The GRAP Standard on Segment Reporting (GRAP 18) was approved by the Accounting Standards Board (ASB) in March 2005, but the Minister of Finance did not approve implementation of this standard by entities for financial periods starting 1st April 2009 as had been suggested by the Board. Since then the International Accounting Standards Board (IASB) has issued IFRS 8 Operating Segments, a Standard that became effective on 1st January 2009 for entities that apply IFRS. This article explains the way forward.
The Accounting Standards Board has now agreed to consider the amendments to the international standard contained in the Standard of GRAP on Segment Reporting (GRAP 18) as part of its work programme.
Since the two Standards (GRAP 18 and IFRS 8) differ significantly, the Board will now examine whether, and/or to what degree, the current GRAP Standard should be amended to ensure the uniform reporting of useful information so as to enhance financial reporting in the public sector.
The Minister of Finance felt that entities were not ready for implementing segment reporting as they lacked the necessary systems to comply with the requirements of the Standard.
The following are the key differences that exist between the current GRAP 18 and IFRS 8:
• The way in which GRAP 18 defines a reportable “segment” is different from that in IFRS 8.
• GRAP 18 does not specify quantitative thresholds that must be applied in identifying reportable segments.
• GRAP 18 requires the accounting policies underlying the disaggregated information to be the same as those underlying the entity information. IFRS 8 requires operating segments to be reported in the same way as it would be done for management purposes. A reconciliation is only required on the aggregated information on what is reported in the financial statements.
• GRAP 18 currently encourages certain disclosure of geographical segments when an entity adopts a service segment approach. IFRS 8 requires an entity
• to identify its operating segments and
• to provide certain disclosures relating to products and services, geographical areas and major customers.
GRAP 18 defines a segment as a distinguishable activity or group of activities of an entity for which it is appropriate to separately report financial information. This is done to evaluate the entity’s past performance in achieving its objectives and as a basis for decisions about the future allocation of resources.
IFRS 8 defines an operating segment as a component of an entity from which it may earn revenue or incur expenses. In addition, its operating results must be regularly reviewed by the entity’s chief operating decision-maker. Such decisions will relate to resources allocated to the segment, and assessments of the segment’s performance. In such cases discrete financial information must be available. The relevancy of this definition still has to be assessed for public sector purposes.
Although IFRS 8 says that segments should be reported on the same basis as that reported on a managerial level, it still requires that segments should be identified and aggregated using thresholds similar to what was required in IAS 14, its predecessor.
The Standard requires judgement to be exercised when an entity identifies the segments to be reported in terms of GRAP 18. These, according to GRAP 18, would normally be in accordance with the manner in which management reports on its segments. It also says that the way in which management reports on segment information for internal use may not be appropriate when segment reporting is done for an external audience.
GRAP 18 requires an entity to identify whether it has a service segment structure or a geographical segment structure and to report its segments accordingly. In the event of management reporting on both these structures it may be useful to disclose both services and geographical segment information. The Standard also encourages disclosures about service and geographical segment information in cases in which the entity has not selected either of these as its primary basis of reporting.
In terms of IFRS 8, the entity would identify operating segments and report external revenues received for each product or service. It would also do so for each group of similar products and services, as well as for each country of domicile. These would be attributed to all foreign countries in total (or separately if material) from which the entity derives revenues. Non-current assets, other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts, are also separated for foreign countries.
An entity must also disclose information about reliance on major customers in terms of IFRS 8. Some of these disclosures may be useful for public sector reporting purposes.
The important difference, however, relates to the fact that IFRS 8 segment information does not have to be compiled using similar accounting policies to those required on an overall reporting basis. The advantage of this is that an entity would not have to amend the information that it publishes for internal reporting purposes when operating segments are reported, saving on time and costs.
An entity also does not have to adjust its current systems when it obtains segment reporting information. It merely has to prepare a reconciliation between the (consolidated) financial statement information and the segment report.
The segment report is therefore not a disaggregation of financial information on a segment basis, but may result in useful information for decision-making purposes since it reflects the way in which the entity operates.
The advantages of segment reporting are captured in the objective of GRAP 18 and the core principle in IFRS 8. The disclosure of segment information will
• Assist users of financial statements to better understand the entity’s performance and to identify resources allocated to support the major activities of the entity;
• Enhance transparency of financial reporting and enable the entity to better discharge its accountability obligations; and
• Enable users to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
The amendments to the current GRAP 18, and whether it best reflects the needs of the users of those statements and promotes accountability, will depend on the comments received on the documents during the participation process by everyone that is affected.
The Board plans to issue an exposure draft on GRAP 18 early in 2010, the final date being determined by its current work programme.
Belinda van der Merwe CA(SA) is the Project Manager at the Accounting Standards Board.