The proposed amendments follow up on various bits and pieces that came out of the Board’s post-implementation review of the standard a few years ago. Here’s how the exposure draft sums them up:
- “ (a) emphasize that the chief operating decision maker is a function that makes operating decisions and decisions about allocating resources to, and assessing the performance of, the operating segments of an entity;
- (b) add to the existing requirements an explanation that the chief operating decision maker may be either an individual or a group;
- (c) explain the role of non-executive members when identifying an entity’s chief operating decision maker;
- (d) require the disclosure of the title and description of the role of the individual or the group that is identified as the chief operating decision maker;
- (e) require an explanation in the notes to the financial statements when segments identified by an entity differ between the financial statements and other parts of its annual reporting package;
- (f) add further examples of similar economic characteristics to the aggregation criteria in paragraph 12A of IFRS 8;
- (g) clarify that an entity may disclose segment information in addition to that reviewed by, or regularly provided to, the chief operating decision maker if that helps the entity to meet the core principle in paragraphs 1 and 20 of the Standard; and
- (h) clarify that the explanations of reconciling items shall be given with sufficient detail to enable users of financial statements to understand the nature of the reconciling items.
- The Board also proposes amending IAS 34 Interim Financial Reporting. The Board proposes that, in the first interim report after a change in the composition of an entity’s reportable segments, the entity shall present restated segment information for all interim periods both of the current financial year and of prior financial years, unless the information is not available and the cost to develop it would be excessive.”
I expect most of those points largely speak for themselves. The basic definition of an operating segment, you’ll recall, relies in part on identifying a component of an entity “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.” Although this makes sense from the perspective of providing information to investors that aligns with how the entity might appear if seen “through the eyes of management,” it might inherently seem to assume a rather old-fashioned view of the world where the “boss” regularly receives a reporting package in a defined format, and relies heavily on the content and structure of that package for decision-making. Not that such processes don’t exist any more, but in the modern technologically-facilitated world, a decision maker might be engaging with an entity from a myriad of perspectives on a real-time basis, precluding any clear causal link between a particular mode of review and how resources are allocated or performance assessed. Against this backdrop, it seems likely that some issuers could comply with the letter (and even the substance, such as it is) of IFRS 8 without truly communicating their strategic focus; the amendments fine-tune various aspects of the process, but can’t change that basic reality.
Some of the points do at least address long-standing issues raised by regulators. For example, the OSC and others have often raised comments about discrepancies between the segments reported in the financial statements and the way in which the issuer describes itself in the MD&A or elsewhere; although such a discrepancy doesn’t necessarily indicate non-compliance with IFRS 8, it might at least point to the possibility of it. As indicated above, the IASB now proposes that an issuer should acknowledge and explain such situations in the notes to the statements; it expects that this “will reinforce the management approach used in IFRS 8 and encourage consistent identification of segments.” You might think it’s a bit of a conceptual oddity though: given that the MD&A in no way lies within the scope of the financial statements, it’s perhaps peculiar that the statements should have to explain any aspect of why management prepared that other document as it did. I’m not sure whether any existing disclosure requirements take the same form – I can’t think of any that do.
Also as noted above, the IASB proposes clarifying that in addition to the disclosures set out in the standard, an entity may disclose additional information about its reportable segments if that helps it to meet the core principle, even if it creates that information solely for purposes of the financial statements. It seems a bit sad that such a thing should have to be specified, but it shows you how narrowly some people read the standards. Anyway, the exposure draft proposes that the amendments will be applied retrospectively, but of course we’ll have to wait a while to know their effective date…
The opinions expressed are solely those of the author