IFRS 8 vs IAS 14: How Segment Reporting Changed and Why the CODM Concept Was a Shift
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Sai Manikanta Pedamallu
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IFRS 8 vs IAS 14: How Segment Reporting Changed and Why the CODM Concept Was a Shift
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
In 1997 the international and American standard-setters each issued a segment reporting standard. They went in opposite directions.
The IASC issued IAS 14, built on a risk and reward approach. The FASB issued SFAS 131, built on a management approach. The two boards had discussed both concepts through the 1990s and had been unable to agree on a common standard, so each proceeded with its own.
Nine years later the IASB abandoned its position entirely. As part of the short-term convergence project with US GAAP, it replaced IAS 14 with IFRS 8, adopting SFAS 131 almost word for word, effective for periods beginning on or after 1 January 2009.
Two IASB members dissented and voted against the new standard. Understanding why they did, and what the post-implementation evidence actually showed, is more instructive than the comparison table.
Post 81 covered how IFRS 8 works. This post covers what it replaced and what the shift produced.
IAS 14: The Risk and Reward Approach
IAS 14 required financial information to be reported by business segment and by geographical area, and it prescribed a specific structure for doing so.
The primary and secondary format. An entity determined which of the two bases, business or geographical, was its primary reporting format, and which was secondary. The determination turned on whether the entity's risks and returns were affected predominantly by the products and services it produced, or by the fact that it operated in different geographical areas.
The primary format carried extensive disclosure requirements. The secondary format carried a reduced set.
Prescribed content. IAS 14 specified what information was to be reported for each format, rather than leaving it to what management happened to review.
IFRS measurement. Segment information was prepared using the entity's own accounting policies, meaning the segment numbers were IFRS-compliant numbers.
The structure had a clear logic. If investors are assessing risk and return, and risk and return are driven predominantly by product markets in one business and by country exposure in another, then the reporting should follow whichever driver dominates.
It is worth noting that IAS 14 in its revised form was not purely risk-and-reward. It was described as being based on the management approach but subject to a risks and rewards qualification, meaning the entity started from its internal organisation and then tested it against the risk and return criterion. The two approaches were closer than the shorthand suggests, but the qualification was decisive: where internal organisation and risk-and-return pointed in different directions, IAS 14 required the risk-and-return answer.
Why the IASB Changed Position
The stated reason was convergence. The project was conducted jointly with the FASB and focused on reducing differences between IFRS and US GAAP that could be resolved within a relatively short timeframe. Because the IASC had worked closely with the FASB and the Canadian standard-setter during the late 1990s, eliminating the remaining differences on segment reporting was seen as a logical selection for short-term convergence.
The substantive reason was user preference. As part of its due process, the IASB discussed segment reporting with financial statement users. Most users interviewed favoured the SFAS 131 management approach over the IAS 14 approach with its risks and rewards qualification.
The IASB also relied on academic evidence from US studies indicating that segment disclosures under SFAS 131 improved predictive accuracy and were quickly reflected in share prices.
The underlying argument is a straightforward one. Management runs the business on the basis it has chosen because that basis reflects how the business actually works. A framework that requires reporting on a different basis produces information that management itself does not use, and requires reconciliation between the internal and external views that adds cost without adding insight. Reporting through the eyes of management gives users the same view the people running the business have.
What Actually Changed
Five differences carry the substance.
The primary and secondary format disappeared. IFRS 8 requires a single set of operating segments, identified by reference to what the chief operating decision maker reviews. There is no primary basis and no secondary basis, and no requirement to determine which of business or geography dominates risk and return.
Segment identification became a question of internal organisation. Under IAS 14, segments were determined by testing the entity's structure against a risk and return criterion. Under IFRS 8, segments are the components whose results the CODM regularly reviews for resource allocation and performance assessment, with the aggregation criteria and quantitative thresholds applied to those components.
Segment measures need no longer comply with IFRS. This is the most fundamental change. IFRS 8 requires the amount reported for each segment item to be the measure reported to the CODM, even where that measure does not comply with IFRS. IAS 14 required segment information to be prepared using the entity's accounting policies.
Disclosure became conditional on what the CODM sees. Under IFRS 8, with limited exceptions, information is reported only where it is regularly reviewed by or provided to the CODM. An entity that does not report segment assets to its CODM does not disclose segment assets. IAS 14 prescribed the content.
Entity-wide disclosures were introduced. IFRS 8 requires disclosure about products and services, geographical areas, and major customers, applying to all entities within scope including those with a single reportable segment. These sit outside the segment framework and are intended to preserve a baseline of comparable information regardless of how the entity segments itself.
Where IFRS 8 Differs From SFAS 131
The convergence was close but not complete. Three differences remained.
IFRS 8 does not require segment reporting in interim financial reports, where the US standard does. In practice, other requirements frequently mandate interim segment information regardless, and in India SEBI's listing regulations require it quarterly.
IFRS 8 requires the reporting of segment liabilities where that information is provided to management.
IFRS 8 defines segment assets for the entity-wide geographical disclosure as non-current assets, a definition that includes intangible assets.
The Dissent and the Objections
Two members of the IASB voted against IFRS 8. The objections were substantive and they are worth stating properly rather than dismissing, because they identify genuine trade-offs.
Comparability. If each entity segments according to its own internal organisation, and measures segment results on whatever basis its CODM uses, then two entities in the same industry may report on entirely different bases. A user cannot compare them directly.
Non-IFRS measures. Permitting segment profit to be measured on a basis that does not comply with IFRS was seen as a significant concession, particularly for the most granular level at which many users actually analyse a business.
Management discretion over segmentation. Because segments follow internal organisation, and internal organisation is within management's control, management can influence what is reported by changing how it organises internal reporting.
Loss of geographic information. IAS 14 guaranteed a geographical view. IFRS 8 guarantees only the entity-wide geographical disclosure, which is less granular than a full geographical primary format would have been.
Adopting a US standard wholesale. The IASB effectively imported SFAS 131 rather than developing an independent position, which raised process concerns quite apart from the technical merits.
What the Evidence Showed
Post-implementation research on European blue chip companies produced findings that partly supported and partly contradicted the objections, and the picture is more interesting than either side predicted.
On the number of segments. IFRS 8 resulted in the reporting of significantly more operating segments on average. However, most companies reported the same number or fewer.
Those two findings sit together, and the reconciliation is that the mean rose while the median did not. A minority of entities disaggregated substantially, pulling the average up, while the majority changed little. The standard did not force widespread disaggregation; it permitted it, and some entities took the opportunity.
On geographic information. The concern about loss of geographic data was not borne out. Research identified an improvement in the fineness of disclosures and a significant increase in the disclosure of geographic groupings.
On segment measures. Research on the equivalent US transition found that the move from the earlier US standard to SFAS 131 led firms to disclose a greater number of segment measures, not fewer.
On aggregation. This is where the honest answer is least comfortable for both sides. Research found evidence that managers maintain their ability to aggregate segments to protect excess returns under both the IAS 14 revised framework and the management approach.
That finding matters. The concern that IFRS 8 gives management discretion to aggregate away inconvenient information is real, but it is not a new problem created by IFRS 8. The discretion existed under IAS 14 as well. The management approach did not introduce the aggregation problem; it inherited it.
This is why aggregation, as covered in Post 81, remains the most heavily challenged judgment in segment reporting regardless of which framework applies.
Comparison
| Area | IAS 14 | IFRS 8 |
|---|---|---|
| Underlying philosophy | Risk and reward, with a management approach starting point subject to a risk and return qualification | Management approach: report as the CODM sees the business |
| Segment identification | Business and geographical segments, tested against risk and return | Operating segments as reviewed by the CODM |
| Reporting format | Primary and secondary formats, with different disclosure levels | Single set of operating segments; no primary or secondary distinction |
| Determination of primary basis | Whether risks and returns are affected predominantly by products and services or by geography | Not applicable |
| Measurement basis | The entity's IFRS accounting policies | The measure reported to the CODM, which need not comply with IFRS |
| Disclosure content | Prescribed by the standard | Conditional on what is regularly reviewed by or provided to the CODM |
| Entity-wide disclosures | Not a separate requirement, since geographical information was built into the format | Required: products and services, geographical areas, major customers |
| Segment liabilities | Required for primary format | Required only where provided to management |
| Reconciliation | Between segment and consolidated amounts | Between segment totals and entity amounts, with reconciling items described |
| Convergence with US GAAP | Differences remained | Substantially converged with SFAS 131, with three remaining differences |
The Indian Transition
India went through the same shift, one step behind.
AS 17 Segment Reporting, India's standard under the previous framework, was modelled on IAS 14 and used the same architecture: business segments and geographical segments, with a primary and secondary format determined by the dominant source of risks and returns.
Ind AS 108 replaced it with the management approach on Ind AS adoption.
For Indian companies transitioning to Ind AS, this produced a genuine change in how segment information was constructed, not merely a relabelling. Three consequences were common.
Segments changed. Entities that had reported business segments as primary under AS 17 sometimes found that their CODM reviewed the business on a different basis, and the reported segments changed accordingly.
Measures changed. Segment profit that had been an IFRS-compliant subtotal under AS 17 became whatever the CODM actually used, with reconciliation to the consolidated figure.
Geographic information became entity-wide rather than a reporting format. The AS 17 geographical secondary format was replaced by the IFRS 8 entity-wide geographical disclosure, which is structured differently.
The regulatory overlay described in Post 81 remains: RBI prescribes segment categories for banks, and SEBI requires quarterly segment reporting, so the Indian application of the management approach operates alongside prescriptive requirements that IAS 14 would have accommodated more naturally.
What Survived
Three features of IAS 14 carried into IFRS 8 largely intact, and it is worth noting them because the discontinuity is sometimes overstated.
The 10 per cent quantitative thresholds. The criteria for determining reportable segments remained similar to IAS 14, with the difference that intersegment sales are now considered in the revenue test.
The 75 per cent external revenue test. The completeness backstop requiring additional segments to be reported until 75 per cent of entity revenue is captured.
Reconciliation to the consolidated financial statements. Both standards require segment totals to be reconciled to the corresponding entity amounts, with material reconciling items identified.
The mechanics of determining which segments are reportable, once the segments themselves have been identified, are recognisably the same exercise under both standards. What changed fundamentally was how the segments are identified in the first place, and how they are measured.
What Big 4 Auditors Focus On
For entities that transitioned between the frameworks, and for entities where the internal structure has changed since:
Whether reported segments still reflect the CODM's actual view. An entity that identified its segments on transition and has not revisited them, while its internal reporting has evolved, may be reporting a structure that no longer corresponds to how the business is run.
Consistency between segment reporting and other communications. Auditors compare segments in the financial statements against the management commentary, investor presentations, and earnings calls. Divergence between the public narrative and the reported segments requires explanation.
Aggregation. Given the research finding that aggregation discretion persists under both frameworks, this remains the primary focus, tested against long-run margin, growth, and return data.
Explanation of non-IFRS segment measures. Where segment profit is measured on a non-IFRS basis, auditors test that the basis is explained, that differences from IFRS measurement are described, and that any asymmetrical allocations are disclosed.
Dip IFRS Exam Angle
The comparison is examined conceptually rather than computationally.
Most tested areas:
Explaining the difference between the risk and reward approach and the management approach.
Identifying that IFRS 8 removed the primary and secondary format distinction.
Recognising that segment measures under IFRS 8 need not comply with IFRS, and that reconciliation and explanation are required instead.
Explaining why entity-wide disclosures were introduced and to whom they apply.
Articulating the arguments for and against the management approach.
Common traps:
Assuming IAS 14 was purely risk-and-reward. Its revised form started from the management approach and applied a risks and rewards qualification.
Assuming IFRS 8 requires more segments. The evidence showed the average rose while most entities reported the same number or fewer.
Assuming IFRS 8 introduced management discretion over aggregation. The discretion existed under IAS 14 as well.
Stating that IFRS 8 removed geographic information. It replaced the geographical reporting format with entity-wide geographical disclosure, and the evidence showed geographic disclosure improved rather than deteriorated.
Assuming full convergence with US GAAP. Three differences remain, including interim reporting and segment liabilities.
FAQ
Why did the IASB abandon the risk and reward approach it had chosen only nine years earlier?
Primarily convergence with US GAAP under the short-term convergence project, supported by user preference for the management approach and by academic evidence that segment disclosures under the US standard improved predictive accuracy.
Was IAS 14 purely a risk and reward standard?
Not in its revised form. It was based on the management approach but included a risks and rewards qualification, meaning the entity started from its internal organisation and tested it against the risk and return criterion. Where the two diverged, risk and return governed.
Did IFRS 8 reduce the number of segments companies report?
The evidence is more nuanced. Adoption resulted in significantly more operating segments on average, while most companies reported the same number or fewer. A minority disaggregated substantially and raised the average.
Did companies lose geographic information under IFRS 8?
The research did not support that concern. Studies identified an improvement in the fineness of disclosures and a significant increase in the disclosure of geographic groupings, notwithstanding the removal of the geographical reporting format.
Is aggregation discretion a problem created by IFRS 8?
No. Research found that managers maintained the ability to aggregate segments to protect excess returns under both IAS 14 revised and the management approach. IFRS 8 inherited the problem rather than creating it.
Why did two IASB members vote against IFRS 8?
The dissent centred on comparability between entities, the permission to use non-IFRS measures for segment reporting, management discretion over segmentation, the loss of the guaranteed geographical format, and the adoption of a US standard largely unchanged.
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This is Post 83 of the Global Fin X IFRS Series. Previous: IAS 24 Related Party Transactions: What NFRA and Big 4 Look For in India. Next: Post 84: IFRIC 12 Service Concession Arrangements: Toll Roads, Airports and Indian PPP Projects.