman, the editors and an anonymous reviewer for helpful comments and suggestions. We are also grateful to the participants at the 2013 European Accounting Association Congress (Paris), the 2013 British Accounting and Finance Association Conference (Newcastle) and the 2013 International Workshop on Accounting and Regulation (Siena) for their suggestions on the earlier versions of the paper. All errors are the sole responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Nichols et al. (2012) also discuss the debate surrounding the adoption of IFRS 8.

2 Studies arguing for the importance of segment information include, for example, Boatsman, Behn, and Patz (1993); Bodnar, Tang, and Weintrop (2003); Herrmann and Thomas (2000); Maines, McDaniel, and Harris (1997); Mautz (1968); McConnell and Pacter (1995); Paul and Largay (2005); Street et al. (2000); Roberts (1989); and Veron (2007).

3 Standards vary in their terminology regarding lines of business segments, from ‘classes of business’ in SSAP 25 to business segments in IAS 14R and business activities in IFRS 8. As in prior literature (e.g. Berger & Hann, 2003; Herrman & Thomas, 2000; Street et al., 2000), we use LOB to refer to business segments.

4 However, SFAS 14 also required the disclosure of depreciation, capital expenditures and equity in the net income and assets of associates for industry segments.

5 A more detailed summary of the deliberations and processes that led to the issuance of IAS 14R can be found in Street and Nichols (2002).

6 IFRS 8 only differs from SFAS 131 in that it does not require segment reporting in interim reports, it requires the reporting of segment liabilities (if this information is provided to management) and it defines segmental assets as ‘non-current assets', which includes intangible assets.

7 Crawford et al. (2013) point out that in informing its decision to converge with SFAS 131, the IASB used evidence from US studies showing that segment disclosures under SFAS 131 improved predictive accuracy and were quickly impounded into share prices. They point out the problem of relying upon the US evidence on SFAS 131 vs. SFAS 14 as a proxy for IFRS 8 vs. IAS 14R analysis, because although the disclosure requirements of IFRS 8 and SFAS 131 are nearly identical, the requirements of IAS 14R are different from those of SFAS 14.

8 Nichols et al. (2012) examine the impact of IFRS 8 in a sample of 14 European countries, not including the UK.

9 Crawford et al. (2012) treat the IFRS 8 entity-wide disclosures as segments, but do not discuss the reasons for doing so. Our study, however, demonstrates the rationale for treating the entity-wide disclosures as segments and, furthermore, reports two sets of results, with and without the entity-wide disclosures being treated as segments.

10 Segment information production costs can be another factor, though this would not be the case for very large companies, which are the subject of our analysis, hence we do not consider this factor in our study.

11 Although the 127 companies account for less than 25% of the total number of non-financial companies listed on the London Stock Exchange, they account for close to 90% of the market capitalisation of all non-financial segment-reporting constituents of the FTSE All Share index.

12 The products/services areas reported under entity-wide disclosure are different from the reported business operating segments. There is, thus, no double counting when products/services areas are treated as segments under the broad approach. For example, Antofagasta PLC reports seven business operating segments (Los Pelambres, El Tesoro, Michilla, Esperanza, Exploration and evaluation, Railway and other transport services, and Water concession) and four products/services areas (copper, molybdenum, silver and gold). The company also reported nine geographic areas under entity-wide disclosures.

13 Because line items of similar accounting substance may have different names under different standards, we group all segmental accounting line items into broadly defined categories that capture their accounting substance. For example, all segmental sales-related definitions (e.g. the sales by origin and sales by destination items of SSAP 25, the revenue from external customers item of IAS 14R and the revenues from external customers item of IFRS 8) are denoted as sales.

14 The results for 2003 are very similar to those of 2002 and 2004 (SSAP 25 years), and those of 2007 are very similar to those of 2006 and 2008 (IAS 14R years). To simplify the tables, data for years 2003 and 2007 are not reported, but are available upon request.

15 IAS 14R required the disclosure of a substantially greater volume of accounting information for primary segments than for secondary segments.

16 An alternative explanation may be that the firms’ internal reporting and organisational structures tended to be organised along business lines rather than geographic dimensions.

17 Valuation literature demonstrates that earnings (profit) and book value (assets) are the primary inputs in accounting-based valuation models, and analyst literature suggests that earnings, sales and assets are the most important accounting information types for analysts (Breton & Taffler, 2001; Garrod & Rees, 1998).