In Europe, the replacement of IAS 14 with IFRS 8 was highly controversial, mainly because of the management approach allowed by IFRS 8 compared with the more prescriptive approach previously required by IAS 14. The management approach in IFRS 8 requires segment information to be reported externally based on how information is reported internally to the company’s management. In contrast, IAS 14 had contained very prescriptive requirements as to what should be reported and how.
The European Parliament is required to endorse all IASB standards and IFRIC interpretations in order for the standards and interpretations to come into effect. The European Financial Reporting Advisory Group (EFRAG) reviews the proposed standards and makes its recommendations to the European Commission as to whether or not the parliament should endorse the standards and interpretations. When ED 8 was issued, concern was expressed about the management approach by many commentators to both the IASB and EFRAG.
After the IASB issued IFRS 8, the European Commission sought further feedback, by means of a questionnaire, on whether or not the European Parliament should endorse IFRS 8. The questions focused on the management approach, the lack of mandatory disclosure requirements and whether these were perceived as positive or negative by commentators.
A paper prepared and presented by Nicolas Véron, Research Fellow at Bruegel (a European think tank created to contribute to the quality of economic policy making in Europe) argued that IFRS 8 should not be endorsed. The paper argued that the success of IFRS thus far can be attributed both to market (investor) demand and to European Union (EU) leadership and that convergence with US GAAP ‘is far from universally accepted as an appropriate framework for setting the current standard-setting agenda’.
The paper contended that ‘segment information is one of the most vital aspects of financial reporting for investors and other users’ and is also inherently divisive between makers of financial statements on the one hand, who want to control the information, and users on the other, who want it to be specifically objective. The risks and rewards approach to identifying segments (previously contained in IAS 14) arguably meets the needs of users while the management approach arguably meets the needs of makers, although both approaches may be consistent (as envisaged by IAS 14).
The paper argues that the discretion permitted by IFRS 8 in determining the content of segment profit or loss and segment assets and in making or not making certain disclosures (e.g. disclosure of liabilities, statement of profit or loss and other comprehensive income line items and geographical information) contrasts with the prescribed measurement and disclosure requirements of IAS 14, favoring makers over users. The paper quotes from various respondents’ letters to the IASB, particularly those of analysts, who did not support changing IAS 14 and moving to a standard based on SFAS 131, because they regarded SFAS 131 as inferior to IAS 14. Part 2
