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Commentsfrom ACCA
May 2006

ACCA is pleased to have this opportunity to comment on the Exposure Draft (ED) on operating segment disclosures which was considered by ACCA’s Financial Reporting Committee.

Overall comments

The principal reason for the issuing of the ED is to further convergence between IFRS and US GAAP. We hold the view that this convergence is an aim which should be pursued by IASB because:

• The harmonisation of financial reporting around the world improves its usefulness to investors in global capital markets in particular
• Potentially this is a benefit to the reporting companies by way of cost of capital and by way of lower preparation costs for those with listings in both the US and elsewhere
• Harmonisation of requirements also assists accountants who may like to work in different countries or for different companies.

On the other hand, we note that convergence produces costs and difficulties. These arise principally from the additional changes to IFRS that are entailed and that give rise to:

• extra costs in preparation of financial statements by companies
• changes that have to be communicated and understood by preparers, auditors  and users alike
• new translations of the standards into the many languages around the world in which IFRS are available
• approval of the changes by the different endorsement authorities around the world.

Changes to IFRS have therefore to be justified by the improvement in the quality of the resulting reporting. On balance we are not convinced by that the changes proposed in this case merit this, as we have set out in our answers to Q2, Q4 and Q5 below. We note that:

• For companies in Europe and other jurisdictions which moved to IFRS in 2005, this would represent a restatement of the basis of these key disclosures soon after first reporting under IAS14
• The changes proposed are to disclosure requirements that are not even part of the reconciliation statement required by the SEC of those foreign companies listed in the USA, the elimination of which statement is an objective of the convergence programme
• The number of companies currently providing both IFRS and US GAAP information (who will clearly gain from ED8) is relatively modest compared to the number of those reporting purely under IFRS who may gain little.

We would therefore prefer that IAS14 was left in place for now until the case for changing it becomes clear on the grounds of remedying significant deficiencies. We would prefer IASB to pursue convergence via joint projects with FASB to deal with subjects where standards do not exist or in areas where they are clearly in need of improvement.

If however there were nevertheless to be changes to IAS14 we suggest that these are:

• Limited to changing the basis of selection of segments and not to the information content which should be provided to investors (see our answer to Q1 below)
• Implemented as part of a package at a much later date than the date of 2007 proposed in ED8, when there would be a possibility of gathering a number of changes together to put through as a batch. Continuous piecemeal changes undermine the reputation of IFRS and raise compliance costs.

Responses to specific questions raised by IASB

Q1. Adoption of the management approach in SFAS 131

As note in our overall comments above, we would prefer to see IAS14 not changed for now. If, however, changes are to be made then we would support this change in determining the selection basis of segments. We note that IAS14 currently requires a primary and secondary segment analysis based on a line-of-business analysis and a geographical analysis. This more complex picture would be better replaced with the analysis used by the directors.

Q2. Divergence from SFAS131

We consider that the standard should define what would constitute segment profit and the allocation of assets and liabilities to segments. Under ED8 there are no such definitions. Instead the reporting would be as done to the CEO or board. This means that the segment reporting could be done on potentially a very wide range of bases – for example using EBITDA, assets excluding goodwill, or even using national GAAP as opposed to IFRS. If so then there might be costs or assets for example which would be excluded from any of the segments and only show up as part of the reconciliation back to the consolidated accounts. We consider that this represents inadequate comparability between reporting entities and permits management to report an incomplete analysis.

Subject to our preference for retaining IAS14, we would otherwise broadly agree with the views of the three board members who voted against the ED.

On the question of costs and benefits, we would see the proposals of ED8 as leading to changeover costs as explained in our overall comments. Continuing with the IAS14 disclosures involves no incremental costs to those companies already providing them. Switching to ED8 could lead to some costs savings for US listed companies but these constitute a relatively small number.

Q3. Scope of the standard

We agree with the extension from the existing compulsory application by listed companies to financial institutions.

We have more difficulty with the requirement in Paragraph 3 that if another sort of company provides any segment information it must conform to this standard. We note that this is an existing part of IAS14, but nevertheless it seems unnecessarily restrictive. It would seem to prevent an unlisted entity for example producing on a voluntary basis an analysis of sales, without also producing segmental profits or assets etc. This goes against the principle that standards set a minimum requirement that can always be added to and prohibiting what might be useful information being provided. In these cases we would propose that extra analytical information would be permitted as long as there was a clear disclosure that the extra information did not constitute segmental information in accordance with IFRS8.

Q4. Level of reconciliations

We regard the reconciliations proposed in paragraph 27 as very important if the proposed management approach is to be the basis for calculation. The reconciliation should be provided on a segment-by-segment basis to allow users to get as good information as currently provided under IAS14. In terms of costs and benefits our comments under Q2 concerning the incremental costs apply here as well.

In the examples in the implementation guidance on pages 6-8, the reconciliations for revenues, P&L and assets unhelpfully all start with figures that do not actually appear as totals in the table on page 6, partly because the ED’s requirements refer to the total of reportable segments as opposed to the total of all segments.

Q5. Geographical information about assets

Our preference would be for the existing IAS14 requirements for disclosure of total segment assets under secondary segment analysis to be continued, which would provide the user with some country risk information. ED8’s proposals would represent a backward step by simply providing the total of intangibles and tangible long-lived assets.

Q6. Consequential amendments to IAS34 etc.

We agree with these.

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