This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to Kil-woo Lee, Project Manager at International Accounting Standards Board on 19 May, 2006:
Dear Sir,
Exposure Draft 8 Operating Segments
Thank you for the opportunity to comment on the above Exposure Draft (“ED”).
We support the change in defining a business segment to focus on the components of the business that management use to make decisions about operating matters. In a period where accounting standards have become far more complex and difficult for many to apply, the simpler approach set out in ED 8, which acknowledges how an entity’s management uses information, is a welcome relief.
We have two concerns:
Firstly, the ED proposes that the measurement basis used in presenting segment results need not conform to International Financial Reporting Standards (“IFRS”) and that reconciliations are only required at an aggregate level. We believe that, where practicable, the reconciliations to IFRS numbers should initially be at a segment level, then at an aggregate level. Where such a reconciliation is impracticable, this should be stated, together with the reason. We agree that it is important that all material reconciling items are separately identified and disclosed (as per paragraph 27 of ED 8), whether the reconciliation is at a segment level or an aggregated level.
Secondly, for many smaller public companies included within the scope of ED 8, disclosure of segments at a level used by the “chief operating decision maker” may lead to price sensitive information being disclosed to an extent that could compromise the company. For example, there may be only a few customers or even a single customer in a particular segment. We would therefore encourage the IASB to consider the inclusion of a seriously prejudicial exemption. We appreciate that there may be concerns that such an exemption might be abused, with entities simply seeking to avoid making disclosures. We suggest that such an exemption should be accompanied by a requirement to disclose the reason(s) why the segmental information that would otherwise be disclosed would seriously prejudice the entity’s position.
Our comments on the specific questions posed in the invitation to comment are set out below.
Question 1 – Adoption of the management approach in SFAS 131
The draft IFRS adopts the management approach to segment reporting set out in SFAS 131 ‘Disclosures about Segments of an Enterprise and Related Information’ issued by the US Financial Accounting Standards Board.
Is this approach to segment reporting appropriate? If not, why not? What, if any, alternative approach would you propose.
We believe this approach is appropriate.
Question 2 – Divergence from SFAS 131
The wording of the draft IFRS is the same as that of SFAS 131 except for changes necessary to make the terminology consistent with that in other IFRS.
Do you think that the draft IFRS should depart from the management approach in SFAS 131 by setting requirements for:
(a) the measurement of specified items; or
(b) the disclosure of specified amounts that might otherwise not be given
If so, identify the requirements you would add and indicate what you see as the relative costs and benefits of any such requirements
One of the main reasons (if not the only reason) for ED 8 is to achieve convergence with US GAAP. By departing from the management approach to identifying segments, the Board would not achieve this convergence objective. Indeed, if the Board is considering departing from the management approach to identifying segments, there would seem to be little point in considering the replacement of IAS 14.
By allowing entities to present segment information on a basis consistent with that reported internally, there may be cost savings, for example:
· Entities would not need additional systems to produce individual segment results measured in accordance with IFRS for statutory reporting purposes, should the measurement bases used in internally reported segment results not readily conform with IFRS.
· It may reduce the desire for entities to produce a voluminous amount of information outside of the financial statements (but within the annual report), if segment information could be reported on the same basis as is presented to the chief operating decision maker. Instead, they need only refer the reader to the segment information.
However, we would support a requirement to reconcile to IFRS numbers at a segment level where it is practicable, given that many entities will have the information to hand, or be able to obtain it at little extra cost, as it may be derived from consolidation adjustments. Such a requirement would improve comparability among different entities operating in the same segment. Where such a reconciliation is impracticable, that fact and the reason that it is impracticable should be stated.
We note that the above suggestions for a reconciliation by segment would lead to a divergence with SFAS 131. However, we believe that it would improve the information available and that SFAS 131 should also be amended accordingly,
Question 3 – Scope of the standard
The existing standard IAS 14 requires entities whose equity or debt securities are publicly traded and entities that are in the process of issuing equity or debt securities in public securities markets to disclose segment information. The draft IFRS extends the scope to include also entities that hold assets in a fiduciary capacity for a broad group of outsiders
Do you agree with the scope of the draft IFRS? If not, why not?
While we agree that it may be appropriate to extend the scope of the draft IFRS to specific classes of entity, it is not clear from the discussion in BC16 why it should be extended as proposed. It would be helpful for the basis for conclusions to articulate the IASB’s arguments more clearly. We also note that the proposed scope would appear to widen the applicability of the ED 8 beyond that of SFAS 131.
Question 4 – Level of reconciliations
The draft IFRS requires an entity to provide, for specified items, reconciliations of total reportable segment amounts to amounts recognised by the entity in accordance with IFRSs. It does not require such reconciliations for individual reportable segments.
Do you agree with the level of reconciliations required in the draft IFRS? If not, indicate what you see as the relative costs and benefits of any other level of reconciliation.
No.
As noted in our response to question 2 above, the reconciliations to IFRS numbers should be by segment, unless such a reconciliation is impracticable, in which case that fact and the reason that it is impracticable should be stated.
We agree that it is important that all material reconciling items are separately identified and disclosed (as per paragraph 27 of ED 8) whether the reconciliation is at a segment level or an aggregated level.
We note that, in comparing ED 8 to SFAS 131, ED 8 appears to read “impracticable” as it reads in SFAS 131, i.e. as meaning the “necessary information is not available and the cost to develop it would be excessive”.
Question 5 – Geographical information about assets
The draft IFRS requires an entity to disclose geographical information about non-current assets excluding specified items. It does not require disclosure of geographical information about total assets
Do you agree with the requirement to disclose geographical information about non-current assets excluding specified items? If not, for which assets would you require geographical information to be given?
We agree.
Question 6 – Consequential amendments to IAS 34 Interim Financial Reporting
The draft IFRS requires an entity to disclose more segment information interim financial reports than is currently required, including a reconciliation of the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss.
Do you agree with the consequential amendments made to IAS 34. If not, why not
We do not agree. We believe that it should be left to local jurisdictions and exchanges to decide which segment information, if any, should be included in interim reports.
We would be pleased to discuss our comments and observations with you further if this would be helpful. Please contact Helen Thomson at +32 2 778 01 30.
Yours faithfully,
BDO Global Coordination BV
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Exposure Draft, Comments due 19 May 2006: