In the autumn of 2002, Financial Accounting Standards Board ( FASB ) and International Accounting Standards Board ( IASB ) issued memoranda of understanding called “ The Norwalk Agreement ” , a committedness for developing a high quality criterions that could be used for both domestic and cross-border fiscal coverage ( FASB, 2006,1 ) . Most of the major differences between the two Boardss have already been resolved, such as Financial Accounting Standard ( FAS ) 154, Accounting changed and mistake corrections, FAS 153, Exchanges of productive assets, FAS 151, Inventory, International Financial Reporting Standards ( IFRS ) 5, Non-current Assets Held for Disposals and Discontinued Operations, and IAS 19, Employee Benefits. But the undertakings presently underway by FASB are Fiscal Performance Reporting by Business Entities, Revenue Recognition/Liability Extinguishment, Financial Instruments: Liabilitiess and Equity, and Research and Development. IASB undertakings underway are IAS 12, Income Taxes, IAS 14, Segment coverage, IAS 20, Government Grants, IAS 23, Borrowing Cost, IAS 33 Net incomes per Share, and IAS 37, Provisions ( IASPLUS, 2006,1 ) . FASB has undertaken six enterprises to foster the end of convergence of United States By and large Accepted Accounting Principles ( U.S. GAAP ) with International Financial Reporting Standards ( IFRS ) . Short term convergence undertaking is one of the enterprises. Section Reporting falls under Short term convergence undertaking which has been in the docket for about four decennaries between the two criterions. The differences of Segment Reporting is still an unsolved issue and the two boards are go oning to take the differences so that convergence could be obtained, the exposure bill of exchange on this issue has been released as expected in the fourth one-fourth of 2005. But the inquiry arises is that, are the differences in Segment Reporting stuff sufficiency to detain the procedure?
Recent Board Meetings on Segment Reporting
a. January 2005 IASB Meeting
The Board considered reexamining the differences between IAS 14, Segment Reporting and SFAS 131, Disclosures about Sections of an Enterprise and Related Information. Before SFAS 131 was introduced the United States ( US ) criterion was based on similar rules as laid down by IAS 14. But SFAS 131 was given more penchant by the analyst because it provided more utile information reflecting the mode in which the entity manages the concern. But one concern about SFAS 131 is that it does non necessitate consistent accounting policies to be used between section information and other fiscal describing information. The SFAS 131 was besides developed in concurrence with the Canadian criterion compositor and therefore it is already consistent with IFRS than most US dictums. The Board has agreed to do few alterations to the updated dictum of SFAS 131.
B. March 2005 IASB Meeting
The staff recommended including non-public entities in the new proposed statement for section coverage but it was denied because the issue of non-public entities would be considered when the boards trade with the Non-Publicly Accountable Entities ( NPAE ) undertaking.
c. June 2005 IASB Meeting
The Board considered adding counsel similar to the criterion issued by the Canadian Emerging Issues Committee. But this was besides denied by the Board and no decision was made at this point.
d. November 2005 IASB Meeting
The Board agreed to utilize the term “ Operating Section ” through out the exposure bill of exchange on amendments to IAS 14, Segment Reporting. Therefore the exposure bill of exchange would besides be titled “ Operating Sections. ”
e. January 2006 IASB Meeting
The Board issued the Exposure Draft ED 8 Operating Sections. The new proposed exposure bill of exchange adopts the “ direction attack ” for describing the fiscal public presentation of its operating sections ( IASPLUS, 2006, 2 ) .
Causes of Segment Reporting
The undermentioned major differences have caused the issue of Segment describing to be put on the docket of the boards, even prior 1980s. The chief intent of Segment coverage is to unwrap the information about any entity ‘s operations in different industries, its foreign operations and export gross revenues, and its major clients. The demand for Segment coverage occurred when the growing of complex companies with operations in different industries and geographic markets made the entity-level fiscal statements less utile to foretell the future net incomes and hard currency flows unless farther elaborate information was provided. It became a demand for the investor to understand which of an entity ‘s major operations were doing the most positive part to the entity ‘s consequences in order to do intelligent determinations. But on the other manus the preparers of the fiscal statements feared the revelation of sensitive competitory informations ( Epstein and Mirza 2005, 628 ) .
In the late 1960s the concern organisations had become more complex and the rating of direction ‘s operating and fiscal schemes sing different lines of concerns had become more hard to measure. Therefore several national accounting regulation doing organic structures began to turn to this subject. The demand for Segment information was one of the first docket points identified upon the FASBs formation in 1973 ( Epstein and Mirza 2005, 628 ) .
Role of SEC and the Accounting Compositors
The United States, Securities and Exchange Commission, ( SEC ) were the first to do Segment Reporting revelation. In 1970, SEC began necessitating line-of-business information in registrant ‘s one-year filings. In 1974, SEC made it a demand to include this information besides in the one-year studies issued to shareholders. In 1976, SFAS 14, Financial Reporting of Segments of Business Enterprise, was issued which established specific demands for the revelation of section information. Later this demand was declined for interim studies and for non-publicly-held companies. In August 1981, International Accounting Standards Committee ( IASC ) came out with IAS 14 with a similar theoretical account to the United States criterion. In August 1997, IASC revised this criterion by altering the method of finding reportable sections to include how a coverage entity is internally managed. In 1998, United States adopted the same attack of IAS 14 by revising SFAS 14 and set uping a new criterion on Segment coverage as SFAS 131 ( Epstein and Mirza 2005, 628 ) .
IAS 14 and its effects
The first international criterion on section coverage, IAS 14 was applicable to both publically held and all concern organisations, other than those which were little, locally based, and non-diversified. Revised IAS 14, on the other manus was applicable to merely those entities which had publically traded equity or debt securities.
Reasons to Change SFAS 14
SFAS 14 had some major issues which required to be solved since it was making incommodiousness for the investors. One of the issues it had was, it did non provided any guidelines for the revelation of the information sing different sections. Tyson and Jacobs did a research on Segment coverage in the Banking Industry ; they determined that the descriptive headers of Segment describing were different including the place where it was disclosed. They found nine different headers used by 10 homogenous companies within the same industry. The other job with SFAS 14 was the proper definition of the section. The 10 sample houses chose to group geographic parts but with different sections dwelling of different parts. For illustration one company grouped as one segments all of its concern operations in Asia, the Middle East and North Africa. The other company split the geographic part into two sections, Asia/Pacific and “ other parts ” . With SFAS 14 there was deficiency of dependability, verifiability and neutrality ( Jacobs and Tyson, 37 ) . The deficiency of such primary features of fiscal information harmonizing to the conceptual model undertaking, specifically SFAC No. 2 Qualitative Features of Accounting Information ( FASB 1980 ) , occurred preparers discretion and the many ways revelations presented by group of houses, ensuing in deficiency of comparison and besides comprehensibility and determination utility. Besides in June 1995, a research done by Wells, Thompson, and Phelps pointed out that practising comptrollers perceived Segment coverage as holding negative impact on entities in United States to vie internationally while the accounting pedagogues, portfolio directors and main fiscal officers perceived it as holding a positive impact ( Wells, Phelps, and Thompson, 35 ) .
In September 1994, the American Accounting Association Financial Accounting Standards Committee responded to the FASB treatment memoranda “ Reporting Disaggregated Information by Business Enterprises ” mentioned that “ the standards set Forth in SFAS No. 14 for placing reportable sections are excessively obscure and general. The impression of an “ industry section ” lacks preciseness. ” The commission recommended specifying section coverage as “ Operating Section. ” The first clip this was referred was in the place paper, “ Fiscal Coverage in 1990s and beyond ” by the Association for Investment Management and Research. The advantage for utilizing “ Operating Section ” attack was that the entities would form themselves into runing sub-units to stand for hazard, growing factors and expected return. The entities would besides pull off the constituent operations in different ways depending on the economic system and competition in the market which would place the hazard and return profile of each market section. External information beginnings for the investors to analysis an industry hazard and future return chances such as Standard Industrial Classification ( SIC ) codifications, which helps to roll up the industry and trade statistics, besides required the Committee to take actions towards the revelation demands of operating sections so that the information is compatible and enhance utility to measure current market conditions. The Committee besides supported information of segmental informations to be reported in interim footing ( Barth, Bell, Collins, Crooch, Elliott, Frecka, Imoff, Landsman and Stephens, 76 ) .
Exposure Draft on Segment Reporting
In January 1996, FASB and Accounting Standards Board of the Canadian Institute of Chartered Accountants issued an exposure bill of exchange, “ Reporting Disaggregated Information about Business Enterprise ” that changed the revelations required by the US and Canadian Companies. This exposure bill of exchange was the first criterion to be developed jointly with a standard compositor organic structure from another state. It was besides the first criterion to let revelations of accounting information that are non in conformance with Generally Accepted Accounting Principles ( GAAP ) . But the writers Herrmann and Thomas pointed out once more that the proposed statement did non increase the qualitative features of accounting information as structured in SFAC No. 2. It decreased the representational fidelity, materiality, neutrality and comparison qualitative features of the revelations ( Herrmann and Thomas, 1996, 36 ) .
American Accounting Association in its response to the IASC call for remark on its “ Draft Statement of Principles on Reporting Financial Information by Segment ” ( March 1996 ) . The Committee felt that the geographic informations revelation should be more desegregated, but merely future research would find if disclosing gross revenues informations is sufficient and that a broader set may be appropriate ( Salter, Swanson, Achleitner, Lembre and Khanna 119 ) . But the exposure bill of exchange was critiqued by Herman and Thomas ( 1997 ) indicating out that “ it decreases the representational fidelity of disaggregated information by keeping a rigorous attachment to internal coverage patterns even when this may ensue in inconsistent application between income statement and balance sheet ” ( Herrmann and Thomas, 1996, 40 ) .
Emerge of SFAS 131
About 200 remark letters were received by the Board on the exposure bill of exchange. The FASB issued SFAS 131, Reporting Disaggregated Information about a Business Enterprise, in 1997. In September 2000, Herrmann and Thomas came out with another article on Segment revelations in which they explained the differences between SFAS 14 and SFAS 131. SFAS 131 brought important alterations in the industry. Under SFAS, 14 it was required by houses to unwrap section information by both line-of-business and geographic country with no specific nexus to the internal organisation of the company, ensuing two sets of section information, one used by the direction internally and the other to describe externally in conformity with SFAS 14. Under SFAS 131, bulk of the houses define their operating sections by merchandises and services, but some define it as geographic country or a combination of both. Besides enterprise-wide revelation sing geographic countries, the proportion of country-level section revelation increased due to the acceptance of SFAS 131, whereas the proportion of broader geographic country section revelations decreased ( Herrmann and Thomas, 2000, 291 ) .
Besides in September 2000, Street, Nichols, and Gray came with a research paper on Segment revelation and the betterments of SFAS 131 on Segment coverage. It proved that entities had more line-of-business sections under SFAS14 ; they are describing more points of information about each section due to the new criterion, which has besides improved consistence of the fiscal statements ( Street, Nichols and Gray, 259 ) . Besides SFAS 131 improved monitoring and information schemes of the houses by increasing information integration uncovering the houses to unwrap antecedently hidden information about their variegation schemes which led to betterment in market rating and monitoring of section information by the houses ( Berger and Hann, 163 ) . The revelation of concealed cross-segment transportations besides lead to pricing rectification and highlight managerial actions to ease cross-subsidization ( Piotroski 2003, 233 ) .
Major differences between IAS 14 and SFAS 131
Footing of Reportable Segment
Under IAS 14, it is necessary to specify which concern and geographical sections are reportable besides whether the concern sections or the geographical sections would be the primary manner of section coverage, with alternate going the secondary manner, which is determined by the dominant beginning and nature of hazard and return derived from the merchandises or services or from runing in different states or selling into different markets. For illustration, if an entity ‘s strategic determinations are made in footings of geographical location of either operations or its clients so geographical section will be the primary coverage format. If the determinations revolve around the merchandise or service offerings, so concern section will be the primary format. On the other manus under US GAAP it is based on the operating sections and the manner the direction evaluates fiscal information for the intent of apportioning resources and measuring public presentation and it is reported internally to the top direction, which may or may non be based on lines of concern or geographical countries ( Deloitte, 10 ) . Following are some cardinal differences:
Types of Segment Disclosures
Under IFRS, it requires revelations for both “ primary ” and “ secondary ” sections. A significant sum of revelation is required for primary format so the secondary format. Under US GAAP, merely one footing of cleavage is allowed, along with other certain “ enterprise-wide ” revelation which requires demoing grosss from major clients and grosss by state ( Deloitte, 10 ) .
Accounting Basis for reportable Sections
Under the IFRS criterions, sums are based on IFRS measurings. Whereas under US GAAP, sums are based on whatever footing is used for internal coverage intents and so these sums are reconciled with the relevant sums in the fiscal statements ( Deloitte, 11 ) .
IFRS gives definition of Segment consequence which is Segment gross subtraction section disbursals, before subtracting minority involvement. No such definition is available under US GAAP ( Deloitte, 11 ) .
These differences were resolved by the Boardss by revising IAS 14. The IASB released the latest exposure bill of exchange on 19th January, 2006 Exposure Draft ED 8 “ Operating Section ” , the remark period ends on May 19th 2006 and at that place has non been any proclamation when the concluding criterion will be proposed. But the proposed IFRS would use to the one-year fiscal statements for periods get downing on or after 1 January, 2007.
New Changes to ED 8
The new bill of exchange adopted the “ direction attack ” to section coverage which means the section information is consistent with the direction determinations which they use to do operating determinations, section information will besides be more consistent with the one-year studies ; the basic ground for this is to let the investors and other fiscal statement users to better judge the company and this attack is besides cost effectual for the preparers as the same information would be used for internal and external coverage intents ( Herrmann and Thomas, 2000, 288 ) . The new bill of exchange besides adds to its range the entities that hold assets in a fiducial capacity for a wide group of foreigners. More degree of rapprochement has been required for specified points and besides to unwrap geographical information about non-current assets excepting specified points and has required more section information for interim fiscal studies. ( IASB, 2006, 2 )
Drawbacks of the ED 8
The proposed bill of exchange does non necessitate unwraping the measuring of net income or loss for neither a section nor it requires the measuring of net income and loss to be consistent with the ascription of assets to the reportable sections. Besides extra revelation is required by the new criterion because section coverage is a disclosure criterion and hence does non impact the rapprochement of IFRS sums to US GAAP. ( IASB, 2006, 1 )
Continuing research reveals that section coverage is one of the most of import revelations to users of fiscal statements. Radebaugh and Gray pointed out that U.S houses are faced with the most extended section coverage demands in the universe ( Radebaugh and Gray, 1993 ) . Surveies and interviews with representatives of assorted user groups conducted by the American Institute of Certified Public Accountants ( AICPA ) : Particular Committee on Financial Reporting, the Association for Investment Management and Research ( AIMR ) : Fiscal Accounting Policy Committee, and the writers of the Construction Industry Computing Association ( CICA ) Research Study on Financial Reporting for Segments clearly indicated that users place a high value on Segment coverage ( Barth, Bell, Collins, Crooch, Elliott, Frecka, Imoff, Landsman and Stephens 80 ) . The differences between the two criterions have been resolved up to a great extent in the new proposed exposure bill of exchange, but the accounting profession and the preparers of the fiscal statements would non prefer the thought of drawn-out revelations required by the new criterion. Adoption of “ Management Approach ” would leak important cardinal analysis and determination devising impressions of the entity to the rivals and increase hazard in the fiscal market for entities to vie. Besides the addition in revelation demands for the section information for the interim fiscal coverage would besides non be welcomed by the prepares since it would make more work through out the twelvemonth, but on the other manus the users of fiscal statements would profit from this new criterion ; since more item revelation will be required by entities than it was in the yesteryear. Besides proposed IFRS would be cost effectual for the preparers because it will cut down the cost of supplying disaggregated information for many entities, since it uses section information that is generated for direction ‘s usage, but once more the issue remains that is the new proposed statement be more good so the cost it would happen.
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