Early this year, the biggest single body of investors, in the world’s largest IFRS-using capital market (the ABI, NAPF and IMA) objected to the European Union’s adoption of IFRS 8, the proposed standard for segmental reporting of companies.

IFRS 8 drops the clear, overriding requirement of the current EU standard to determine segments for disclosure based on an objective (and externally audited) view of economic risk, including financing risks.

IFRS 8 is based on US standard SFAS 131 and requires senior management to report according to the highly ambiguous test of the form of divisional information they usually show themselves.

This is so ambiguous in practice that the Securities and Exchange Commission has said that it finds out about significant businesses not portrayed in company accounts by reading newspapers.

Like much in the US financial reporting system, SFAS 131 is a standard of form. The existing EU standard is about business substance.

Investment demands a return for risk, but the risk affects more than direct investors.
Any portrayal of performance without sufficient clarity on business risk will not only be misleading to investors, leading to mis-pricing, but may be harmful to the wider public as the risk will not have gone away.

Last week’s European Commission report backing IFRS 8 says that a positive feature of SFAS 131 is that business segment reporting stays the same if management structures have stayed the same.

Good for whom? With some businesses and banks taking on novel forms of risk within existing structures, applying SFAS 131 can result in the impression - even to boards - that not much has changed, when in substance everything has changed and things may be on the brink.
The European Parliament, by contrast, understands what IFRS 8 and the EC report both fail to address ­ public financial information is not just an arbitrary committee-decided ‘scorecard’ for capital markets; it moderates company behaviour in the first place through accountability for performance and risk; the essence of demonstrable, accountable stewardship.

A simple analogy for stewardship - and the failings of IFRS 8 - is the Plimsoll line. The line is painted on the outside of a ship, because the crew and captain may have the means and incentive to overload it. The line stops them taking the loading that little bit too far.

The parliament has also recognised that neither the IASB, nor the endorsement processes for other pipeline IFRS, give standards financial stability impact assessments.

The IASB has offered a review of IFRS 8 within two years. That may not be good enough for something that has not had any economic impact assessment.