IFRS 8: what is it good for?

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.