The Financial Reporting Review Panel (FRRP) of the Financial Reporting Council (FRC) is concerned about how companies are reporting the performance of key parts of their business in the light of the introduction of IFRS 8, ‘Operating Segments’.
IFRS 8 requires companies to provide an analysis of profit, assets and liabilities so that investors can see the performance of the principal operations or “segments”. The new standard requires management to define the company’s operating segments in accordance with how its operations are managed in practice. In this way the IASB sought to respond to criticisms of IAS 14 (the previous standard), to reduce the ability of management to disguise poor performance of a part of the business, and to enable investors to review a company’s operations from the same perspective as management.
The Panel has reviewed a sample of 2009 interim accounts and 2008 annual accounts (when they had early applied the standard) and has asked a number of questions about the implementation of IFRS 8.
The Panel has asked a number of companies to provide additional explanations where:
- Only one operating segment is reported, but the group appears to be diverse with different businesses or with significant operations in different countries.
- The operating analysis set out in the narrative report differs from the operating segments in the financial statements.
- The titles and responsibilities of the directors or executive management team imply an organisational structure which is not reflected in the operating segments;.
- The commentary in the narrative report focuses on non-IFRS measures whereas the segmental disclosures are based on IFRS amounts.
Bill Knight, chairman of the Panel, said: “IFRS 8 requires companies to report publicly in the same way as they measure performance and allocate resources internally. Implementation is a challenge, but also an opportunity to communicate better by linking the business review with the content of the IFRS accounts.”
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