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Question:
Segment reporting is atoll that provides an opportunity for the organisations to add value to the data distributed by the management of the organisation regarding their geographic and industry operations (Bugeja, Czernkowski and Moran, 2015). Organisations under management approach to segment reporting are required to report financial data of the segment in line with the way in which the business is managed by the organisations. It is also identified that the segment reporting is a management tool that helps the organisations in encompassing the entire organisation within certain parameters (Aleksanyan et al., 2015). The financial information of the organisation is provided by segment reporting in a disaggregated manner.
This financial information is considered to be essential for the organisations in predicting and assessing the performance of specific segments of the organisation. The stakeholder of the organisation, on the basis of such performance assessment determines the future scope or direction of the organisation (Hollie and Yu, 2015). In addition to this, if the information is appropriate and sufficient, the users of financial statement are also able to identify the potency and limitation of the organisation and probable ability for enhancement (Stanko, Utterback and Fitzgerald, 2011). The main aim of this essay is to critically discuss and AASB 8 approach of segment reporting and its determinants and consequences to segment reporting. Therefore, different aspects of segment reporting will be examined in this essay.
AASB: Australian Accounting Standard Board
It is identified that all the reporting related to the organisation’s operating segment was initially governed by guidelines of IAS-14 (International Accounting Standard) segment reporting and AASB-114. However, these guidelines have been revised by AASB and IAS and new financial reporting standards are issued which suggest some modifications in the requirements of established segment reporting (Locke, 2010). AASB 8 is considered as more principles-based than the old accounting standards which are rules-based. AASB 8 has replaced AASB 114 and it is applied to the reporting periods that start from 1 January 2009. There are certain differences between the old and new accounting standards such that AASB 114 is equivalent to IAS 14 and AASB 8 is equivalent to IFRS 8.
AASB 8 is the new standard based on segment reporting that enforce disclosures of segment on only those for-the-profit organisations whose equity and debt instruments are publically traded. AASB 8 standard requires that the organisations should provide segment information to the management based on ‘management approach’. The authority believes that by using this approach the users will be able to assess the information regarding the way in which the organisations and the decision makers run their business (Kang and Gray, 2013). In contrast to this, AASB 114 is applied to the broader for profit organisations that has broader scope in comparison to AASB 8. AASB 8 is applied to organisations that have certificates and bonds and are being traded in the market or will be traded in the market in future (Australian Accounting Standard Board. 2008). This application by AASB has provided relief too many organisations which were under the scope of previous standard implementation.
It is evident that AASB 114 was adopted and on 15 July 2004 as Accounting Standard which was in line with the IFRS by 2005. However, this accounting standard was applicable after 1 January 2005 which was further extended to 1 January 2007 (Locke, 2010). Moreover, the reporting periods of AASB 114 started on 1 July 2007 which was dependent on the factor that whether the reporting organisations are elected to adopt and implement accounting standard AASB 114 or not. It is fundamental that the accounting standard AASB 114 is applicable to the reporting organisations for preparation of general purpose financial reports. AASB 114 was modified as AASB 8 because it was found that the segment disclosures were not capable enough to provide information that was required by users of financial statement and the management believe that the disclosure of segment information should be based on operating segments (Australian Accounting Standard Board, 2009). AASB 8 is also applicable to for-profit organisations whose equity and debt instruments are traded in public market.
In AASB 114 segment information needs to be prepared in compliance with accounting policies that are adopted for presenting and preparing the financial statement of combined organisations (Australian Accounting Standard Board, 2008). Whereas, AASB 8 needs that the amount reported for every item of operating segment should be reported to Chief Operating decision maker so that he can assess the performance and allocate the resources. In addition to this, AASB 114 determines segment expense, segment liabilities, segment result, segment revenue and segment assets whereas AASB 8 explains the ways in which the profit and loss, liabilities and assets of the segment are measured for each reportable segment (Australian Accounting Standard Board, 2009). In terms of disclosure, AASB 114 does not require organisations to disclose their expenses and interest income, whereas, AASB 8 requires that organisations should report the revenue and expense of each reportable segment separately.
According to International Accounting Standard Board adopting and implementing management approach will help in enhancing the financial reporting. Using the management approach helps the financial statement users to evaluate the functions and operations of the organisation from the management perspective. In addition to this, as the management has already utilised this information internally thus, costs are associated with the preparation of this information so that it is available in a timely manner. When IFRS 8 and AASB 8 were developed it was believed that it will allow the financial statement users and investors to view the operation of the organisation through management perspective which will help them in understanding the risks faced by the management every day. Moreover, this standard will also help the financial statement users to assess the ways in which these risks are effective managed (Australian Accounting Standard Board, 2012). It was thought that IFRS 8 can be implemented in such a manner that the recurring reporting expenses can be minimised and will not contain any additional expenses. Moreover, it was also believed that by adopting management approach the organisations will report large amount of segment information in interim financial reports (Australian Accounting Standard Board, 2006).
In the views of Nichols, Street and Tarca (2013) by adopting the management approach of SFAS 131:
Example:
Securities Exchange Commission is the current segment reporting regime that is accountable for segment reporting. In the year 2013, PACCAR a manufacturing organisation was alleged by Securities and Exchange Commission because the company failed to report its operating results which were required under segment reporting (Hollie and Yu, 2015).
Some of the disadvantages of management approaches are as follows:
It is possible that some companies may report false segment information that means reporting segment information that is not compliant with general accounting principles. This will ruin the credibility of the financial statements (Zhang, 2013). In addition to this, there are other disadvantages as well from the investor’s perspective which might include the lack of details in terms of financial information, loss of comparability between organisations and loss of specific key segment line items. It was felt that there can be loss of comparability because non-IFRS measures must be used and many organisations do not provide reconciliation from these measures. In addition to this, accounting fraud can be one case where the organisations can be at loss (Milsson and Stockenstrand, 2015).
Example:
Suppose, a company provides it segment information it is possible that the competitors may have access to the information related to profitability of the particular segment.
It is identified that the number of reportable segment after the adoption of AASB 8 has increased along with the extent of disclosure. The reportable segment has increased under IFRS 8/ AASB 8 because IAS 14 imposed constraints on organizations and there were high obligations for aggregation in IFRS 8 (Kang and Gray, 2013). For identifying number of reportable segment three aspects of disclosure were surveyed in terms of reportable segment.
After surveying these three aspects it was found that for 81 companies the average number of segments reported was 5.2. Moreover, it was also identified that 52 companies that applied AASB 8 for the first time, the average number of reportable segments was 5.2 segments in 2009 which was 4.6 segments in the previous year (KPMG, 2010). In addition to this, it was also revealed that one-fourth of the companies were able to disclose segment information after implementation of AASB 8 using a combination of geographical areas along with products and services. The two companies that are listed on ASX and have successfully adopted AASB 8 are Macquarie and Aura Energy. Macquarie prepares the financial statement in accordance with Australian Accounting Standards and it is evident that the company has adopted AASB 8 Operating Segments very early in 2009 (Macquarie, 2009). The company trust is not within the scope of AASB 8 as it does not trade debt or equity instruments in public market thus; AASB 8 will not impact the company. Aura Energy is another Australian company that is listed on ASX and has successfully adopted revised standards AASB 8 in 2009. The revised standard AASB 8 did not influence the company as the company was already disclosing its segment information in an appropriate manner.
It is examined from the above discussion that segment reporting is important for the organisations at present to make effective decisions. Moreover, with the revised standards (AASB 8) the companies can identify the accurate information about their segments. In personal views, both decreasing and increasing number of reportable segments has advantages and disadvantages but if reportable segments are increased investors and organisations can make better decisions specifically in accounting field.
Aleksanyan, M. et al. 2015. Segment Reporting: Is IFRS 8 Really Better. Accounting in Europe 12(1), pp. 37-60.
Australian Accounting Standard Board. 2006. Operating Segments. International Accounting Standards Committee Foundation.
Australian Accounting Standard Board. 2008. Compiled Accounting Standard AASB 114 Segment Reporting. Australian Government: Australian Accounting Standards Board.
Australian Accounting Standard Board. 2009. Compiled AASB Standard – RDR Early Application Only AASB 8 Operating Segments. Australian Government: Australian Accounting Standards Board.
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Bugeja, M., Czernkowski, R. and Moran, D. 2015. The Impact of the Management Approach on Segment Reporting. Journal of Business Finance & Accounting 42(3) & (4), pp. 310–366.
Bugeja, M., Czernkowski, R. and Moran, D. 2015. The impact of the management approach on segment reporting. Journal of Business Finance & Accounting 42(3-4), pp. 310-366.
Camfferman, K. and Zeff, S.A. 2015. Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001-2011. OUP Oxford.
Hollie, D. and Yu, S. 2015. A Perspective On Segment Reporting Choices And Segment Reconciliations. Applied Finance and Accounting 1(2), pp. 88-95.
Kang, H. and Gray, S.J. 2013. Segment Reporting Practices in Australia: Has IFRS 8 Made a Difference? Australian Accounting Review 23(3).
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KPMG. 2010. The Application of IFRS: Segment Reporting. [Online]. Available at: https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ILine-of-Business-publications/Documents/The-Application-of-IFRS-Segment-reporting-(Full-publication-2010).pdf [Accessed on: 21 September 2016].
Locke, C. 2010. what’s new for financial statements? [Online]. Available at: file:///C:/Users/Dell/Downloads/Locke_p62-64.pdf [Accessed on 21 September 2016].
Macquarie. 2009. Macquarie Alternative Investment Trust Annual report - 30 June 2009. [Online]. Available at: https://www.macquarie.com.au/dafiles/Internet/mgl/au/mfg/docs/annual-reports/2009/AIT_Macquarie_Alternative_Investment_Trust_2009.pdf?v=1 [Accessed on: 21 September 2016].
Milsson, F. and Stockenstrand, A.K. 2015. Financial Accounting and Management Control: The Tensions and Conflicts Between Uniformity and Uniqueness. Springer.
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Stanko, B.B., Utterback, J. and Fitzgerald, J. 2011. Segment Reporting: The Aftermath Effects Of Statement Of Financial Accounting Standards No. 131. Journal of Applied Business Research (JABR) 18(4), pp. 97-10 6.
Zhang, G. 2013. Accounting Information and Equity Valuation: Theory, Evidence, and Applications. Springer Science & Business Media.
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