Segment Reporting: Is IFRS 8 Really Better?

Abstract

This paper contributes to the debate on segment reporting standards in the UK and Europe and, specifically, the merit of International Financial Reporting Standard (IFRS) 8 relative to predecessor standards (Statement of Standard Accounting Practice (SSAP) 25 and International Accounting Standard (IAS) 14R). We carry out a longitudinal analysis of segment reporting practices of a large sample of listed UK companies, covering all three reporting regimes. Using the proprietary cost theory (PCT) as our theoretical lens, we present evidence consistent with PCT, that proprietary costs considerations influence companies’ segment disclosure choices. We show that when companies are required to disclose more detailed accounting information for geographical segments (e.g. when geography is the basis of operating segments, under IFRS 8, or primary segments, under IAS 14R), they choose to define geographical segments in broader geographic areas terms than was the case under SSAP 25. We find that although companies disclose greater quantity of segmental information under IFRS 8 and IAS 14R (than SSAP 25), the more recent standards brought about a notable reduction in (i) the level of specificity of the disclosed geographical segments, and (ii) the quantity of disclosed geographic segment profit data – one of the most important data types for users. While this may have reduced the proprietary costs of segment disclosures, the reduction in disclosure of segmental performance data may have reduced the usefulness of segment reports to investors.