The impact of increased standard flexibility on disclosure practices

The impact of increased standard flexibility on disclosure practices

A comparison of the introduction of IFRS 8 in the UK, Germany, France and Italy and its impact on companies’ segment disclosures

Giulia Giunti

Umeå School of Business and Economics Umeå 2015

The impact of increased standard flexibility on disclosure practices

A comparison of the introduction of IFRS 8 in the UK, Germany, France and Italy and its impact on companies’ segment disclosures

Giulia Giunti

Umeå School of Business and Economics Umeå 2015

This work is protected by the Swedish Copyright Legislation (Act 1960:729) ISBN: 978-91-7601-371-7

ISSN: 0346-8291

Cover photos: Claudio Bianchi, Anna Thorsell and Frida Thorsell Electronic version available at http://umu.diva-portal.org/

Printed by: Print & Media Umeå, Sweden 2015

“Just remember, when you’re over the hill, you begin to pick up speed.”

Charles M Schulz

Acknowledgements

Many persons need to be acknowledged for their significant impact during the writing of my dissertation.

I want to start by thanking my supervisors, Prof. Stefan Sundgren and Associate Prof. Tobias Svanström. Their guidance and feedback have helped me all the way and made me a better researcher. It has been a privilege to work with them. I also want to take the occasion and show my appreciation to four persons that have revised my manuscript at different phases and provided me with insightful and valuable comments that have truly improved my work: Dr. Mikko Zerni, Dr.

Benita Gullkvist, Prof. Erland Kvaal and my fellow Ph. D. student Stefan Anchev.

Furthermore, I want to thank Anna Thorsell and Maira Babri for being precious companions throughout this journey. Anna, our friendship has grown so strong during the years that I have worked with my dissertation and having you so close both at work and outside of it has made me a richer person. Maira, we have been in this together not only as Ph.D. students, but already during our university studies. All the laughs and tears we have shared are worth more than any words I can write here. So thank you both, you are marvellous women and remarkable academics. I also want to thank my sister by heart, Kristina Zaytseva for always believing in me; for continuously pushing me to improve; for being by my side through tuff moments and for always showing me new perspectives. You are amazing and a true inspiration. I also want to thank my close friends Ida Widlund, Sandra Kankaanpäa and Katarina Fraenkel for always being there for me.

My family and friends in Italy have supported me all the way, even when it was hard for them to understand what I was doing and why it was sometimes difficult. Among them, the biggest grazie goes to my wonderful mother (Daria Giunti). I also want to show my gratitude to my in-laws (Lehna and Bernt Berglund), to my brother in law (Lars Berglund) and to Johanna Ögren. Their support and love have been invaluable!

Many colleagues have been extra caring and interested in my work and well- being during these years, and for this I want to thank you: Elin Nilsson, Malin Näsholm, Anna-Karin Nordvall, Amin Sofla, Ann-Christin Häggqvist, Galina Biedenbach, Christopher Nicol, Oscar Stålnacke, and Philip Roth. I would also like to give special thanks to Mattias Johansson for his support with all my small and big computer related problems. Especially, when I thought that all my data was gone and unrecoverable, but he did the impossible and saved my day!

An exceptional tribute goes to my incredible children, Benjamin and Sebastian.

This dissertation has been like a needy sibling for them, often claiming their mother’s attention. At the same time it has grown with us and it has given us many fulfilling moments. I want to believe that it has taught them that important things are worth working hard for and that the accomplishment of one of us becomes the accomplishment of the whole family. They are my motivation and my compass in life.

Lastly, but certainly not least, I want to praise my beloved husband. Dearest Anders, sharing my accomplishments with you has made all the hard work worthwhile and at the cost of sounding like a cliché, you really have been the light brightening up the dark moments. You are otrolig and fantastisk! A thank you is not even close to being enough, but it comes from the bottom of my heart.

Abstract

Following a series of reporting scandals in the early 2000s, several researchers studied the gradual shift toward more principles-based accounting systems.

There seems to be a general belief that the adoption of international principles- based accounting standards will improve financial reporting quality worldwide, although little evidence is provided for this claim. At the same time several studies claim that heterogeneity in countries’ environmental factors will not lead to harmonized accounting practices and that important differences will remain even though there is common international accounting system.

This study contributes to the literature regarding a shift toward more principles- based standards by investigating the effect of increased requirements’ flexibility on disclosure practices in an international environment characterized by harmonized accounting regulations but heterogeneous disclosure practices. The standards that are used are IFRS 8 Operating segment and its predecessor IAS 14R Segment Reporting. IFRS 8 took effect from January 1 2009. The countries included in the study represent the four largest economies in Europe, namely the UK, Germany, France and Italy.

The methodology used is quantitative and follows a positivistic research approach. This study investigates the impact that a regulatory change has on disclosure practices by observing data reported in the annual reports and asserts the eventual differences between the two standards and across the four countries.

The study provides evidence of only a marginal change in segment disclosure practices after the introduction of IFRS 8. The change is mostly characterized by a loss of key information indicating that more flexible requirements negatively impact accounting practices. This implies that if the purpose of a regulatory change is to assure a certain level of information, more rigid requirements are to be preferred. Further, this study shows that, opposed to expectations; disclosure practices are more heterogeneous under more rules-based standards. However, there is an indication that the reason for increased homogeneity is that companies listed in the UK and Germany, presenting a higher amount of segment information under IAS 14R, have decreased the information under IFRS 8. It seems thus that standard enforceability decreases under more flexible disclosure requirements.

Table of Contents

1. Introduction

1.1 Accounting information and accounting regulations 1 1.2 International accounting standards and the harmonization

of accounting practices 4

1.3 The introduction of IFRS 8 Operating Segments 6

1.4 Research questions and purpose 7

1.5 Contribution 8

1.6 Disposition 11

2. IFRS 8

2.1 The process of adoption of IFRS 8 12

2.2 Segmental reporting requirements according to IFRS 8 13

2.2.1 Core principle 14

2.2.2 Chief Operating Decision Manager (CODM) 15

2.2.3 Segment definition and number of segments reported 15

2.2.4 The identification of reportable segments 16

2.2.5 Disclosure requirements per operating segment 17

2.2.6 Entity-wide disclosures 19

2.2.7 Smaller listed companies and IFRS 8 22

2.2.8 Strengths and weaknesses of IFRS 8 23

3. Theoretical chapter

3.1 Introduction 25

3.2 Accounting information and the reporting environment 26 3.3 Rules- versus principles-based accounting systems 28 3.4 Standard characteristics and disclosure practices 33

3.5 Studies on the effects of the regulatory changes in segment

reporting standards (pre-IFRS 8) 37

3.6 Studies on the effects of the regulatory change from IAS 14R

to IFRS 8 45

3.7 Summary and discussion of Part I 57

3.8 Country-specific factors related to financial reporting 59 3.9 International differences in the introduction of IFRS 62 3.10 The persistence of international differences in accounting

practices 65

3.11 Summary and discussion of Part II 67

3.12 Firm-level characteristics and segment reporting 70

3.12.1 Firm-level characteristics 71

3.12.2 Competitive environments and proprietary costs 74

3.13 Years of reporting under local GAAP and disclosure

language 75

4. Research design

4.1 Operationalization 77

4.1.1 Sub-question 1 77

4.1.2 Sub-question 2 82

4.2 Data 83

4.3 Methodological reflections 84

5. Sample selection and sample demographics

5.1 Sample size and selection 86

5.2 Sample demographics 88

5.2.1 Continuous variables 88

5.2.2 Indicator variables 90

5.3 Smaller companies 98

5.4 Correlation analysis 99

6. Results

6.1 Introductions 101

6.2 Number of words reported 102

6.3 Identification of the CODM 106

6.4 Segment definition 110

6.5 Number of primary/operating segments reported 111

6.6 Number of single segment companies 118

6.7 Disclosure requirements per primary/operating segment 124

6.7.1 Analysis by items 124

6.7.2 Analysis by index 134

6.8 Number of geographical areas reported at the secondary/

entity-wide level 147

6.9 Types of geographical areas disclosed 153 6.10 Disclosure requirements per geographical are at the

secondary/ entity-wide level 155

6.10.1 Analysis by items 155

6.10.2 Analysis by index 158

6.11 Analysis of the control variables 165

6.12 Robustness checks 174

6.13 Summary of the empirical results 175

6.13.1 Comparison between standards 175

6.13.2 Cross-country and change analysis 178

7. Discussion and conclusions

7.1 Discussion 182

7.1.1 Effects of increased flexibility on disclosure practices 182

7.1.2 Effects of increased flexibility on the uniformity of disclosure

practices 184

7.1.3 Expectations and outcomes of IFRS 8 186

7.2 Limitations 187

7.3 Conclusions and suggestions for further research 189

References

Appendix I

Appendix II

Appendix III

List of Acronyms

ASBJ Accounting Standards Board of Japan CFA Chartered Financial Analysts

EC European Commission

EFRAG European Financial Reporting Advisory Group

EU European Union

FASB Financial Accounting Standards Board GAAP Generally Accepted Accounting Principles IAS International Accounting Standards IASB International Accounting Standards Board IASC International Accounting Standard Committee ICAS The Institute of Chartered Accountants of Scotland IFRS International Financial Reporting Standards NZICA New Zealand Institute of Chartered Accountants S&P Standard & Poor's Index

SFAS Statement of Financial Accounting Standards SOA Sarbanes-Oxley Act

SSAP Statement of Standard Accounting Practice

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1. Introduction

This doctoral dissertation is structured as a monograph and aims to contribute to the literature examining the impact of (different characteristics of) standards on companies’ disclosure practices in different countries. This is an empirical investigation of the implications of a global shift towards more principles-based accounting standards. Specifically, this study focuses on the adoption of IFRS 8 Operating Segments (IFRS 8) substituting IAS 14 Revised Segment reporting (IAS 14R). The risk and reward approach characterizing IAS 14R is more rules- based than the management approach characterizing IFRS 8. The countries included in the study represent the four largest economies in Europe, namely the UK, Germany, France and Italy. Comparisons between these countries are possible, given that the accounting traditions, legal systems and market orientations are significantly different, as are the experiences and attitudes regarding the implementation of IFRS in general.

1.1 Accounting information and accounting regulations

Information disclosure and the need for financial information are fundamental concepts that are intrinsic to the mechanisms grounding the global business environment. Efficient capital markets rely on corporate disclosure in order to function well, although companies may have different incentives when it comes to revealing internal information (Barth et al., 2008; Burgstahler et al. 2006;

Healy and Palepu, 2001). On the one hand, companies attract investors and build up trust with external parties by revealing financial information, although on the other hand have to take account of incentives such as proprietary costs and the willingness to hide bad performance, thus making it unfavourable for companies to disclose corporate information (Gray and Roberts, 1989; Mark, 1991; Hail and Leuz, 2005). The importance of the relation between market efficiency and the quality of corporate disclosure continues to be a salient issue.

Corporate disclosure has to satisfy a broad range of requirements that can also be contradictory, especially as several parties with different needs are involved, such as creditors, suppliers, customers, employees, investors and government (Healy and Palepu, 2001). The need for corporate disclosure then develops endogenously in order to alleviate the problem of information asymmetry and agency conflicts (Beyer et al., 2010). Despite this, accounting regulations are still required in capital markets. For this reason, companies follow regulations and provide mandatory disclosure, but also disclose voluntary information with a view to reducing the company’s cost of capital and increasing its market liquidity (Beyer et al., 2010).

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Standard setters and regulators influence companies’ reporting practices by developing and formulating standards to guide companies in the preparation of their financial reports. These standards are at the same time used by auditors and internal accountants for control. Standards can be categorized as principles- and rules-based. Principles-based standards can be defined as follows: “They are documents of broad principles and professional judgment in respect of the accounting issue at hand. The intention of the standard should be paramount in the eyes of the users” (Psaros and Trotman, 2004, p. 78). On the other hand, rules-based standards “… require the users of the accounting standard to follow more detailed and specific rules in determining the correct accounting treatment for a transaction or event” (Psaros and Trotman, 2004, p. 78). Following a series of reporting scandals in the early 2000s, several researchers studied the gradual shift toward more principles-based accounting systems (Benston et al., 2006;

d’Archy 2001; Alexander and Jermakowicz, 2006, Wüstemann and Wüstemann, 2010; Nelson, 2003; Nobes 2005).

There seems to be a general belief that the adoption of international principles- based accounting standards will improve financial reporting quality worldwide, although little evidence is provided for this claim (Sunder 2009). At the same time, the financial reporting community has become concerned about the increasing size of financial reports and fear that readers will be overwhelmed by so much data and miss the main message (ICAS and NZICA, 2011). In theory, principles-based standards are preferable because they lead to financial reporting that better reflects the company’s actual economic situation (FASB, 2006 and 2010). There is also empirical evidence to suggest that principles-based standards are just as effective in stopping biased financial reporting as rules- based standards (Psaros and Trotman, 2004; Psaros, 2007; Agoglia et al., 2011).

However, the extensive use of professional judgement and discretion related to principles-based standards has raised concerns about companies possibly abusing the increased flexibility in the reporting requirements for their own gain (Nelson, 2003; Benston et al., 2006; Alexander and Jermakowicz, 2006; Wüstemann and Wüstemann, 2010). Explicitly, the type of standard is dependent on the content the standard regulates and the need for guidance and rules cannot be combined with significant management discretion (Benston et al., 2006). Further, there is a risk that the principles will not be sufficient to create an effective structure that limits managers’ discretion when it comes to making decisions about specific events (Wüstemann and Wüstemann, 2010). Finally, regardless of the type of standard used, the various players on the world regulatory scene will interpret financial standards differently, both now and in the future (Alexander and Jermakowicz, 2006). This aspect and its implications need to be both recognized and accepted.

When attempting an empirical exploration of the effect of the type of standard on companies’ disclosure practices, it is necessary to take account of how the

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differences between rules- and principles-based standards can be measured.

According to Bennet et al., 2006, the distinction between principles- and rules- based standards is only meaningful in relative terms and that the differences are based on the importance given to qualitative characteristics in the conceptual framework and the proportion of professional judgement required (Nelson, 2003 and Bennet et al., 2006). According to this perspective, these differences can be found within the same standard system, such as IFRS or US GAAP and across them (Bennet et al. 2006).

The impact of specific standard’s characteristics on companies’ disclosure practices has mainly been explored in experimental research. Financial statement preparers are usually asked to make accounting decisions based on two standards; one more and one less precise (Cuccia et al., 1995; Hoffman and Patton, 2002; Psaros and Trotman, 2004; Psaros 2007; Agoglia et al., 2011).

However, this methodology has some limitations (Hoffman and Patton, 2002;

Psaros and Trotman, 2004; Psaros 2007; Agoglia et al., 2011). Firstly, an effective manipulation of the standard is important in order to be able to investigate the effect of different standard’s characteristics. Manipulating an existing standard for the purpose of testing its impact on the work of preparers and auditors increases the risk of operationalization bias. Secondly, the two versions of the standard cannot always be tested in the same experiment. Finally, there is a difference between investigating what preparers say they would do in a given situation and what they actually report in practice. There are also examples of studies investigating the impact of the characteristics of standards on companies’ disclosure practices using archival data. These types of studies offer the possibility to directly compare the effect of standards’ characteristics on actual financial statements using real standards (Clarkson et al., 2006; Collins et al., 2012). The use of actual standards also helps to prevent misinterpretation of the characteristics of interest (Collins et al., 2012).

This study contributes to the debate about the effect of different standards’

characteristics on disclosure practices by investigating the impact of increased requirements’ flexibility on disclosure practices. Previous studies have focused on precision, i.e. the impact of less specific requirements on auditors’

judgements and financial preparers’ decisions (Hoffman and Patton, 2002;

Psaros and Trotman, 2004; Psaros 2007; Agoglia et al., 2011). An example of a less precise requirement is when instead of stating a specific quantitative threshold (e.g. 90 per cent), the requirement states “the majority of” (Agoglia et al., 2011). On the other hand, flexibility regards the possibility of including or excluding certain key line items based on the specific situation of the firm.

Further, flexibility is an important feature of principles-based standards and enables companies to better reflect the economic situation of the entity (IASB, 2013). An example of a more flexible requirement is one that allows companies to withhold a specific piece of information, if the information is not available or is too costly to be collected, as in the case of IFRS 8:31.

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In short, this study aims to investigate the impact of more flexible requirements on companies’ reporting practices in an international environment characterized by harmonized accounting regulations and heterogeneous disclosure practices.

For this reason, the next section discusses the harmonization of accounting rules and the ongoing process of the harmonization of accounting practices in the countries reporting under IFRS.

1.2 International accounting standards and the harmonization of accounting practices

Since the year 2000 an increasing number of countries have adopted International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). It is now also possible for foreign companies listed on the US market to present their financial reports according to IFRS. Over 100 countries now use IFRS, which highlights the importance and magnitude of the standards.

It is important to note that the vast spread of IFRS as a publicly-enforced financial reporting system is relatively new. In the period 2003 to 2008, more than 50 countries (including EU countries) mandated IFRS for all listed companies. At the same time, 15 additional countries either mandated IFRS for some listed companies or allowed listed companies to voluntarily adopt IFRS. In 2015, at least 131 jurisdictions have required IFRS for all listed companies, for some listed companies or permitted it.¹ The conclusion drawn from this development is that IFRS is now the major financial reporting language for global companies. The ambition of an international adoption of IFRS is to produce high-quality standards for investors and users by improving the degree of transnational and transsectoral comparability between companies (IASB Framework, Art.10).

The EU has played an important role in the diffusion of the adoption of IFRS worldwide and has served as a model for countries deciding to adopt after the EU decision in 2002 (Véron, 2007). Examples of such countries are Australia, Norway and China. For this reason, it is fair to argue that the realization of this process should not only be attributed to investor demand, but also to EU leadership. The responsibility of the EU covers three important steps in the adoption process: endorsement, enforcement and implementation (Véron, 2007).

These steps are particularly challenging in the context of the EU due to the underlying differences characterizing the various countries. In this respect the international adoption of IFRS has harmonized accounting standards, although as yet the process of harmonization of accounting practices is far from complete. A strong research stream claims that the complete harmonization of accounting practices internationally has not yet been achieved due to the variety of accounting systems used by different countries prior to the introduction of IFRS and to other environmental factors affecting companies’ reporting practices (e.g.

1 http://www.iasplus.com/en/resources/ifrs-topics/use-of-ifrs (15-08-2015)

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Jaafar and Mcleay, 2007; Nobes, 1983, 1998, 2006, 2008; Kvaal and Nobes 2010 and 2012).

From a general perspective, the accounting literature has identified several country-related factors with an impact on different aspects of financial reporting.

The influence that a country specific environment (e.g. history, culture, legal environment, politics, market orientation, the influence of tax rules on the financial accounting measurements and enforcement) has on companies’

disclosure practices is not a new research topic and has been studied by several authors over the years (e.g. Jaggi, 1975; Gray, 1988; Doupnik and Salter, 1995;

Jaggi and Low, 2000; Ali and Hwang 2000; Hope, 2003; Archambault and Archambault, 2003; Jaafar and Mcleay, 2007; Soderstrom and Sun, 2007;

Holthausen, 2009). Further, several studies claim that due to this heterogeneity in the countries’ environmental factors, harmonized standards will not lead to harmonized accounting practices and that important differences will remain (Cascino and Gassen, 2015; Jafaar and Mcleay, 2007; Nobes, 2006; Kvaal and Nobes, 2010 and 2012; Soderstrom and Sun, 2007). It therefore follows that this heterogeneity could affect how companies react to the specific characteristics of a standard (e.g. the importance of qualitative characteristics in the conceptual framework and the degree of judgement required), which would in its turn affect their disclosures practices.

The harmonization of accounting regulations in Europe is a small part of a much larger and complex process of unification that began in the 1950s. The EU is composed of 28 member states with very specific cultural and economic backgrounds. The countries of interest in this study are the UK, Germany, France and Italy. During the period of interest of this study, mainly 2008-2009², these were the largest countries in terms of GDP and population. Furthermore, these countries also have different legal systems, market orientations and accounting traditions. Explicitly, when it comes to environmental factors, the UK is a common law country and market-oriented (Ali and Hwang, 2000), whereas Germany, France and Italy are code law countries with bank-oriented markets (Ali and Hwang, 2000). Moreover, these countries seem to have reacted differently to the introduction of IFRS in general (Fow et al., 2013; Demaria and Dufour, 2007; Haller and Eierle, 2004; Paananen and Heng Hsiu, 2009), for example regarding the specific process of understanding and interpreting the new standards and attitudes toward the changes required by IFRS. The UK appears to have been more confident about the implementation of IFRS and has engaged in professional argumentation against some of the more controversial standards, which may have put them at a disadvantage (Fox et al., 2013). On the other hand, Italy relied extensively on auditors for support in the implementation process and assumed that their interpretations were correct (Fox et al., 2013). France and Germany had a negative attitude towards some of the accounting regulations in

2 The majority of countries adopted IFRS 8 in 2009, although there are examples of earlier adopters from 2006.

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IFRS and claimed that their national GAAP offered a better solution (Demaria and Dufour, 2007; Paananen and Heng Hsiu, 2009). Knowledge about the countries’ reactions to the introduction of IFRS is an important factor, because it indicates the general attitudes towards the international accounting standards and the process of harmonizing accounting practices. These attitudes are of relevance when trying to understand companies’ disclosure practices in the different countries.

Standards setters need to have better insights in order to make decisions about how to improve standards in an as yet imperfect system. This study addresses the need for empirical studies that reflect the important dimensions of companies’

disclosure practices, the characteristics of standards and the harmonization of accounting practices.

1.3 The introduction of IFRS 8 Operating Segments

The standards that are used to study the impact of increased flexibility on disclosure practices are IFRS 8 Operating segment and its predecessor IAS 14R Segment Reporting. IFRS 8 took effect from January 1 2009, although early adoption in 2006 was permitted.

There are three main reasons for studying this standard. First, segment information is a key aspect for investors and analysts in their evaluation of the company as a whole and facilitates the construction of reliable forecasts (Nichols et al., 2013). Information about the segments is fundamental, because investors and analysts depend on companies’ disclosures in order to access this type of information (Herrmann and Thomas 1996). The importance of providing relevant segment information and managers’ incentives to reveal such information has been the focus of several studies (e.g. Gray 1981; Standford 1998; Tsakumis et al. 2006; Hope and Thomas 2008). Theoretically, the investors’ community has access to comparable information internationally in relation to segment disclosures, although an assessment of the degree of enforcement of the new standard in the different adopting countries is essential.

Managers can choose whether or not to disclose information that could be used by analysts to attract investors. However, at the same time, segment disclosure is sensitive information that could benefit competitors (Hope et al., 2006; Hope and Thomas, 2008; Nichols and Street, 2007).

Second, discussions have been held about how firms should report information related to their segment (IASB, 2013). The new standard refers to a so-called management approach, where segments are defined according to a company’s internal management structures, organizational levels, decision-making processes and how it assesses performance. The main intention with this new standard is to provide information about segments based on the specific structure of the entity’s internal organization. It follows that in order to reflect the

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organization and its specific internal processes there is a need for more flexible rules (IASB, 2013). IFRS 8 allows for an increased flexibility of requirements and an increased degree of management discretion compared to its predecessor IAS 14R. The main advantage that standards setters expect when introducing more flexible rules is that the relevancy and accuracy of the disclosed information should increase (e.g. FASB, 2010). On the other hand, increased flexibility could have a negative impact on the amount of information disclosed, which may lead to companies ceasing to disclose sensitive key line items (IASB, 2013). It is therefore of interest to investigate whether the increased flexibility of the new standard leads to the expected benefits in all the major countries in Europe, or whether there are differences at country-level that lead to heterogeneous segment disclosure practices.

Third, this standard is not only an attempt to improve the efficiency and reliability of segment reporting, but is also an important step in the process of narrowing IFRS and US GAAP convergence. The corresponding change from SFAS 14 to SFAS 131 occurred in 1998 in the US and since then has generated a large amount of research in an attempt to explore the different mechanisms and to test whether or not this change has led to the predicted benefits (e.g. Herrmann and Thomas, 2000 and Nichols and Street, 2002). IFRS 8 has been criticized for focusing on convergence rather than information quality (Véron, 2007). It is thus of relevance to investigate whether the benefits predicted with the introduction of IFRS 8 were realized in practice in all the major countries in Europe, given that the implementation process was not straightforward and was criticized from different quarters (Véron, 2007).

1.4 Research questions and purpose

The overall research question in this study is:

How does the adoption of a standard that is characterized by more flexible disclosure requirements affect companies’ disclosure practices?

More specifically, the purpose of the study is to make use of the introduction of IFRS 8 to analyze the effects of the more principles-based standard on European companies’ disclosures. Hence, the empirical setting for studying the more general issue of the impact of standards’ characteristics on companies’ reporting behaviour in an international environment is the change from IAS 14R to IFRS 8.

The overall research question has been divided into two sub-questions in order to operationalize and specify the overall research question.

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The first sub-question concerns the assessment of the impact of the new standard on segment disclosure practices. More specifically, this study considers all the relevant aspects of segment disclosure both at the operating segment level and the entity-wide level in terms of geographical information. This question reads as follows:

1) What is the impact of IFRS 8 on segment information disclosed per operating segment (geographical area) by companies listed in the four major countries in Europe?

The second sub-question concerns the comparison of disclosure practices before and after the introduction of IFRS 8 in the four studied countries. The purpose is to assess whether the increased flexibility of IFRS 8 leads to differences in disclosure practices. This question reads:

2) Are there country-level differences in the segment information disclosed before and after the introduction of IFRS 8 by companies listed in the four major countries in Europe and, if so, what are the main differences?

The second research question aims to investigate two main aspects. The first is to assess whether segment disclosure practices were more homogenous under IAS 14R. Given that IAS 14R is relatively more rules-based and characterized by a check-list mentality, it should lead to relatively homogeneous segment disclosure practices. Further, by investigating the disclosure practices of the same companies under IFRS 8, it is possible to examine whether the introduction of a more principles-based standard (IFRS 8) has had an impact on the homogeneity of disclosure practices.

The second aspect is to focus on the companies that actually changed their segment reporting practices as a consequence of the new standard. Here I examine whether the change in disclosures for those companies is the same in all the studied countries and whether eventual trends can be identified that reveal how companies exploit the flexibility of IFRS 8.

1.5 Contribution

The adoption of IFRS 8 offers a unique setting for analyzing the effect that this type of standard has on companies’ disclosure practices internationally.

Following the definition of Bennet et al. (2006) described in the previous paragraphs, IFRS 8 is relatively more principle-based than IAS 14R by presenting more flexible disclosure requirements. Exploiting this change to empirically analyze the impact of the standards’ characteristics on companies’

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reporting behaviour avoids the construction of a fictive standard, as has been the case in previous experimental studies (e.g. Psaros and Trotman, 2004).

Further, when it comes to the adoption of IAS and IFRS worldwide, a considerable amount of research has been presented about specific standards.

The standards that have been analyzed relate to the changes towards fair value accounting, financial instruments (IAS 39), goodwill (IFRS 3) and different tax orientations. These standards are about measure and recognition (Véron, 2007).

On the other hand, segment reporting is about disclosure (Véron, 2007). Hence, the changes in standards related to measure and recognition have involved major modifications in companies’ accounting practices, in that the new standards deviate substantially from the previous rules. The change to IFRS 8 infers that companies could continue to report in the same manner if the reporting reflects the internal structure of the company, but offers more flexibility and adaptability (Véron, 2007). In comparison to the other standards mentioned, IFRS 8 does not force a major change on a company’s accounting practices.

Following, this study contributes to the research stream investigating the impact of the characteristics of standards related to accounting outcomes by using archival data and exploiting an actual regulatory change. The analysis is also extended to a direct comparison of the impact of increased flexibility across different countries, which is relatively unexplored in the literature.

The strength of the approach used in this study is that it allows a direct comparison between countries. Studying the disclosure practices of companies in the major countries in Europe is important, because these countries can function as benchmarks for companies in the EU as a whole. Furthermore, the strength of this research setting lies in the comparison of the same group of companies in different countries that are already following harmonized accounting standards, both before and after the introduction of IFRS 8. The focus on one standard will thus enable a clearer isolation of the implications of flexibility on companies’

reporting behaviour and facilitate an in-depth analysis of segment reporting practices. A weakness is that an investigation of only one standard limits the generalization of the results to other accounting aspects. However, the results of this study could apply to other disclosure standards e.g. regarding how more flexible requirements affect the amount of information reported from a more general perspective.

As indicated, the main interest of this study is to determine whether or not there are differences in disclosure practices at the country-level when shifting towards a more principles-based standard. In order to identify eventual country-level differences it is necessary to control for the impact of difference at the firm-level as well. In this study, the firm-level variables used in the literature are included to control for the impact of firm-level characteristics on disclosure practices. In this respect the study contributes to the literature regarding how the

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characteristics of standards, such as flexibility, impact the uniformity of disclosure practices in a context in which accounting rules are harmonized.

To my knowledge, only three empirical studies have looked at the initial comprehensive results of the introduction of IFRS 8 in Europe (Nichols et al., 2012; Cereola et al., 2013; Leung and Verriest, 2015). These studies are important because they outline the introduction of the new standard in several countries and their results can be largely generalized. However, the results are not so informative when it comes to the identification of eventual specific differences between countries with regard to companies’ segment disclosure practices. Even though they focus on a large international sample, it is not possible to ascertain whether the impact of IFRS 8 differs according to where the company is listed. My study addresses this particular aspect.

Additionally, in previous studies of different countries companies that have not presented their financial report in English are usually dropped (e.g. Nichols and Street 2007 and Nichols et al. 2012). To my knowledge, this is the first study to collect information from native language reports when an English version is not available. Not providing the financial report in English could be an indication of less transparent disclosures. It is therefore informative to investigate whether or not the amount of segment information provided by companies not disclosing in English is lower.

Some studies (published or otherwise) have investigated the introduction of IFRS 8 in a single country. For example, Crawford et al. (2012) have investigated the introduction of IFRS 8 in the UK, Heem and Valenza (2010) in France, Pardal and Morais (2011) in Spain, Pisano and Landriana (2012) in Italy, Weissenberg and Franzen (2012a and 2012b) in Germany, Kang and Gray (2013 in Australia and Mardini et al. (2012) in Jordan. All these studies focus on a sample of the largest companies listed in the specific country.³ However, they also highlight different things, e.g. Crawford et al. (2012) investigate the introduction of the new standard from a comprehensive perspective, while the other studies select one or two elements of interest, such as the number of segments or the items disclosed per operating segment. It therefore follows that a direct comparison of the results of the studies in different countries is not possible. My study contributes to the literature by directly investigating how the introduction of IFRS 8 has impacted reporting practices in different countries from a comprehensive perspective.

Further, this is the first study to compare companies’ segment disclosure practices in the UK, Germany, France and Italy in relation to the introduction of IFRS 8 and to analyze the information disclosed at the operating and entity-wide

3 Crawford et al. (2012) appears to be the only study to include the largest companies and a proportion of relatively smaller companies.

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level. This is also the first study to include smaller companies in the sample when assessing the effects of the introduction of IFRS 8. The reason for including smaller companies in the sample is dictated by the fact that the EC’s perception is that the nature of the management approach should suit all sizes of companies (IFRS 8, BC 110-111). However, smaller listed companies and their organizational representatives have expressed major concerns about the introduction of IFRS 8, in that the management approach obliges smaller listed companies to disclose commercially sensitive information (IFRS 8, BC 110- 111). Thus, it is of interest to investigate a sample that also includes smaller companies

Finally, the results of this study are of interest for several actors. For example, they provide standards setters with new insights into the advantages and drawbacks of increased flexibility in the international standards and contribute to a deeper understanding of the implications of the trade-off between relevancy and homogeneity related to rules- versus principles-based standards in a context in which country-related factors have a potential impact on companies’ reporting practices. The contribution of this study is also of interest for financial statements preparers, in that it shows them how more flexible requirements could affect the reporting practices of companies from different countries and thereafter impact the relevance of the information provided. Finally, this study is of interest for users of financial information, in that it investigates an important disclosure area of financial reporting, namely segment information. Thus, this study addresses the need to provide empirical evidence of impact of IFRS 8 on the amount of segment information disclosed and its homogeneity in the major countries in Europe after the introduction of IFRS 8.

1.6 Disposition

The remainder of the dissertation is structured as follows. The next chapter includes a presentation of the disclosure requirements of IFRS 8 and comparisons with SFAS 131 and IAS 14R. Chapter 3 presents the theoretical framework. Chapter 4 continues the presentation of the study’s research design and includes a methodological discussion. The sample selection process and the relevant descriptive statistics are presented in Chapter 5. A presentation and analysis of the study’s empirical results are presented in Chapter 6. Finally, Chapter 7 discusses the findings and includes the study’s concluding remarks and suggestions for future research.

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2. IFRS 8

2.1 The process of adoption of IFRS 8

The adoption of IFRS 8 started in early 2006 when the IASB published the first Exposure Draft (ED8). The draft was the result of a meeting between the IASB and US FASB, the purpose of which was to discuss the convergence programme with US GAAP and accelerate its fulfilment. Segment reporting was a priority project in the programme (IASB and FASB, 2006). The two bodies had worked for several years on a so-called Norwalked Agreement and were committed to the development of “high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting” (IASB and FASB, 2006). Even though the priorities of the project changed after the decision was made to adopt IFRS 8 and the idea of complete convergence had been put aside, all the decisions pertaining to the wording and content of IFRS 8 have been made with a view towards full convergence with US GAAP.

The IASB invites the submission of comments. This is common for all new standards and for major changes made to existing standards. ED8 was scrutinized by a series of stakeholders, including the big four audit networks, the CFA Institute and S&P and comments were collected by the IASB. In general, the comments related to a full convergence with US GAAP. Further, the stakeholders wondered why the IASB had introduced this standard at this specific point in time. The majority of the stakeholders submitting comments were against the adoption of IFRS 8, or at least thought that its adoption could wait (Véron 2007).

Despite the negative comments, IASB decided to only make minor changes to ED8 and to continue the adoption process. IFRS 8 was then issued in November 2006. The EFRAG was involved in the writing of a report to the European Commission, which was delivered in January 2007. This report concluded that IFRS 8 should be adopted despite the negativity of members to several parts of the report.

In February 2007 the Accounting Regulatory Committee of the EU voted for the adoption of IFRS 8. The decision was based on the EFRAG’s report.

On 18^th April 2007 the European Parliament’s Economic and Monetary Affairs Committee presented a motion listing a series of concerns about the introduction of IFRS 8. This motion was the result of complaints brought to the EU institutions by investor groups and stakeholders. The motion was addressed by the Commission, which resulted in a delay of the enforcement decision until 30^th September 2007. In the meantime, the Commission prepared an assessment of

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the impact of the introduction of IFRS 8 by sending a questionnaire to several stakeholders groups. This assessment resulted in a public report, which has also been used in this study as a reference point for analyzing IFRS 8 and its characteristics. The report is called Endorsement of IFRS 8 Operating Segments:

Analysis of Potential Effects (Ref. MARKT F3 D, 2007).

These assessments did not lead to any significant changes and a standard that was materially similar to the ED8 was approved by the IASB in November 2006.

IFRS 8 became both effective and compulsory in January 2009. It is important to note that even though the endorsement of the standard within the EU had yet to be finalized, the Commission encouraged European listed companies to early adopt IFRS 8. IFRS 8 is more or less identical to the US standard SFAS 131, which became effective in 1997.

Table 2.1 summarizes the historical milestones of the changes in segment reporting worldwide from 1980 to 2009. It is important to mention that before the compulsory adoption of IFRS in 2005, different countries followed their local GAAP for disclosing segment information.

Table 2.1 Historical changes in segment accounting regulations

2.2 Segmental reporting requirements according to IFRS 8

The main characteristics and requirements of IFRS 8 are explained in this section. The section also includes a comparison of IFRS 8 and IAS 14R. The main characteristics and requirements of SFAS 131 are also presented and compared to IFRS 8. This section only presents a technical comparison of the standards. A presentation of the empirical studies related to the introduction of the different standards is provided in the theoretical chapter (sections 3.5 and 3.6).

History of Segment reporting (IAS/IFRS)

March 1980 Exposure Draft E15 Reporting Financial Information by Segment

August 1981 IAS 14 Reporting Financial Information by Segment

January 1983 Effective date of IAS 14 (1981)

1994 IAS 14 (1981) was reformatted

December 1995 Exposure Draft E51 Reporting Financial Information by Segment

August 1997 IAS 14 Segment Reporting (IAS 14 Revised)

SFAS 131 adopted in the US

July 1998 Effective date of IAS 14R (1997)

January 2005 Compulsory adoption of IFRS for publicly listed companies in the EU

and other countries e.g. Australia and South Africa

30 November 2006 IAS 14 superseded (possibility to early adopt IFRS 8)

January 2009 Compulsory adoption of IFRS 8 Operating segments

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The presentation focuses on the following key contents of IFRS 8: the core principle, the identification of the CODM, the definition and number of segments, the identification of reportable segments, the disclosure requirements per operating segments and entity-wide disclosures. This section ends with a brief discussion about the attitudes of smaller companies toward the introduction of IFRS 8 and a presentation of the envisaged changes to IFRS 8.

2.2.1 Core principle

The US introduced SFAS 131 in 1997, the same year as IAS 14 was substituted by IAS 14R. As described above, the introduction of IFRS 8 was an important step in the convergence process between IFRS and US GAAP. Although IFRS 8 and SFAS 131 are very similar, there are some minor differences between the standards. These will be highlighted in the presentation of the disclosure requirements for IFRS 8.

The US changed from SFAS 14 to SFAS 131 in 1997 in order to address the changing structure of companies. Using the industry lens for companies with vertically integrated operations was no longer the best practice (Véron, 2007).

The purpose of the change was to understand the value creation process of the company and for this reason the management approach offered a more suitable alternative in the US (Véron, 2007). At the same time, IASC revised IAS 14 and decided that the risk and reward approach was the most suitable for dealing with the changing structure of companies (Véron, 2007). This means that the division of the segments should be based on a company’s operations in terms of the different levels of risk and its value creation potential.

The core principle of IFRS 8 requires an entity to:

“… disclose information to enable the users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates” (IFRS 8:1).

The new standard (IFRS 8) refers to a so-called management approach, where segments are defined according to the way in which management structures the organizational levels inside the company to sustain the decision-making process and assess performance. In contrast, IAS 14R refers to a so-called risk and reward approach, which requires companies to divide segments into primary and secondary. Furthermore, companies have to define their primary and secondary segments either as line of business or geographical areas. In other words, if a company defines its primary segments as line of business, their secondary segments will be geographical areas. IAS 14R:26 required the same information for primary segment regardless of whether the segments related to business or geographical areas.

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2.2.2 Chief Operating Decision Manager (CODM)

As already indicated, IFRS 8 requires the disclosure of segment information in a way that is consistent with how management views the company. In this respect, companies can focus on the information used by management to assess performance and make resource-allocation decisions (Pwc, 2009). It follows that the identification of the CODM and its function gains new significance when it comes to segment disclosures. IFRS 8:7 describes it as “… a function, not necessarily a manager with a specific title”. The function regards the “allocation of resources to and assess the performance of the operating segments of an entity.” Thus, the CODM could either be a group of individuals (e.g. an executive committee or operating committee) or a single member of the management team. It is important that companies take into account the differences between the different jurisdictional rights and obligations that have a potential impact on the identification process of the CODM. A supervisory board should not be considered as a CODM, because it usually only approves decisions made by the management.

According to IFRS 8, the CODM is a central function under IFRS 8 since it is based on its regular revision of segment information that certain key line items should be disclosed. One example is IFRS 8:23, where it is stated that “An entity shall report a measure of liabilities for each reportable segment if such amount is regularly provided to the chief operating decision maker.” On the other hand, the disclosure of liabilities for each primary segment is always required under IAS 14R.

2.2.3 Segment definition and number of segments reported

According to the nature of the management approach, IFRS 8 does not require the distinction of segments only according to line of business or geographical areas. The identification of segments can also be based on the internal reports that are regularly reviewed by the chief operating decision-maker (IFRS 8, IN 11:5). This implies that a company is allowed to define its segments as “mixed”.

Explicitly, this is usually a combination of line of business and geographical areas. This possibility should allow companies to identify their segments in a way that best describes the internal structure of the company.

With regard to the definition of segments, SFAS 131 differs slightly from IFRS 8 when the entity is organized in a matrix form. A matrix organizational structure is characterized by multiple reporting lines, which means that the employees have more than one formal chief. According to SFAS 131, when an entity presents a matrix form, it is required to base its operating segments on line of business. In contrast, IFRS 8 does not have this restriction and even if the entity is in matrix form it should follow the core principle of IFRS 8 when defining the segments.

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The adoption of the management approach allows companies to follow their internal structure in more detail when disclosing their segments. The majority of studies investigating the introduction of SFAS 131 in the US concluded that companies disclose more segments at the operating level under the new standard compared to SFAS 14 (e.g. Hermann and Thomas, 2000; Street et al., 2000;

Berger and Hann, 2003; Ettredge et al., 2005). Based on the empirical evidence concerning the change to SFAS 131, the EU Commission expects companies to report a larger number of segments after the introduction of the new standard (IFRS 8, BC 9c). According to those supporting the introduction of this new standard, another aspect that is expected to improve with the introduction of IFRS 8 is a reduction in the number of entities reporting only one segment as their primary segment. The practice of reporting only one segment disadvantages external users of financial information, because it is much easier to hide sensitive information if all operations are disclosed as one segment (Véron, 2007). IASB (IFRS 8, BC 9c) argues that the management approach should reduce the possibility for companies to disclose only one segment.

2.2.4 The identification of reportable segments

The identification of reportable segments under IFRS 8 follows a series of steps.

(1) The first step is to identify the segments in the company. The definition of an operating segment is provided in IFRS 8:5.

(2) The second step regards the eventual aggregation of similar segments.

IFRS 8:12 allows companies to aggregate two or more segments if all the stated criteria are fulfilled. The criteria relate to similarities in products and services, production processes, type of customers, the distribution method and the nature of the regulatory environment (if applicable).

(3) The third step is to verify the quantitative thresholds presented in IFRS 8:13. This means that a segment (of those that are left after step 1 and step 2) must be reported if at least one of the quantitative thresholds is fulfilled. The quantitative thresholds are the following:

a. Its reported revenues, including both sales to external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments.

b. The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments reported a loss.

c. Its assets are 10 per cent or more of the combined assets of all operating segments. (IFRS 8:13 a-c)

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(4) The fourth step concerns the aggregation of minor segments that do not fulfil the qualitative thresholds (IFRS 8:14). However, those segments can only be aggregated to produce a reportable segment if they have similar economic characteristics. They also have to share a majority of the aggregation criteria listed in IFRS 8:12.

(5) The final step is to verify that the external revenue of all segments is at least 75% of the consolidated returns. If this is not the case the company should identify additional segments (and aggregate with other reportable segments if appropriate) until 75% is reached.

In contrast, under IAS 14R segments were identified on the basis of the predominant sources of risks and returns. A distinguishable component of an entity that is subject to different risks and rates of return from other segments should be considered a reportable segment (IAS 14R:9). Further, the risk and reward approach leads to segmentation based either on businesses or geographical areas. Finally, contrary to IFRS 8, if the segment identification does not coincide with how the company is structured and does not reflect the internal information-flow, the internally reported segment information is not used as the basis for external financial reporting. Under IAS 14:27 and 32, internally reported information needs to be rearranged to fit the requirements of the standard.

The quantitative thresholds in IFRS 8:13 correspond to those found under IAS 14R:35. The board considered an approach in which any material operating segment would need to be disclosed separately (IFRS 8, BC 29). However, this choice would have meant moving away from the wording of SFAS 131. Further, the board was concerned about the concept of materiality being misinterpreted and leading to confusion (IFRS 8, BC 29).

What is new for IFRS 8 is that even though IFRS 8 retains the quantitative thresholds, it also invites companies to report segments that are material but do not meet the threshold requirements. IFRS 8:13(c) states that:

“Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements.”

2.2.5 Disclosure requirements per operating segment

From a general perspective, IFRS 8 does not define segment revenue, profit/loss, assets or liabilities. It therefore follows that entities have more discretion in determining what is included in segment profit/loss given that the amounts are consistent with internal reporting practices. Opponents of IFRS 8 have expressed concern about the lack of specificity for the measurement of a segment’s

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profit/loss and the opportunity for management to report non-GAAP measures (Nichols et al., 2012).

The disclosure of profitability per segment is required under both IAS 14R and IFRS 8. However, under IFRS 8 no definition of the reportable segment profitability to be disclosed is provided. Concerns have been expressed about the potential loss of comparability when non-IFRS profitability measures are allowed under IFRS 8 (Nichols et al., 2012).

The disclosure of assets and liabilities under IFRS 8 is only required “… if such amount is regularly provided to the chief operating decision maker” (IFRS 8:23). Under IAS 14R, the entity is obliged to disclose segment assets and segment liabilities for each reportable segment identified as primary (IAS 14R:56). Under SFAS 131 there is no requirement to disclose segment liabilities.

A company is obliged to report a measure of profit or loss for each reportable segment (IFRS 8:23). Furthermore, a company should also disclose the information listed below if it is included in the measure of segment profit/loss reviewed by the CODM or otherwise regularly provided to the CODM, even if this is not included in the measure of segment profit/loss (IFRS 8:23).

Information about the specific requirement under IAS 14R is provided for each of the presented items:

- Revenues from external customers;

(This item is always required to be disclosed under IAS 14R:51) - revenues from transactions with other operating segments of the same

entity;

(This item is always required to be disclosed under IAS 14R:52) - interest revenue;

- interest expense;

- depreciation and amortization;

(This item is always required to be disclosed under IAS 14R:58) - equity method income;

(This item is always required to be disclosed under IAS 14R:64) - income tax expense/benefit;

- material non-cash items other than depreciation and amortization (This item is always required to be disclosed under IAS 14R:61).

The following balance sheet information is required under IFRS 8 if it is included in the measure of segment assets reviewed by the CODM or otherwise regularly provided to the CODM, even if this is not included in the measure of segment assets (IFRS 8:23). Information about the specific requirement under IAS 14R is provided for each of the presented items:

19 - Equity method investment;

(This item is always required to be disclosed under IAS 14R:64) - additions to non-current assets (capital expenditures required under IAS

14R:57).

The following items are examples of voluntary disclosures under IFRS 8 and IAS 14R:

- Additional income statement detail;

- additional balance sheet detail;

- cash flow information;

- R&D expenses;

- restructuring expenses;

- exceptional items.

A loss of segment information could occur when the disclosure of the majority of the items per operating segment under IFRS 8 is conditional to its inclusion in the measure of segment profit/loss reviewed by the CODM or to its regular provision to the CODM. In other words, IAS 14R required the disclosure of a list of items per primary segment unconditionally from the internal use of the information in the company. IFRS 8 puts new pressure on auditors to evaluate the regular internal provision of specific information in a company. It is thus of interest to evaluate whether this type of wording will affect companies’

disclosure practices in a negative way, to the extent that they stop disclosing key line items.

2.2.6 Entity-wide disclosures

The IFRS 8:31 requires an entity - including an entity with a single reportable segment - to disclose information about its products and services, geographical areas and major customers for the entity as a whole. This requirement applies regardless of how the entity is organized and if the information is not included as part of the disclosures about segments. IAS 14R required the disclosure of secondary segment information for industry and geographical segments in order to supplement the information provided for the primary segments. Further, IFRS 8 requires the provision of entity-wide geographic disclosures for both the country of domicile and all individually material countries.

IFRS 8:33 requires the following items to be disclosed “… unless the necessary information is not available and the cost to develop it would be excessive.”; (a) revenues from external customers (i) attributed to the entity’s country of domicile and (ii) attributed to all foreign countries in total from which the entity derives revenues; (b) non-current assets… (i) located in the entity’s country of domicile and (ii) located in all foreign countries in total in which the entity holds assets (IFRS 8:33 a-b). While SFAS 131 requires the disclosure of the same

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items, it presents a slightly different definition of non-current assets. The IFRS definition includes intangibles, whereas the equivalent “long-lived assets” in SFAS 131 does not.

Entity-wide information under IFRS 8 and information related to the secondary segment under IAS 14R with regard to geographical area is relatively analogous.

Under both standards companies are required to disclose geographical revenues.

In addition to revenues, IAS 14R:69 required the disclosure of total assets per geographical segment. When it comes to total assets, IFRS 8:33(b) states that:

“If assets in an individual foreign country are material, those assets shall be disclosed separately.” One main difference is that IAS 14R:69 additionally required the disclosure of capital additions for each geographical segment at the secondary level. There is no such requirement under IFRS 8.

The IASB considered some opinions relating to the necessity of requiring country-by-country disclosures, or at least requiring disclosing more specific items per geographical segment under IFRS 8 in order to promote greater transparency (IFRS 8, BC 48). In this case, the board argued that this type of modification would create discrepancy with SFAS 131 and thereby go against the purpose of convergence (IFRS 8, BC 50).

Additionally, IAS 14R has been criticized for allowing large and vague groupings of geographical areas at the secondary level (Nichols and Street, 2002). Since IFRS 8 requires the disclosure of entity-wide geographic disclosures for all individually material countries, a reduction in companies reporting broad geographical areas is expected (IFRS 8, BC 48).

A summary of the entity-wide geographic information found in IFRS 8 follows.

Information about the specific requirement under IAS 14R is provided for each of the items presented:

- Sales revenues;

(This item is always required to be disclosed under IFRS 8 and IAS 14R)

- non-current assets;

(This item is always required to be disclosed under IFRS 8. IAS 14R requires the disclosure of geographical total assets for each geographical area)

- capital additions

(This item is always required to be disclosed under IAS 14R).

The following items are voluntary disclosures under IFRS 8 and IAS 14R with regard to geographical information at the secondary/ entity-wide level: