Post-Implementation Reviews for IASB and FASB Standards: A Comparison of the Process and Findings for the Operating Segments Standards

Abstract

The International Accounting Standards Board (IASB) and the Financial Accounting Foundation (FAF) have recently completed post-implementation reviews (PIRs) for their converged standards on operating segments IFRS 8 and SFAS 131. The two accounting bodies use PIRs as an additional standard assessment mechanism. This paper (1) provides an overview of the main differences and similarities between the two PIR processes and (2) compares the findings of the PIRs on the operating segment standards supplemented with insights from a survey of the segment information notes of a sample of STOXX Europe 600 companies. The IASB and the FAF set the specific PIR objectives and conduct the information gathering phase differently. For the IFRS 8 and SFAS 131 PIRs, these differences meant that the FAF focused more narrowly on how SFAS 131 performs compared to the previous standard, while the IASB is aimed to more broadly assess constituents' views on whether IFRS 8 works well in practice. Comparing the PIR findings for the operating segments standards is warranted given that the standards are converged and that the standard setters re-expressed their commitment to keep them substantially converged. Uniform PIR processes could have eased the cooperation in maintaining convergence. Given the different scope of the reviews, standard setters will need to find a common ground on how to proceed and which issues to address further.

Acknowledgements

I am grateful to Paul André, the journal editor, and a reviewer for helpful comments. I thank Harikrishnan Harikumar Sheela and Ondine de Peretti de la Roca for their research assistance. STOXX Ltd. has kindly provided the composition of STOXX Europe 600. Financial support from the ESSEC Research Center (grant 043-217-1-2-12-P-1) is gratefully acknowledged.

Notes

1. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index and is a subset of the STOXX Global 1800 Index. It comprises large, middle, and small capitalization companies across the European region (http://www.stoxx.com/indices/index_information.html?symbol=SXXP). STOXX Limited is a leading provider of European equity indices currently owned by Deutsche Borse and SIX Group; Dow Jones and Company owned it before December 2009 (STOXX, 2010).

2. The IASB PIR specifically reports that ‘regulators think that the management perspective is a difficult approach to enforce because it is solely based on management's judgment to identify operating and reporting segments’ (IASB, 2013b, p. 25). In other words, enforcing SFAS 131 and IFRS 8 raises the issue of making sure that managers truthfully report the internal organization of the company which is, under normal conditions, ‘invisible’ to outsiders.

3. Other disclosure requirements include reconciliations, aggregation and allocation policies, segment descriptions, item definitions, geographical information, and entity-wide disclosure of major customers.

4. Baudot (2013) identifies three types of convergence: direct emulation, difference reduction, and progressive redesign.

5. Except for the terminology differences, there are three other differences between the two standards: (1) under IFRSs, non-current assets include intangible assets, whereas the guidance for SFAS 131 limits long-lived assets to tangible assets, (2) IFRS 8 requires segment liabilities to be disclosed if the CODM reviews this measure, whereas SFAS 131 does not contain this requirement, and (3) a matrix-form organization should identify operating segments based on products and services under SFAS 131, whereas IFRS 8 permits identification of operating segments as such (i.e. matrix type of segmentation) (Deloitte, 2006). It should also be mentioned that, after wide-ranging consultation activities (European Commission, 2007) and a heated public debate (Veron, 2007), the European Union endorsed IFRS 8 while expressing a certain degree of regret that users' interests are not properly served by the new standard (Crawford et al., Forthcoming). As part of the endorsement decision, the European Union required an implementation review of its own to be performed and sent to the IASB (ESMA, 2011).

6. Paul Pacter raised this point at the March 2012 IASB meeting (IFRS Monitor, 2013).

7. As of 1 February 2014, the FAF PIR team had completed the review of six FASB and GASB standards. These were FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, FASB Statement No. 131 Disclosures about Segments of an Enterprise and Related Information, GASB Statements No. 3 Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements and No. 40 Deposit and Investment Risk Disclosures as one PIR, FASB Statement No. 141(R) Business Combinations, GASB Statements No. 10 Accounting and Financial Reporting for Risk Financing and Related Insurance Issues and No. 30 Risk Financing Omnibus as one PIR, and FASB Statement No. 109 Accounting for Income Taxes.

8. As of 1 February 2014, this was the only completed PIR by the IASB, with another PIR planned for IFRS 3 Business Combinations.

9. Hans Hoogervorst also raised this question at the May 2012 IASB meeting (IFRS Monitor, 2013).

10. When one of the board members questioned whether 62 was a small number of comment letters, staff members conjectured that constituents prefer to influence the future rather than participate in post-implementation reviews (IFRS Monitor, 2013). Of the 17 events, eight were used to define areas for investigation and nine to collect information about the effect that applying IFRS 8 had on financial reporting.

11. Various national regulators have issued discussion papers on disclosure quality and overload (e.g. EFRAG (2012); see Barker et al. (2013) for a literature review and comment on the issues raised in the EFRAG/ANC/FRC discussion paper). As a result of this pressure, the IASB added a disclosure framework initiative to its work program in December 2012 (http://www.iasplus.com/en/projects/research/disclosure-framework).

12. The FAF PIR did not address this issue.

13. Previous analyses on the relation between competitive harm and a firm's lobbying position vis-à-vis SFAS 131 show that large firms were more likely to be against the standard because they were facing other powerful rivals which increases proprietary costs from additional segment disclosures (Ettredge et al., 2002a).

14. There are 3+1 quantitative thresholds. The three main quantitative thresholds are (1) at least 10% of combined internal and external revenue of all operating segments, (2) at least 10% of combined reported profit or loss of all operating segments, and (3) at least 10% of combined assets of all operating segments. In addition, if less than 75% of the consolidated revenue is allocated to reportable segments additional operating segments will be identified to be reported even if they do not meet the three main quantitative thresholds.

15. Except for Bens et al. (2011), the other papers use a pre/post-SFAS 131 setting and look at whether and how the number of segments reported has changed. An, albeit imperfect, proxy for improper segment aggregation in the cross-section that is specific to disclosures under the management approach is the cross-segment variation in profitability (André et al., 2013; Ettredge et al., 2006).

16. Although it worries the IASB that some preparers regard IFRS as not suitable for reporting their transactions.

17. In addition, if one of the documents is missing I code consistency based on the existing documents.

18. p-Values are based on one-tailed t-tests.

19. Some companies report segment net interest instead of interest revenue and interest expenses separately. I also count the net item here.

20. Significance level is slightly weaker if it is based on the non-parametric test (z-stat −1.45; p-value 0.07).