Table 5.8 reports frequency distribution and descriptive statistics for the primary (and secondary) compliance indices described in Section 5.6. The compliance indices (Appendix B. 6, Table 5.8) pile-up on the right of the distribution (high compliance indices) with a heavy-tail on the left (low compliance indices). 72.50%37 (75.50%38) of the companies have compliance score higher than 90% for the reportable segments. On the other hand, only less than a quarter (less than a half) of the companies achieved the same compliance level for the entity-wide information. Half (almost 70.00%) of the companies have greater than 90% overall compliance level. More than two (three) fifths of the companies provided all the necessary information about their reportable segments. However, only less than a quarter (half) of the sample companies fully complied with the entity-wide information requirements of the standard. In most of the cases those companies who had 100.00% compliance index for the reportable segment (entity-wide) requirements of the standard did not provided all the entity-wide (reportable segments) information required by the standard. Therefore, it is interesting to note that only 13.50% (34.50%) of the companies fully complied with all IFRS 8 requirements.
The compliance level for reportable segments range from 29.41% (29.41%) to 100.00% (100.00%), with a relatively high average of 91.28% (92.99%). However, the results reveal a considerable level of non-compliance with the entity-wide disclosure requirements of IFRS 8. The extent of compliance with the entity-wide disclosure requirements range from 0.00% (0.00%) to 100.00% (100.00%), with an average of 76.02% (85.91%). These two parts of the disclosure requirements make the total compliance level range from 40.00% (42.86%) to 100.00% (100.00%), with an average of 86.91% (91.28%). (Table 5.8 and Table 5.10, Appendix B. 6)
Table 5.8 Compliance indices _ Frequency distribution and descriptive statistics
Although, the results show a relatively high level of compliance on average, there is still substantial non-compliance especially with the entity-wide segmental information requirements of IFRS 8. Furthermore, there is considerable variation between the compliance levels of individual companies (see high std. deviation in Table 5.8 and Table 5.10, Appendix B. 6).
The study focuses on the first year of the implementation of IFRS 8 (mandatory or voluntary early adoption). The preparers’ and auditors’ unfamiliarity with the requirements of the new segment reporting standard can be one of the reasons for the relatively low level compliance with the entity-wide requirements of IFRS 8. Crawford et al. (2012a) interviewed preparers, users and auditors of financial statements and found that the interviewees had difficulties understanding the concept of the new entity-wide disclosure requirements. Many of them (even a number of the auditors) linked the entity- wide disclosures required by IFRS 8 to the geographical information required by IAS 14R.
“..., there appeared to be a great deal of confusion among the respondents about the new category of entity-wide disclosures which were mandated under IFRS 8. Users, in particular, either did not know what these were or equated them with geographic disclosures which had previously been provided as segment data under IAS 14R. Even a
number % number % number % number % number % number %
0.00 - 10.00 0 0.00 0 0.00 4 2.00 4 2.00 0 0.00 0 0.00 10.01 - 20.00 0 0.00 0 0.00 2 1.00 0 0.00 0 0.00 0 0.00 20.01 - 30.00 1 0.50 1 0.50 0 0.00 1 0.50 0 0.00 0 0.00 30.01 - 40.00 0 0.00 0 0.00 10 5.00 3 1.50 1 0.50 0 0.00 40.01 - 50.00 3 1.50 1 0.50 9 4.50 8 4.00 2 1.00 3 1.50 50.01 - 60.00 3 1.50 5 2.50 22 11.00 3 1.50 4 2.00 2 1.00 60.01 - 70.00 10 5.00 7 3.50 18 9.00 17 8.50 14 7.00 6 3.00 70.01 - 80.00 10 5.00 12 6.00 36 18.00 17 8.50 19 9.50 16 8.00 80.01 - 90.00 28 14.00 23 11.50 52 26.00 49 24.50 60 30.00 36 18.00 90.01 - 100.00 145 72.50 151 75.50 47 23.50 98 49.00 100 50.00 137 68.50 Total 200 100.00 200 100.00 200 100.00 200.00 100.00 200 100.00 200 100.00 100.00 87 43.50 121 60.50 47 23.50 98 49.00 27 13.50 69 34.50 Mean Median Minimum Maximum Range Std. Deviation 100.00 20.05 11.82 91.28 95.00 42.86 100.00 57.14 10.80 86.91 90.24 40.00 100.00 60.00 70.59 12.52 12.26 76.02 80.00 0.00 100.00 100.00 21.75 92.99 100.00 29.41 100.00 70.59 Compliance index % % 94.12 29.41 100.00 90.00 0.00 100.00 91.28 85.91
Reportable segments Entity-wide information Segmental information (total)
CI1_R CI2_R CI1_EWI CI2_EWI CI1_T CI2_T
number of the auditors did not seem to recognise that this category of information included more than geographic disclosures.” (Crawford et al., 2012a, p7)
However, previous research (e.g. Al-Shammari et al., 2008; Hodgdon et al., 2009) proved that compliance improved over time. Thus, the compliance with the entity-wide requirements of the standard may increase as the preparers and auditors become more familiar with the requirement of the new standard.
“IFRS 8 does not include an exemption from disclosure on the ground of commercial sensitivity. Although, we are sympathetic to the specific concerns raised, we think that a competitive-harm exemption is inappropriate because it would provide a means for broad non-compliance with the Standard.” (IASB, 2013b, p19)
After the IASB issued ED 8 for public comments (19 January 2006) some respondents argued that competitive harm might be associated with the introduction of the new segment disclosure standard. The respondents to the ED 8 suggested that a competitive harm exemption should be in the standard. However, IASB argued that such a general exemption would provide too much opportunity for non-compliance. Later even the Financial Reporting Review Panel (FRRP) called the companies “attention to the fact
that no exemption is given from any aspect of IFRS 8 on the grounds that disclosure would
be commercially prejudicial”. (FRRP, 2010, p2; Roberts, 2010) Furthermore, Katselas
et al. (2011) analysed the comment letters on the ED 8 and found that single segment firms were less likely to support IFRS 8. The authors explained it with the potential release of proprietary information. As part of the PIR of IFRS 8 the IASB carried out a public consultation through a Request for Information (RIF). (see more in Section 2.2) Many respondents expressed concerns about the disclosure of commercially harmful information once again. Thus, it would not be surprising if beside the unfamiliarity with the new standard preparers intentionally kept back potentially harmful proprietary information from competitors.
A more detailed analysis of the compliance scores reveals that the companies withhold some more sensitive entity-wide information. (Table 5.9, Appendix B. 2) Only 48.50% of the sample companies disclosed information about the extent of their reliance on their major customers. Both SFAS 131 and IFRS 8 require disclosures about major customers. However, research found that only a very low % of the companies discloses information about their major customers. (Crawford et al., 2012a; Nichols et al., 2012) (Table 5.3)
Many companies may not have major customers because of the services, products they provide (e.g. companies in consumer services, customer good industries such as transportation, hotel and restaurant services, retailers). However, it is also likely that companies hold back information about their major customers because of the commercially sensitive nature of the information. (Table 5.9)
Although 74.00% of the companies disclosed information about their external revenues attributed to the entity’s country of domicile and to all foreign countries only 55.00% of them disclosed information about their non-current assets in the same detail. Additionally, almost a quarter (24%) of the companies omitted to disclose the basis of how they attribute (e.g. based on the location of the customer, the origin, the destination, the service provided etc.) the external revenues to individual countries. This makes it difficult to analyse the provided revenue information and questions its comparability. (Table 5.9)
Table 5.9 Compliance with selected disclosure requirements of IFRS 8 (% of the companies)
Revenue from external customers should be reported for each (group of) product and services “unless the necessary information is not available and the cost to develop it
Reference
IFRS 8 Disclosure requirement YES NO NA NK Total NO + NK
8.34
An entity shall provideinformation about the extent of its
reliance on its major customers. 48.50 0.00 0.00 51.50 100.00 51.50
8.27 (a)
An entity shall disclose thebasis of accounting for any
transactions between reportable segments. 38.00 12.50 22.00 27.50 100.00 40.00
8.33 (b)
An entity shall report the following geographical information unless the necessary information is not available and the cost to develop it would be excessive (in which case that fact should be disclosed): (b) Non-current assets
other than financial instruments, deferred tax assets, post- employment benefit assets, and rights arising under insurance contracts (i) located in the entity’s country of domicile and (ii) located in all foreign countries in total in which the entity
holds assets. 55.00 23.50 8.50 13.00 100.00 36.50
8.33 (a)
An entity shall disclose thebasis for attributing revenues
from external customers to individual countries 64.50 24.00 11.50 0.00 100.00 24.00
8.33 (a)
An entity shall report the following geographical information unless the necessary information is not available and the cost to develop it would be excessive (in which case that fact should be disclosed): (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. 74.00 6.50 7.50 12.00 100.00 18.50
8.22 (b)
The entity shall disclose the types of products and servicesfrom which each reportable segment generates
revenues. 86.00 14.00 0.00 0.00 100.00 14.00
8.32
An entity shall report the revenues from external customer for each product and service, or each group of similar product and services, unless the necessary information is not available and the cost to develop it would
be excessive (in which case that fact shall be disclosed). 80.50 13.50 5.50 0.50 100.00 14.00 Disclosure
would be excessive, in which case that fact shall be disclosed” (IFRS 8, 8.32). The companies can use the same excuse when they have difficulties to provide the revenues from external customers attributed to and non-current assets located in the company’s country of domicile and all foreign countries. (IFRS 8, 8.33) 14% (NO=13.50%, NK=0.50%) of the companies did not disclose their external revenue by (group of) products and services and 18.50% (NO=6.50%, NK=12.00%) of the companies did not disclose their external revenues attributed to the country of domicile and to all foreign country. However, none of these companies disclosed that the company lacked the necessary information and its cost of production would have been excessive. Furthermore, 36.5% (NO=23.50%, NK=13.00%) of the companies did not disclose their non-current assets located in the country of domicile and in all foreign countries. However, only one company (Carnival) provided an excuse. “Our ships move between
geographic regions and, therefore, it is not meaningful to allocate these ship assets and
ship capital expenditures to particular regions.” (Carnival, 2010 Financial Statements,
p16) (Table 5.9)
With two exceptions the companies are highly compliant with the reportable segment disclosure requirements of IFRS 8. 40.00% (NO=12.50%, NK=27.50%) of the companies did not mention the basis of accounting for the transactions between their reportable segments and 14.00% (NO=14.00%, NK=0.00%) of the companies did not provide information about the types of revenue generating products and services of the company’s reportable segments. (Table 5.9)
“In prior years, costs were reported on a geographic basis. Resources are now managed on a global basis and accordingly the Executive Committee does not measure costs or operating profit by segment and therefore the Group no longer reports operating profit by segment.” (Micro Focus International plc., Annual Reports and Accounts 2010, p51 and p57)
“Operating costs, financial income, financial expenses and income taxes in relation to the Agency, New Homes and the Other segment are managed on a centralised basis at a Righmove Group Limited level and as there are no internal measures of individual segment profitability relevant disclosures have been shown under the heading of Central ...” (Rightmove plc, Annual Report 2009, p62)
An additional interesting fact is that two companies (Micro Focus International plc, Rightmove plc) claimed that their costs and profit are managed on a corporate level.
Table 5.10 Compliance indices (and std. deviations) by adoption, ICB industry sector, type of auditor, type of reporting segment, US and cross listing status and FTSE listing
number % CI1_R CI2_R CI1_EWI CI2_EWI CI1_T CI2_T number % CI1_R CI2_R CI1_EWI CI2_EWI CI1_T CI2_T
FTSE Type of reporting segment
FTSE 100 69 34.50 92.15 92.90 76.86 87.26 87.23 91.13 Business 119 59.50 91.89 93.26 80.77 91.56 88.69 92.85 (12.59) (12.79) (17.97) (16.90) (11.50) (11.17) (12.73) (12.76) (20.19) (16.77) (11.88) (11.14) FTSE 250 131 65.50 90.83 93.03 75.57 85.19 86.74 91.36 Geographic 38 19.00 88.58 91.35 65.06 74.54 81.94 87.51 (12.51) (12.01) (23.54) (21.55) (12.02) (10.65) (11.75) (11.13) (23.39) (22.92) (10.59) (9.62) Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28 Mixed 43 21.50 91.99 93.68 72.54 80.31 86.37 90.27 (12.52) (12.26) (21.75) (20.05) (11.82) (10.80) (12.57) (11.94) (20.66) (20.28) (11.62) (10.09) Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28 Adoption (12.52) (12.26) (21.75) (20.05) (11.82) (10.80) Early adoption 29 14.50 95.82 97.78 74.47 88.87 89.52 95.19 (6.36) (5.63) (17.15) (14.74) (7.15) (6.41) Auditor
Not early adoption 171 85.50 90.51 92.17 76.28 85.41 86.47 90.62 Big4_A 63 31.50 92.42 94.06 71.22 80.28 86.64 91.05
(13.15) (12.89) (22.46) (20.81) (12.40) 11.26) (11.66) (11.38) (25.14) (25.51) (11.53) (10.61)
Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28 Big4_B 53 26.50 86.45 88.85 72.61 83.39 82.49 87.45
(12.52) (12.26) (21.75) (20.05) (11.82) (10.80) (14.31) (14.37) (21.92) (20.77) (13.53) (12.51)
Big4_C 45 22.50 92.94 94.16 81.54 91.41 89.64 93.52
Industry (10.43) (9.84) (18.45) (12.59) (9.87) (7.93)
Basic Materials 22 11.00 86.46 87.31 77.50 88.40 83.07 86.95 Big4_D 33 16.50 96.25 97.31 83.07 93.25 92.29 96.04
(18.03) (18.52) (16.55) (13.06) (14.38) (14.07) (5.95) (5.33) (15.78) (11.11) (6.52) (5.87)
Consumer Services 49 24.50 92.52 94.52 68.43 80.15 85.94 91.19 BIG4 194 97.00 91.56 93.21 76.01 85.92 87.16 91.49
(12.24) (12.21) (24.19) (25.15) (12.64) (11.97) (11.88) (11.51) (21.86) (20.25) (11.54) (10.36)
Customer Goods 19 9.50 90.54 92.08 78.69 86.62 87.01 91.15 Not BIG4 6 3.00 82.31 85.67 76.19 85.56 78.69 84.57
(13.47) (13.07) (23.93) (24.01) (13.45) (11.87) (26.37) (28.24) (19.52) (12.77) (18.26) (21.09)
Health Care 6 3.00 91.42 94.44 88.73 92.62 90.25 93.65 Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28
(11.60) (10.68) (12.27) (8.69) (11.32) (9.39) (12.52) (12.26) (21.75) (20.05) (11.82) (10.80)
Industrials 60 30.00 92.08 93.39 80.42 88.37 88.62 91.88
(11.24) (10.75) (17.75) (14.78) (10.71) (9.94) Listing
Oil & Gas 16 8.00 90.79 92.97 70.59 83.74 84.68 90.95 Cross listed 182 91.00 91.55 93.24 76.77 86.84 87.26 91.61
(9.35) (9.00) (23.62) (19.71) (9.08) (6.57) (12.33) (12.12) (20.36) (18.27) (11.29) (10.43)
Technology 15 7.50 89.06 92.40 83.62 91.33 87.73 92.43 Not cross listed 18 9.00 88.55 90.45 68.41 76.48 83.42 87.98
(14.11) (12.11) (20.92) (17.67) (12.85) (10.27) (14.45) (13.69) (32.47) (32.35) (16.19) (13.97) Telecommunication 5 2.50 91.62 94.12 84.57 100.00 89.19 95.24 Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28 (12.16) (13.15) (17.68) (0.00) (12.60) (10.65) (12.52) (12.26) (21.75) (20.05) (11.82) (10.80) Utilities 8 4.00 97.59 97.59 60.71 74.55 89.30 93.81 (3.32) (3.32) (29.56) (32.16) (4.96) (5.06) US listing Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28 US listed 116 58.00 91.08 92.94 77.08 87.48 86.88 91.45 (12.52) (12.26) (21.75) (20.05) (11.82) (10.80) (12.18) (11.83) (19.78) (17.99) (11.30) (10.47) Not US listed 84 42.00 91.56 93.05 74.54 83.74 86.95 91.04 (13.05) (12.89) (24.24) (22.52) (12.57) (11.31) Total 200 100.00 91.28 92.99 76.02 85.91 86.91 91.28 (12.52) (12.26) (21.75) (20.05) (11.82) (10.80)
reportable segments entity wide information segmental information (total)
Compliance score (%) for (Std. Deviation)
reportable segments entity wide information segmental information (total)
Company Compliance score (%) for Company
Several items only need to be disclosed for each reportable segment if they are regularly provided to the CODM or the items are included in the calculation of segment profit or loss. However, all companies must disclose a measure of profit or loss for each reportable segment. (IFRS 8, 8.23)
The results in this Section indicate that there is a considerable variation between the individual companies’ level of compliance. The next Section (Section 5.7.2) tests the hypotheses developed in Section 5.4 and investigates whether the differences in the level of compliance with the requirements of IFRS 8 are associated with different company characteristics.