IFRS 8- Operating Segments is primarily a disclosure standard and is particularly relevant for large organizations that operate in different geographical locations and/or in diverse businesses. Information about an entity’s segments is relevant to assessing the risks and returns of a diversified or multinational entity where often that information cannot be determined from aggregated data.
In January 2006, the IASB issued ED 8 Operating Segments, which it proposed as a replacement to IAS 14 Segment Reporting. The ED was part of the IASB’s program for achieving convergence with standards issued by the FASB in the United States and essentially adopted the requirements of the FASB Statement of Financial Accounting Standards No. 131 (SFAS 131) Disclosures about Segments of an Enterprise and Related Information.
The major changes from IAS 14 are the adoption of the management approach to identifying segments and the lack of prescription in respect of segment disclosures. ED 8 was finally issued as a new standard, IFRS 8 Operating Segments, in November 2006. IFRS 8 was applicable for annual reporting periods beginning on or after 1 January 2009.
In Europe, the replacement of IAS 14 with IFRS 8 was highly controversial. Concern was expressed by many commentators about the management approach and the lack of mandatory disclosure requirements. Those in favor of the management approach argued that the information provided under that approach will be more relevant and reliable because it will, inter alia, enable investors to evaluate the company on the same basis as that used by management in its decision making and that any concerns about understandability are addressed by the reconciliation requirements of IFRS 8.
Those against the management approach argued that management will take advantage of the discretion provided in IFRS 8 in order to control the information provided to users. Only time will tell whether concerns about the approach eventuate.