Among other things, IFRS 8.23 requires disclosing a measure of profit or loss for each reportable segment, and provides a list of items to be disclosed about each reportable segment “if the specified amounts are included in the measure of segment profit or loss reviewed by the chief operating decision maker, or are otherwise regularly provided to the chief operating decision maker….” The list includes “material items of income and expense disclosed in paragraph 97 of IAS 1” (which in turn requires that when items of income or expense are material, an entity shall disclose their nature and amount separately.” The IFRS Interpretations Committee recently considered some issues relating to how an entity applies these requirements, including whether material items for the above purpose are only those that are material on a qualitative basis; whether it includes amounts that are an aggregation of individually quantitatively immaterial items; and whether the materiality assessment is performed at an income statement level (from an overall reporting entity perspective) or at a segment level. The underlying submission indicated much diversity in practice on these and other points, both within its own jurisdiction and based on broader outreach to securities regulators.

The IASB’s staff own research seemed to confirm this diversity. Asked to comment on a theoretical fact pattern in which an entity generally interprets IFRS 8 to disclose only those items that are material on a qualitative basis, such as unusual items, the meeting material records:

• Most respondents say either that (the fact pattern) is not common or they could not determine whether it is common. One respondent says such a fact pattern is common, but they do not have evidence that it has a material effect. A few respondents report mixed views as to whether the fact pattern is common; most of those respondents say the fact pattern does not have a material effect, and one says it could have a material effect. One accounting firm says (the fact pattern) is common and has a material effect but they do not observe diversity. One securities regulator says it observes diversity.

Which seems to cover most of the possible permutations! Even so, the IFRIC concluded, using its familiar form of wording, that the current standards “provide an adequate basis for an entity to apply the disclosure requirements,” and tentatively decided not to add a standard-setting project to the work plan. The Committee referred to the existing content in IAS 1 relating to materiality and to aggregation of information, commenting broadly that “an entity applies judgement in considering whether disclosing, or not disclosing, information in the financial statements could reasonably be expected to influence decisions of users of those financial statements.”

Many of the comment letters on the tentative agenda decision took issue with aspects of the drafting though, often emphasizing that such materiality considerations result in an appropriate degree of diversity in the nature and content of what’s disclosed. For example, the Accounting Standards Board of Canada thought that “some may interpret IFRS 8.23(f) to require the full statement of profit or loss to be replicated at the segment level (and) to require the notes to be replicated at the segment level…We think that if it was the IASB’s intention to require this, IFRS 8.23(f) would have articulated this…To avoid misinterpretation, we recommend that the Committee clarify that…application of this paragraph could result in different levels of disclosure depending on the entity’s facts and circumstances, including the materiality judgments it has made.”

In related vein, the following is from the Johannesburg Stock Exchange:

• Our understanding is that the existing diversity in practice may have developed because of a potential concern of disclosure overload. However, in our view, nothing in the (tentative agenda decision) implies that the segment report must mechanistically mirror the income statement and its accompanying notes for each reportable segment. In our view, materiality is a relevant consideration, and application of qualitative and quantitative materiality will appropriately lead to the aggregation of items that are material at an overall level, but immaterial at a segmental level. We believe the (tentative agenda decision) could make this point more clearly, for example by further emphasizing that assessing what to include in a segmental report is not a purely mechanist process, that materiality is still applicable, and that it must be applied from the perspective of the financial statements as a whole.
• Furthermore, we note that applying materiality appropriately in the segment report may result in differentiated reporting for individual segments. For example, cost-of-sale disclosures, including the breakdown thereof into various elements, may be relevant and material for some segments, but not for others. From our observations, this is not consistently applied in practice.

By adopting a “management approach” to segment reporting, the IASB (as acknowledged in the original basis for conclusions) somewhat prioritized allowing users “to review an entity’s operations from the same perspective as management” over comparability of information across entities.” The standard has been in place for almost fifteen years, so it’s no surprise if (as one might put it) a certain amount of dust and gunk accumulates within the mechanics over such a period. The IFRIC’s agenda decision (once it’s been satisfactorily tweaked), might be seen as a kind of spring clean, refreshing awareness of how things were always intended to work…

The opinions expressed are solely those of the author.