IFRS 8 Operating Segments

This assignment delves into the analysis of an Exposure Draft regarding improvements to IFRS 8, 'Operating Segments'. It examines various perspectives presented in comment letters submitted by prominent organizations such as BDO, EFRAG (European Financial Reporting Advisory Group), ESMA (European Securities and Markets Authority), EY, and KPMG. The analysis sheds light on the differing viewpoints and potential implications of these proposed changes to IFRS 8.

Review of current Accounting issues

Table of Contents
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................4
Outlining major issues covered in the exposure draft............................................................4
An assessment to whether or not regulator behaviour can be explained by public interest
theory......................................................................................................................................5
An outline of the views presented in comment letters...........................................................6
An assessment as to whether the comment letters can be interpreted as being “for” or
“against”.................................................................................................................................7
Application of regulating theories with justification..............................................................8
REFERENCES................................................................................................................................9

QUESTION 1
The article lights on accounting scandal in Fuji Xerox Australia and New Zealand, The
business situation went out of hands of the organization when the top executives of Fuji Xerox
involved in fraudulent acts and covering up of major accounting irregularities. The subsidiary
company's executives were marked for manipulation of accounting books and overstating of
profits in the spam of 6 years.
The company showed humongous profits of AU$ 451 million in the period of 6 years
which was delightedly fabricated by the managing director of entity. This report reveals that
company presented regular revenues in order to hit the standard targets. This was done by
manipulation of accounting books (Weygandt, 2010.). All the losses endured during the tenure
were ignored to show well presented books. MD also sold assets of organization and fabricated it
as revenue to cover the falsified sales of millions.
The article also reveals that executives favouring it were highly compensated with
salaries much more than the market rate, gifts, huge bonuses and expenses were born on
corporate credit cards. The executives also were allowed meals and high gage expense on the
corporate cards. It was recorded that in 10 months 3 executives spent over $50000 on dinners.
The overstating of revenue on managed service agreements is the main point of this
scandal. The company showed more revenue on MSA's to report more profit in segment. The
MSA's have no lower limit on value and the pricing varies on the basis of use. The
overstatement was covered with sale of assets being recorded in revenue to make up for the
fictional revenue (Kieran, 2017). There was double recording of advanced sales in order to
achieve the targets. The promotional products and donations to schools were also recorded as
sales to achieve the target. Further, the non operating transactions were also marked as revenue
from sales to cover up the mistakes in accounting figures.
Accounting theory, principle and concepts related to it are :
 Usefulness: the theory of usefulness suggests that the main purpose accounting is to
create books and statement which provides information to the reader about the financial
position of the company (Deegan, 2013). This information is also useful in taking
business and economic decisions. This theory also states that the financial reporting must
also comply with the economic, legal and social environment of the place where
company is operational. The theory also suggests that the accounting rules must be
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flexible so that they can be changes with the changes in environmental conditions. The
books and statements of Fuji Xerox were misleading and tampered. The MD of the
company manipulated the transactions to show maximization in the revenue and the sales
was fictitious in books. The information provided by the statements was false as profits
of around 431 million dollar were falsely planted.
 Full disclosure: This principle states that a company show all the financial statements and
transactions which might affect the understanding of viewer. Moreover, this principle
also states that the information provided in statements is important for the stakeholders as
the judgement of organization is based on this information (Lukka, 2010). Also, the
company is also liable to disclose any contingent events which may affect the financial
position or situation of company. Fuji Xerox violated the principle widely as all
accounting books and statements were fabricated by the company to show high amount
of revenue. The organization also did not reveal the losses that were being incurred by
institution and this showed the books clean, this followed a wrong interpretation of
company's position. The falsified sales revenue created high operating profits for the
organization.
 Realization concept: This concept states that companies must record the transaction in the
books of accounts when revenue is realized. In other words it can be said revenue must
be recorded only when cash has been received or right to receive cash, i.e. assurance has
been received from the customer (Godfrey, 2010). Fuji Xerox did not follow this rule as
organization recorded the advanced sales into books of accounts. Moreover, the
transactions were recorded twice to show more revenue. Also fictitious sales were created
by the officials of the company. These fictitious sales did not realize any amount which
violates the principle. The fabrication was done to reach the sales target of month which
widely desecrated the rules of accounting.
 Principle of reliability: The principle of reliability condemns that every transaction
recorded in the books of accounts must be evidenced with a legal and reliable document.
It also suggests that the document must be authentic and should be show appropriate links
to the transaction. This principle of accounting is important to follow and is to be checked
while auditing the books of the institution. Fuji Xerox violated this principle widely as
the company falsified transactions in the books. These sales transaction were evidenced
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with fraudulent documents to provide links to the transactions. The fabricated revenues
were covered through fake sales and documents were created to show evidences. The
documents did not match the linked transactions and also under evidence was pointed out
in the books.
 Prudence principle: This concept states that the business should record the transactions of
loss as soon as they occur but the transactions of profit must be recorded when they are
realized in the business. This states that business is liable to record all the losses
immediately into the books of accounts. Fuji Xerox Australia and New Zealand did not
record the losses that occurred in accounting years which resulted in higher revenues.
Also revenue which did not exist was created by the company through the use of MSA's.
The organization recorded fictitious sales which were never realized. The loses occurred
were hid in books and statements to fabricate the accounts (Schroeder, 2011). This was
done by the officials of company to show more revenue in order to reach the monthly
targets.
 Matching concept : This concept reflects that the expenses incurred must be recorded
with revenue they realized in the books of accounts. This must also be done in same the
period of its accrual. This concept was not followed by Fuji Xerox as the expenses were
not correctly recorded with revenue. The books were fabricated by officials of company
to increase sales revenue of the period. The organization also covered fictitious revenue
created by company by converting the non operating revenue to operating or sales
revenue and the evident expenses were not recorded in the transactions. These
transactions were made to cover the extra millions in books of sales. Further, the free
products were marked as revenue in the books (Board, 2010. ). This created non
matching of expenses and revenue in the accounting transactions. Books were ill
managed and showed inappropriate cost in comparison to the revenue earned by Fuji
Xerox.
 Dual aspect concept: This concept is the basis of preparation of books of accounts. It
states that every transaction that is recorded in the books have two aspects to it. Debit and
credit. Fuji violated as the fabrication of books created fake transaction.
 Materiality concept: This concept states that company the transactions included in the
financial must have significant impact on the opinion of the person. The information
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provided in the financial statements must have material importance to the entity and
disclosure of such information is mandatory. Fuji Xerox violated this principle as the
financial statements were fabricated by the company and they consisted of revenue
transactions that were fictitious which overstated the gross profit of organization. Also
sale of assets were marked as sales revenue in the books which increased the revenue and
the financial statements were falsely presented. The irrelevant information was provided
in the statement which leads to wrong perception of the financial condition of Fuji Xerox
as the revenue was highly maximized by the officials of company.
 Objectivity concept: The concept states that financial statements of institution must be
evidenced and also the financial statement prepared must be appropriate and not
fabricated or influenced by the opinion of officials or executives of the company (Weil,
2013). Fuji Xerox completely violated this concept as the officials of entity manipulated
and fabricated the books of accounts to show more revenue and reach monthly target of
revenue. Fuji Xerox's MD used MSA's to fabricate maximization on the revenue of
organization. The falsified revenue was covered by accounting department by recording
the sale of assets as revenue created from sales of products and services and many non
operating revenues were manipulated to operating revenue. This created falsified books
and statements and the fabrication was done by the MD of the company to show more
revenue and the biased books were created.
QUESTION 2
Outlining major issues covered in the exposure draft
IRFS 8 is the first accounting standard that was issued earlier for Post implementation
review with the convergence with the US GAAP. Financial Accounting Foundation of US also
conducted PIR considering the requirements mentioned in US GAAP. AASB incorporates IFRS
into their own national accounting standards, AAS (AASB Exposure Draft, 2017). Recently, on
29th March 2017, IASB (International Accounting Standard Board) issued an exposure draft (ED)
for bringing improvement in IFRS 8, operating segments. As per the draft published, IASB
proposed following amendments in the IFRS 8, that are mentioned below:
 Description of CODM (Chief Operating Decision Maker): An individual or group of
individual who make operating decisions i.e. allocation of business resources,
performance evaluation and others is referred as CODM. As per the proposed
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amendments, entity will be required to disclose the title along with the description of role
of CODM.
 Determination of reportable segments: A clear explanation is required, if operating
segments that have been identified in the company’s published financial statement
significantly differs from the segments reported in other parts of business reporting.
Moreover, new standards will be added to set the clear aggregation criteria in which units
with similar kind of economic characteristics will be reported as operating segments
(BDO Exposure Draft, 2017).
 Information regarding additional segments: Entity may also disclose other relevant
information regarding their operating segments that goes beyond the requirement
necessary to be provided and reviewed by the CODM.
 Reconciling items: Proposed amendments also will clarify the need of enough detailed
explanation for reconciliation so that all the users can easily understand and examine
their nature.
 Change in composition of the reportable segments: These particular amendments are
related to IAS 34, “Interim Financial Reporting” that the first interim report of the
company after the compositing change must provide restated segmental information for
all the interim periods.
An assessment to whether or not regulator behaviour can be explained by public interest theory
Public interest theory states that regulations and amendments are made in the best interest
of the public. As per this, accounting bodies should made changes in the accounting standards
for correcting inequitable or inefficient market practices so as to provide all the necessary
information to the information users for making good decisions (Hantke-Domas, 2003). The
proposed change in the standard IFRS 8 will improve the quality of disclosure and provide
sufficient details about entity’s operating segments which will protect public’s interest. For
instance, investors need to make comparison of different companies’ financial position for
making effective and qualitative investment decisions. However, the key issue is that currently,
companies do not provide enough details of their internally reported line items which arises
difficulties for the investors, therefore, in accordance with the prospective changes mentioned in
the ED, it will be mandatory for the entities to disclose specific line items clearly that will protect
investor’s interest.
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Besides this, IASB raised users concerns because they need detailed set of information
about certain specific line items which presents a clear linkage with the cash flow & profit i.e.
depreciation & Amortization & expenditure, thus, prospective amendments will combat the
given issue and improve the reporting requirement. Although, different parties need disclosure
about different line items as it varies from industry to industry, still, in despite of the mandatory
disclosure requirement, all the entities are also allowed to disclose other relevant materialistic
information in addition to the standard requirement. The amendments also ensure consistent
identification for the reporting segments, as per which, establishments will report the same
segmental units in their annual accounts like to those which were reported in other reporting
documents. If any difference is founded, then, they have to justify reasons for the differences in
segmental reporting. In addition to this, post implementation review (PIR) is a step taken by the
IASB to improve financial accounting and reporting. Thus, from the discussion, it becomes clear
that IAS has mentioned the necessary amendments considering the views of all the information
users and assists them in good decision.
An outline of the views presented in comment letters
EFRAG published comment letter on 3rd August 2017 for the ED/2017/2 which supported
IASB’s efforts in order to improve IFRS 8 addressing the key issues regarding post-
implementation review. EFRAG viewed that the prospective changes in the standard will help to
improve the disclosure quality (EFRAG Comment letter, 2017). EFRAG responded that clear
disclosure of role of CODM will address the key issues in jurisdiction; still, necessary further
guidance needs to be issued to help entities in identifying CODM.
Similarly, ESMA (European Securities and Markets Authority) also provided favourable
viewpoint in regards to the proposed amendments because it will definitely help in increasing
consistency in the IFRS 8 application. The changes address the key concerns that already raised
earlier by ESMA with respect to IFRS 8’s post-implementation review (ESMA comment letter,
2017).
Earnest and Young Global Limited who is the central coordinating body provided
opposite view point because they do not considered the changes necessary or helpful (EY
comment letter, 2017). Moreover, several changes presented are not even clear and they will
potentially add just clutter to the company’s annual accounts.
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Lastly, the comment letter published by KPMG replied positive in which IASB’s efforts
in order to recognise the issues in post-implementation review is being favoured with the
objective to improve disclosure quality for the operational segmental information (KPMG
Comment Letter, 2017).
An assessment as to whether the comment letters can be interpreted as being “for” or “against”
EFRAG agreed with the description of role of CODM along with the clear reporting of
CODM’s title as individual in paragraph 7A and in case of group, it must be disclosed in
paragraph 7B. Similarly, ESMA & KPMG also supported the prospective change requirement to
pay more emphasizes on the CODM with some further clarification. They all suggested that
changes in paragraph 7 must focuses that how CODM identification will affect separation of
strategic decision making and operational decisions as well. They also agreed that number of
specified list of line items which is necessary to be reported following IFRS 8 should not be
extended, because, it will not provide highly relevant and materialistic information to the
investors. Besides this, they favoured paragraph 28A to disclose reconciling items.
However, in contrast to this, after acknowledging the investors and regulators view point,
EFRAG disagreed with the requirement of 22(d) disclosure to explain the reasons for differences
in identified reportable segments under the financial statements and other business reporting
(EFRAG Comment letter, 2017). It is because, it may be difficult to implement in the real
business practice to identify “annual reporting package”. Similarly, KPMG also replied in
against for the paragraph 22(d) and stated that no need of such disclosure requirements. It is
because; financial statement is not the document where entities need to explain the
inconsistencies between non-IFRS accounting information and accounts prepared by full
compliance with the IFRS.
Unlike this, ESMA favoured the disclosure of necessary reasons why entities’ operating
segments reported differently in the final accounts and other annual reporting packages so as to
improve consistencies in ECEP and APMs. Moreover, ESMA showed concerns regarding new
paragraph 20A which allow the firm to disclose those information that is not provided to or
reviewed by the CODM (ESMA comment letter, 2017). The underlying reason, it may leads to
bring disclosure arbitrage of APMs in notes to the financial statement. Although there were
several differences in the response, still, both EFRAG and ESMA supported its practical
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implementation with several suggestions. KPMG’s comment letter also appreciated the changes
and supported the same.
EY totally presented a contrasting (against) view point as they believed that the key
challenge for the IFRS 8 is that it is based on the traditional reporting in which written reports
are prepared whereas current requirement is based on modern IT. It makes it easier for all the
decisions makers to access relevant accounting report and information anytime. Thus, it is the
main area of concerns for the IASB whereas the prospective changes do not pay attention over
such concerns. Although they gave acceptance for description of CODM, still, they do not think
that clarification in paragraph 7, 7A & 7B are necessary (EY comment letter, 2017). No-doubt, it
seems necessary to show segmental information consistently, still, there is no need to report
explanation why they have reported different segments in their annual accounts and other
reporting package. Although they agreed with the restatement disclosure to present useful
information, still, disclosure of comparative information in current or previous financial year in
first interim report after the composition charges on the reportable segments do not contribute in
the timeliness and comparability characteristics.
Application of regulating theories with justification
Public interest theory lay emphasizes that government and other regulatory bodies must
works in the best interest of the public and design rules and regulations protecting their rights
(Sanday, 2014). However, on the contrary note, private-interest theory is viewed as self-interest
theory with some personal motivation. Capture theory happen when a regulatory body works in
the public interest but eventually acts differently in the benefit of the industry instead of public
(Gans & Ryall, 2017).
IASB proposed all the 6 amendments in IFRS 8 keeping into account the public’s interest
and their information requirement as well for the purpose of making rational decisions. Thus,
boosting public interest was their main motive. However, reviewing all the comment letters, it is
founded that all the questions were answered taking into account both the industry or companies
viewpoint along with the interest of investors and other users. For instance, EFRAG
acknowledged investors & regulators point of view and after gave disapproval on disclosure
need under paragraph 22(d). Further, considering public interest, EY said that no-doubt, entities
have to show segmental information consistently, however, taking into account industry’s
interest; they do not need to report explanation for the differences in operational segments in
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their final statements and other reporting package. Thus, it becomes clear that capture theory best
suited for explaining the comment letters.
REFERENCES
Books and journals
Gans, J., & Ryall, M. D. (2017). Value capture theory: A strategic management review. Strategic
Management Journal. 38(1). pp.17-41.
Hantke-Domas, M. (2003). The public interest theory of regulation: non-existence or
misinterpretation?. European journal of law and economics. 15(2). pp.165-194.
Sanday, P. R. (Ed.). (2014). Anthropology and the public interest: Fieldwork and theory.
Academic Press.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
Lukka, K. (2010). The roles and effects of paradigms in accounting research. Management
Accounting Research, 21(2), pp.110-115.
Godfrey, J., Hodgson, A., Tarca, A., Hamilton, J. and Holmes, S. (2010). Accounting theory.
Biondi, Y. and Zambon, S. eds. (2013). Accounting and business economics: Insights from
national traditions. Routledge.
Schroeder, R.G. Clark, M.W. and Cathey, J.M. (2011). Financial accounting theory and analysis:
text and cases. John Wiley and Sons.
Board, F.A.S. (2010). Statement of Financial Accounting Concepts No. 8, Conceptual
Framework for Financial Reporting. Financial accounting Foundation, Norwalk.
Weil, R.L., Schipper, K. and Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D., KIESO, D. and Elias, R.Z. (2010). Accounting principles. Issues
in Accounting Education, 25(1), pp.179-180.
Online
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AASB Exposure Draft. (2017). Improvements to AASB 8 Operating Segments. [PDF]. Available
through: http://www.aasb.gov.au/admin/file/content105/c9/ACCED278_04-17.pdf.
[Accessed on 15th September 2017].
BDO Exposure Draft. (2017). [Online]. Available through: <
https://www.bdo.global/getattachment/Services/Audit-Assurance/IFRS/IFR-bulletins/
IFRB-2017-07.pdf.aspx?lang=en-GB>. [Accessed on 15th September 2017].
EFRAG Comment letter. (2017). [Online]. Available through:
http://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing
%2FSiteAssets%2FEFRAG%2520final%2520comment%2520letter%2520on
%2520Exposure%2520Draft%25202017-2%2520Improvements%2520to%2520IFRS
%25208%2520Operating%2520Segments.pdf>. [Accessed on 15th September 2017].
ESMA comment letter. (2017). [Online]. Available through:
https://www.esma.europa.eu/sites/default/files/library/esma32-61-
179_cl_to_efrag_on_ed_improvements_to_ifrs_8.pdf. [Accessed on 15th September
2017].
EY comment letter. (2017). [Online]. Available through:
http://www.ey.com/Publication/vwLUAssets/ey-comment-letter-ed-2017-2-
improvements-to-ifrs-8-operating-segments/$FILE/ey-comment-letter-ed-2017-2-
improvements-to-ifrs-8-operating-segments.pdf. [Accessed on 15th September 2017].
Kieran, S. (2017). False Accounting and Fictitious sales at Fuji Xerox, Australia, NZ. [Online].
Available through: < https://www.crn.com.au/news/false-accounting-and-fictitious-sales-
at-fuji-xerox-australia-nz-470035/page0>. [Accessed on 15th September 2017].
KPMG Comment Letter. (2017). [Online]. Available through: <
https://home.kpmg.com/content/dam/kpmg/xx/pdf/2017/08/isg-comment-letter-
improvements-to-ifrs8-operating-segments.pdf>. [Accessed on 15th September 2017].
False accounting and fictitious sales at Fuji Xerox Australia, NZ. 2017. [Online]. Available
through: <https://www.crn.com.au/news/false-accounting-and-fictitious-sales-at-fuji-xerox-
australia-nz-470035/page0 >. [Accessed on 15th September 2017].
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