The Benefits and Limitations of IFRS 8 in Segment Reporting

Subject: Business
Type: Reflective Essay
Pages: 5
Word count: 1478
Topics: Accounting, Finance, Tax


IFRS 8 operating segments needs specific classes of entities for disclosing data about its goods and services, operating segments, and the geographical areas; in which it functions and its key clients and consumers (Partenie, Lucia, Leonica & Ludovica, 2009). It has been observed that the swapping of IAS 14 with IFRS 8 has been exceedingly debatable, as it included significant changes to the approach of identification of segments and to the disclosure requirements. In the current study, the focus is on discussing the benefits and limitations of IFRS 8 in segment reporting.


IFRS 8 in segment reporting allows the organizations to document the outcome of different areas of the businesses. For companies that operate in diverse segments or geographic areas, IFRS 8 can support in revealing, which areas are productive and generate profit and which are unprofitable on the bottom line. In that context, it can be pointed out that if IFRS 8 in segment reporting displays a business’s international operations are more productive in comparison with domestic operations, then it could prompt a transformation in strategic direction (Nichols, Street, & Cereola, 2012). Moreover, it does not allow the managers of respective companies from hiding unsuccessful ventures.

It has been further identified that IFRS 8 in segment reporting entails a firm to account monetary and descriptive information regarding its reportable segments. This, in turn, enables the partners and shareholders of the company to know, whether it is growing or there is a drop in the performance. On the other hand, it can be mentioned that IFR 8 allows the stakeholders of the organizations to obtain a better sense of the fluctuations that might influence the overall numbers (Nichols, Street, & Tarca, 2013). It asserts that if a company reports much higher income than anticipation, IFRS 8 can permit to show where those incomes are being generated from. Moreover, the stakeholder can look at the same report for determining if the numbers are sustainable. It supports the investors better to understand the organization and its potential cash flow.

There are some drawbacks of IFRS 8 in segment reporting as well. It has been determined that segment information may be ambiguous to the investors and other external users who follow it. It can be mentioned that operating data by segments are generated for internal management users and usually arbitrary judgments are done by management to develop such segment data (Crawford, Ferguson Helliar & Power, 2014). However, the limitations and nature of segment data are known to internal management users but external users have problem to understand them and use it in making investment decisions. On the other hand, it has been studied that IFRS8 in segment reporting can place high focus on short-term numbers. For instance, a firm may develop a division merely for its online job. Such division may run a substantial discrepancy prior the right people and infrastructure are in place. If such losses are compensated by the overall outcome of the company then it may not stand out on the financial statements (Lucchese, & Di Carlo, 2012). 

The replacement of IAS 14 with IFRS 8 in Europe has been extremely debatable due to the management approach permitted by IFRS 8 equated with more rigid method before need by IAS 14. It has been identified that the management approach in IFRS 8 needs information of segment to be testified externally on the basis of how data is conveyed internally to the management of the organization. On the contrary, IAS 14 had involved very prescriptive needs as to what should be testified and how (Crawford et al. 2014). The European Parliament has been required to sanction all IFRIC interpretations and IASB standards for letting principles and elucidations to come into effect. Furthermore, the European Financial Reporting Advisory Group (EFRAG) reviewed the suggested standards and made references to the European Commission regarding whether or not the parliament require to approve the interpretations and standards. Therefore, when ED 8 has been released then apprehension has been shown regarding the management approach by number of commentators to both EFRAG and IASB. 

The European Commission generated feedback after IFRS 8 has been issued by IASB to know whether the European Parliament should sanction IFRS 8. On the other hand, there has been argument that IFRS 8 should not be endorsed as the achievement of IFRS can be accredited both to European Union leadership and market demand (Aleksanyan & Danbolt, 2015). Furthermore, it has been identified that segment reporting or evidence is the crucial element of financial reporting for users and investors. It is fundamentally divisive as well between creators of financial statements and users, who need it to be precisely purposeful. The risks and rewards method to recognizing segments (earlier involved in IAS 14) debatably fulfills the requirement of users whereas the management approach under IFRS 8 achieves the requirements of makers (Sucuahi, 2013). 

Certain concerns have been raised against IFRS 8, when it was first introduced. It has been pointed out that IFRS 8 would not include sufficient precautions in the definition process of segments that could lead into too much scope for the management to describe them. Moreover, it can result to less objective information and can generate fear that segments’ definition cannot be steady from one year to another that can detriment comparability (Nichols & Street, 2007). On the other hand, it has been determined that as IFRS 8 would be relied on the internal management information then would allow the usage of non-GAAP measure for external objective deprived of needing a complete settlement to IFRS on a segment basis. Therefore, there has been a fear that the management may hide non-profitable activities by utilizing such provisions. 

It can be further pointed out that IFRS 8 do not completely ignores the requirements of many stakeholders. IFRS 8 allows the stakeholder to prepare and assess the business reports to know whether the company is feasible to make investment or not. On the other hand, it has been also claimed that needs of stakeholders has been disregarded to some extent. Some stakeholders fear that management may select data to be disclosed and hide negative segment information by conjoining it with other segments (Partenie et al. 2009). It has been observed that some stakeholders believe that IAS 14 provide more safeguards than IFRS 8 as segment reporting would be relied on information exchanged by all members of board and subject to an arduous assessment. Moreover, IFRS 8 does not eradicate the fiduciary duties of board to the shareholders. 

Segment reporting under IFRS 8 is beneficial to different stakeholders groups and users to significant extent. In that context, it can be pointed out that IFRS 8 allows companies to give general information on matters as how the reportable segments need to be recognized and the kinds of goods and services from which each reportable segment generates their revenue (Nichols, Street & Cereola, 2012). This enable the stakeholder groups and users to use the information given by organizations to make investment decisions. On the other hand, IFRS 8 ask firms to disclose and report the amount of income or loss and total assets and liabilities for every reportable division. This help the user of financial report of companies to know whether they would generate expected return or not. According to IASB, IFRS 8 segment reporting would help the users of financial statements for understanding the past performance of company, accessing more easily the risks and returns of an entity and making more knowledgeable decisions regarding the company as a whole. It has been claimed that shareholders and users of financial statements such as predictors, investors, workers, market makers, employees and others may be concerned in the prospects and performance of one specific division of the firm instead of the company as a whole (Nichols, Street & Tarca, 2013). Therefore, IFRS 8 can assist the users and shareholder group to collect the information of one specific segments that they want to study about more specifically. It has been further determined that different segments of the organizations would have distinct income potentials capital needs, growth opportunities and types and degrees of risk. Thus, through IFRS 8, the past results of the firm and its future outlooks can be understood by users and shareholder groups effectively. As a result, all the users and shareholders would be able to gather disaggregated and consolidated information.

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The overall study has focused on IFRS 8, which is a replacement of IAS 14. IFRS 8 has both benefits and limitations that can impact the reporting of segment of companies in the business or annual reports. On the other hand, it has been identified that IFRS 8 followed management approach due to which there has been controversy with IFRS 8. However, it has been observed that there is no significant changes in information disclosure while comparing IFRS 8 against IAS 14 needs. 

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  1. Aleksanyan, M., & Danbolt, J. (2015). Segment reporting: Is IFRS 8 really better?  Accounting in Europe12(1), 37-60.
  2. Crawford, L., Ferguson, J., Helliar, C. V., & Power, D. M. (2014). Control over accounting standards within the European Union: the political controversy surrounding the adoption of IFRS 8. Critical Perspectives on Accounting25(4), 304-318.
  3. Lucchese, M., & Di Carlo, F. (2012). An analysis of segment disclosure under IFRS 8 and IAS 14R: Evidence from Italian listed companies. World Business Institute Australia, Refereed Paper108(1), 1-10.
  4. Nichols, N. B., & Street, D. L. (2007). The relationship between competition and business segment reporting decisions under the management approach of IAS 14 Revised. Journal of International Accounting, Auditing and Taxation16(1), 51-68.
  5. Nichols, N. B., Street, D. L., & Cereola, S. J. (2012). An analysis of the impact of adopting IFRS 8 on the segment disclosures of European blue chip companies. Journal of International Accounting, Auditing and Taxation21(2), 79-105.
  6. Nichols, N. B., Street, D. L., & Tarca, A. (2013). The impact of segment reporting under the IFRS 8 and SFAS 131 management approach: A research review. Journal of International Financial Management & Accounting24(3), 261-312.
  7. Partenie, D., Lucia, S., Leonica, B., & Ludovica, B. (2009). IFRS 8–Operating Segments. Analele Universitatii din Oradea. Stiinte Economice3, 931-935.
  8. Sucuahi, W. T. (2013). Firm Size as Predictor of Compliance to International Financial Reporting Standards (IFRS) 8. IAMURE International Journal of Business and Management6(1), 45.
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