An analysis of the impact of adopting IFRS 8 on the segment disclosures of European blue chip companies

Journal of International Accounting, Auditing and Taxation 21 (2012) 79–105

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Journal of International Accounting, Auditing and Taxation

An analysis of the impact of adopting IFRS 8 on the segment disclosures of European blue chip companies Nancy B. Nichols a,∗ , Donna L. Street b , Sandra J. Cereola a a b

James Madison University, School of Accounting, Harrisonburg, VA 22807, USA University of Dayton, Department of Accounting, Dayton, OH 45469-2242, USA

a b s t r a c t Amidst the IASB’s post-implementation review of IFRS 8, we examine how the standard’s adoption changed the reporting of segments by European blue chips (i.e. companies comprising the top tier index of 14 European stock exchanges). We focus on anticipated benefits articulated in the IASB’s Basis for Conclusions and concerns expressed by IFRS 8 opponents. In addition to convergence with U.S. GAAP, IFRS 8 results in the reporting of significantly more operating segments on average. However, most companies report the same number or fewer segments. Refuting claims regarding the loss of geographic data at the entity-wide level, we identify an improvement in the fineness of disclosures and a significant increase in the disclosure of geographic groupings. We do not identify an improvement in consistency of segment disclosures with other sections of the annual report, which is due to the consistency already achieved under IAS 14R. IFRS 8 results in a significant decline in the number of reportable segment information items (notably liabilities) and a significant decline in the reporting of capital expenditures at the entity-wide level. Furthermore, adoption of the standard produces a lack of comparability in segment profitability measures and extensive reporting of non-IFRS measures. However, almost all companies report a measure of segment profitability tied to a number on the consolidated income statement or reconciled to the income statement. © 2012 Elsevier Inc. All rights reserved.

1. Introduction In November 2006, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) 8, Operating Segments. The standard became effective January 1, 2009 with early adoption encouraged (IASB, 2006a). In the Basis for Conclusions (BC) accompanying IFRS 8, the IASB explains that in September 2002 the Board added a short-term convergence project to its agenda (IFRS 8, BC2). The convergence project was conducted jointly with the United States (U.S.) Financial Accounting Standards Board (FASB) and focused on reducing differences between IFRSs and U.S. Generally Accepted Accounting Principles (GAAP) that could be resolved in a relatively short time frame. Since the IASB’s predecessor (the International Accounting Standards Committee (IASC)) worked closely with the FASB and Canadian Accounting Standards Board during the late 1990s to issue comparable segment reporting standards, the Boards believed that aiming to eliminate the few remaining differences between International Accounting Standard 14 Revised (IAS 14R) and the North American approach represented a logical selection for short-term convergence. Based on a review of the academic research, the IASB concluded that Statement of Financial Accounting Standard (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information (now ASC 280) (FASB, 1997), provides more useful information to users than its predecessor SFAS 14 (IFRS 8, BC6). Specifically, the academic research provides evidence that adoption of SFAS 131 in the U.S., • increases the number of reported segments and provides more information,

∗ Corresponding author. Tel.: +1 540 568 8778; fax: +1 540 568 3017. E-mail addresses: [email protected] (N.B. Nichols), [email protected] (D.L. Street), [email protected] (S.J. Cereola). 1061-9518/$ – see front matter © 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.intaccaudtax.2012.07.001

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• enables users to see an entity through the eyes of management, • enhances consistency with the management discussion and analysis (MD&A) or other annual report disclosures, and • provides various measures of segment performance. As part of the IASB’s due process, segment reporting was discussed with financial statement users (IFRS 8, BC 7-8). Most of the users interviewed favored the SFAS 131 management approach over IAS 14R that, while based on the management approach, includes a risks and rewards qualification. Our study addresses how the IASB’s convergence with the ‘North American’ management approach in IFRS 8 changed the segment reporting of European blue chips (i.e. companies comprising the top tier index of 14 European exchanges) that previously reported under IAS 14R. Inter alia, we address whether IFRS 8 achieves the IASB’s desired outcomes of “some entities will report more segments” (IFRS 8, BC9c) and “entities will report segment information that will be more consistent with other parts of their annual reports” (IFRS 8, BC9b). Since it issued IFRS 8 amid significant concerns regarding adoption of the management approach, the IASB agreed to a post-implementation review of the standard. Amendments made in 2008 by the IFRS Foundation Trustees to the IASB’s Due Process Handbook formalize the process of conducting post-implementation reviews as part of the life cycle of major IASB projects. The first two IFRSs identified by the IASB for post-implementation reviews are IFRSs 8 and 3. The review of IFRS 8 is underway and targeted for completion at the end of 2013. Thus, our findings are highly policy relevant as they will inform the IASB’s post-implementation review of IFRS 8.

2. The road to convergence and IFRS 8 The IASC articulates its objectives for revisiting IAS 14 and provides arguments for and against IAS 14 in a Draft Statement of Principles (DSOP). After considering the pros and cons, an IASC Steering Committee concludes that IAS 14 should be revised to, among other things, • reduce the use of alternative practices and ensure that segment information is understandable and consistent between enterprises, • provide clearer guidance for identifying and measuring such items as segment revenue, segment expenses, segment results, and segment assets, and • consider requiring additional segment information useful to investors and other decision makers (IASC, 1994, 3). An Exposure Draft (ED) was issued by the IASC in December 1995 entitled, Reporting Financial Information by Segment. The proposals are very similar, but not identical, to those set forth in EDs issued at approximately the same time by the U.S. and Canadian accounting standard setters. IAS 14R was issued in 1997. As noted above, while the IASC was working on the revision of IAS 14, the U.S. FASB and Canadian Accounting Standards Board jointly developed Reporting Disaggregated Information about a Business Enterprise. The North American standard was issued in 1997. Despite substantial efforts to issue converged standards, key differences remained between the North American and international standards. IAS 14R sets forth a two-tier approach requiring disclosure by both line of business and geographic regions (IASC, 1997). Primary segments are based on the management approach modified by a risks and rewards qualification. Each primary segment determined by the management approach is to exhibit similar risks and rewards characteristics; otherwise, the groupings are modified based on the risks and rewards approach. Under IAS 14R if primary segments are based on line of business (geography), the second tier is based on geography (line of business). If the management structure resembles neither line of business nor geographic segments, IAS 14R requires entities to choose between business and geographic segments for primary and secondary segments. In comparison to its predecessor, IAS 14R significantly expands the items of information disclosed for primary segments and requires entities to disclose: • • • • • • • • • •

Revenue (external and inter-segment) Result Assets Basis of inter-segment pricing Liabilities Capital expenditures Depreciation Non-cash expenses other than depreciation Equity method income Reconciliation to consolidated accounts.

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Matrix primarily line of business: Electrolux (two lines of business with one of the lines of business disaggregated into four geographic regions) Professional Products

Consumer Durables Europe

North America

Latin America

Asia/ Pacific

Matrix primarily geographic: KPN (four geographic segments with one geographic region disaggregated into four lines of business) The Netherlands

Consumer Segment

Business Segment

Germany

Getronics Segment

Belgium

Rest of World

Wholesale & Operations

Mixed primarily line of business: Fortum (four lines of business exclusive of Russian operations and one geographic region Russia) Power

Heat

Distribution

Markets

Russia

Mixed primarily geographic: Carrefour (four geographic areas and one line of business) France

Europe

Latin America

Asia

Hard Discount Stores

Fig. 1. Examples of matrix and mixed segment reporting.

For secondary segments, IAS 14R requires disclosure of revenue, assets, and capital expenditures. Additionally, IAS 14R encourages, but does not require, disclosure of segment cash flow information. The standard allows matrix reporting. Examples of matrix and mixed reporting are provided in Fig. 1. SFAS 131 reportable segments are determined based on the management approach. However, there is no risks and rewards qualification. Primary differences between SFAS 131 and IAS 14R include: • SFAS 131 does not have a rule requiring disclosure of segment liabilities; • SFAS 131 does not require segment reporting on a secondary basis, although for each reportable segment not based on differences in products/services, SFAS 131 requires disclosure of revenues from transactions with external customers for each product/service. Similarly, for each reportable segment not based on geography, entities must disclose sales and long-lived assets for the country of domicile and for any country accounting for 10% or more of sales and/or assets. Additionally, while IAS 14R requires entities to choose between line of business and geographic segments for primary segment disclosures, SFAS 131 allows for mixed (i.e. a combination of line of business and geographic) reportable segments. Another difference is that while IAS 14R focuses on segment information consistent with the consolidated statements, SFAS 131 focuses on information utilized by management to operate the business and allows the reporting of non-GAAP measures. Following the Board’s decision to add segment reporting as a short-term convergence project with the U.S., the IASB concluded that both academic research and meetings with analysts reveal that the management approach is preferred and provides more useful information (IASB, 2005). Announcing the issuance of ED 8, then IASB Chair Tweedie emphasized the benefits of adopting the U.S. management approach to segment reporting including the opportunity for users to see an entity through management’s eyes and the entity’s ability to provide the information at a low cost (IASB, 2006b).

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IFRS 8 was issued in November 2006. While the standard follows the core principle of IAS 14R, its adoption may result in a change in an entity’s segments due to elimination of the risks and rewards qualification and elimination of the requirement that primary segments be based exclusively on either line of business or geography. The IASB anticipates that a potential benefit of adopting the management approach will be that “some entities will report more segments” (IFRS 8, BC 9c). As explained in the IFRS 8 Basis for Conclusions, most respondents to ED 8 support the management approach whereby the amounts disclosed for each segment represent the measure reported to the Chief Operating Decision Maker (CODM). Most respondents furthermore indicate that, . . . although the IAS 14 approach would enhance comparability by requiring entities to report segment information that is consistent with IFRSs, the disclosures will not necessarily correspond to segment information that is reported to management and is used for decision making (IFRS 8, BC 9c). Setting forth an alternative view in their comment letters to ED 8, some respondents believe international convergence should be towards IAS 14R as opposed to the North American approach (IFRS 8, BC 11). These commentators indicate that the IAS 14R approach yields comparability across entities because the standard defines the measures of segment revenue, expense, result, assets and liabilities and requires segment measures to be prepared in conformity with the accounting policies of the entity. In response to these concerns, the IASB calls attention to requirements for an explanation of the measurement of segment profit/loss and segment assets and for reconciliations of segment amounts to amounts recognized in the financial statements (IFRS 8, 27 and 28). The IASB thus believes that users should be able to “understand and judge appropriately the basis on which the segment amounts were determined” (IFRS 8, BC 14). Since IFRS 8 does not define segment revenue, result, assets or liabilities, entities have more discretion in determining what is included in segment profit/loss as long as the amounts are consistent with internal reporting practices. In their dissenting opinion, Board members Gelard and Leisenring express their concerns regarding the lack of specificity for the measurement of a segment’s profit/loss and the opportunity for management to report non-GAAP measures. In Improvements to IFRSs issued in 2009 (IASB, 2009), the IASB amends paragraphs 23 and 25 of IFRS 8 clarifying that a measure of segment assets should be disclosed only if that amount is regularly reported to the CODM (IFRS 8, BC 35A). IASB member Cooper dissented from the amendment because he believes it weakens the standard and potentially eliminates a disclosure that may be important for the user to understand the performance and financial position of the entity. Several respondents to ED 8 express concern regarding the level of detail provided by the reconciliations of segment and consolidated data (IFRS 8, BC 40). Their argument is that if information is measured based on management information, reconciliations are needed for individual reportable segments between the segment amounts and the corresponding IFRS measure. These commentators believe that reconciling only total reportable segment amounts to corresponding amounts in the consolidated accounts does not produce useful information. The IASB’s position is that this recommendation would yield two complete segment reports – one based on internal reporting and another on IFRSs. The IASB concludes that the cost of providing two sets of segment information is not justified (IFRS 8, BC 42). Unlike SFAS 131, IAS 14R requires disclosure of segment liabilities. IFRS 8 maintains the disclosure requirement for segment liabilities “if those amounts are regularly provided to the chief operating decision maker notwithstanding that such a disclosure would create divergence with SFAS 131” (IFRS 8, BC 38). The IASB believes that if segment liabilities are considered when assessing the performance of, and the allocation of resources to, the segments, the information is consistent with the management approach. Furthermore, the Basis for Conclusions explains that the disclosure of segment liabilities is supported by some commentators to ED 8, most notably commentary from users. Another difference between IFRS 8 and SFAS 131 is the definition of ‘long-lived’ assets. SFAS 131 focuses on hard assets that cannot be readily removed, thereby, appearing to exclude intangible assets (IFRS 8, BC 60). On the other hand, IFRS 8’s definition of non-current assets includes intangibles. Additional relevant changes from IAS 14R incorporated in IFRS 8 include, • entities with one reportable segment are required to disclose information regarding products and services, geographic areas and major customers, • interest revenue and interest expense are reported separately (unless the majority of the segment’s revenue is from interest and the CODM relies on a net measure), • if material, revenues and assets by individual foreign country are disclosed, and • information about transactions with major customers is required if the revenues equal 10% or more of the entity’s revenues. The proposal in ED 8 to converge international and U.S. segment standards raised concerns in the U.K. and European Parliaments. The Economic and Monetary Affairs Committee of the European Parliament commented that adopting IFRS 8 would “import into EU law an alien standard (U.S. FAS 131) without having conducted any impact assessment” (Economic and Monetary Affairs Committee, 2007). In the U.K., 13 members of the House of Commons submitted a parliamentary motion commenting that IFRS 8 is “totally unacceptable because it gives company directors carte blanche to decide what they disclose and how they disclose it and does not require consistency of disclosure” (House of Commons, 2007). In a 2007 resolution addressing the European Commission’s endorsement of IFRS 8, the European Parliament outlines a number of concerns and conditions. One concern is that the standard requires less geographic information than IAS 14R.

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As a condition of support, the resolution requires the Commission to closely follow application of IFRS 8, paying particular attention to geographic reporting, segment profit or loss, and use of non-IFRS measures (European Parliament, 2007). 3. Literature review 3.1. Research on SFAS 131 In the IFRS 8 Basis for Conclusions (BC 6), the IASB summarizes the findings of academic research supporting its decision to adopt the provisions of SFAS 131. Among other things, research findings indicate, in general, that application of SFAS 131 results in more useful information than its predecessor. Specifically, adoption of the management approach in the U.S. increases the number of reported segments and provides a greater quantity of information; enables users to see an entity through the eyes of management; enables an entity to provide timely segment information for external reporting with relatively low incremental cost; enhances consistency with the management discussion and analysis or other annual report disclosures; and provides various measures of segment performance. Several studies evaluating its adoption in the U.S. provide evidence that SFAS 131 resulted in an increase in the number of reported segments. Street, Nichols, and Gray (2000) identify an increase in the number of segments reported, a reduction in the number of single segment companies, and an improvement in the consistency of segment information provided in the footnotes and the introductory annual report information and MD&A. The findings of Street et al. (2000) also illustrate the lack of comparability resulting from the FASB’s decision not to define segment profit/loss. Herrmann and Thomas (2000) find that more than two-thirds of their sample companies redefine their primary operating segments under SFAS 131 and that companies disclose more items for each operating segment. For entity-wide disclosures, they find an increase in country-level disclosures with a corresponding decrease in broader geographic area disclosures. They also identify a significant decrease in the number of companies reporting earnings by geographic area. Ettredge, Kwon, and Smith (2002) also identify a significant increase in the number of segments reported under SFAS 131. These authors attribute the greater number of segments to greater operational complexity and prior under-reporting. Berger, Hann, and Piotroski (2003) also find an increase in the number of reported segments and the disclosure of more disaggregated information under SFAS 131. Their findings indicate that analysts and the market had access to some of the new segment information required by SFAS 131 before it was made public. However, analysts’ and market expectations were still impacted by release of the new data. By increasing disaggregation, SFAS 131 requires companies to release previously withheld information about their diversification strategies. The new information impacted market valuations and motivated changes in behavior consistent with improved monitoring. Other studies evaluate the impact of SFAS 131 on users. Behn, Nichols, and Street (2002) compare forecast errors for models utilizing SFAS 14 and 131 data. They identify a significant improvement in the predictive accuracy of geographic sales disclosures provided under SFAS 131, thereby supporting the FASB’s argument that segment information by country is more informative and useful. Ettredge, Kwon, Smith, and Zarowin (2005) examine companies that moved from claiming to be single segment companies to companies disclosing multiple segments under SFAS 131. They identify an improvement in the market’s ability to predict earnings for those companies compared to companies that remained single segment. Studies investigating the revised geographic disclosure requirements of SFAS 131 find that companies provide more country specific disclosures (Nichols, Street, & Gray, 2000) and that most companies provide country-level disclosures using thresholds of less than 10% (Doupnik & Seese, 2001). More recent studies analyze the impact of eliminating the geographic earnings disclosure for U.S. companies reporting line of business operating segments. Hope, Thomas, and Winterbotham (2006) examine the impact on earnings predictability for multinationals eliminating their geographic earnings disclosure under SFAS 131 and find no evidence of an effect on analysts’ forecast accuracy or dispersion. They conclude that the FASB’s decision to eliminate the entity level geographic earnings disclosure does not hamper users’ ability to predict the earnings of U.S. multinationals. On the other hand, Hope, Kang, Thomas, and Vasvari (2009) provide evidence that companies that increase the number of geographic segments or continue to disclose geographic earnings under SFAS 131 have foreign earnings that are priced higher than those of companies that do not increase their number of geographic segments or that discontinue reporting geographic earnings. These authors conclude that higher-quality geographic segment disclosures allow investors to better relate reported performance to foreign operations. 3.2. Research on IAS 14R Nichols and Street (2002) examine the segment disclosures of 210 companies reporting under IAS 14R. They find that the move from IAS 14 to IAS 14R resulted in: • a significant increase in the items of information disclosed for each primary and secondary segment, • a significant increase in consistency of the primary segment information with the introductory annual report material and MD&A, and • a significant decrease in companies claiming to operate in one segment.

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On a less positive note, the study finds that following adoption of IAS 14R a number of companies continue to claim to operate in one segment while the annual report taken as a whole suggests the existence of multiple line of business segments and many companies continue to utilize the broad, vague geographic groupings for which the original version of IAS 14 was criticized. Additionally, the authors identify several instances where companies do not provide all the disclosures required by IAS 14R for primary and/or secondary segments.

3.3. Preliminary IFRS 8 research and regulatory warnings In a press release, the U.K. Financial Reporting Review Panel (FRRP, 2010) expresses concerns regarding how U.K. companies are reporting the performance of key parts of their business under IFRS 8. Following a review of a sample of 2009 interim accounts and 2008 annual accounts from early adoptors, the FRRP asked a number of companies to provide additional explanations where: • only one operating segment is reported, but the group appears to be diverse with different businesses or with significant operations in different countries, • the operating analysis set out in the narrative report differs from the operating segments in the financial statements, and • the titles and responsibilities of the directors or executive management team imply an organizational structure which is not reflected in the operating segments, or the commentary in the narrative report focuses on non-IFRS measures while the segment disclosures are based on IFRS amounts. The FRRP encourages Boards of Directors to test their initial conclusions about the company’s segment reporting by considering, among other things, whether information about reportable segments is based on IFRS measures or on an alternative basis and whether reported segment amounts have been reconciled to the IFRS aggregate amounts. Ng (2010) discusses a review by the New Zealand (NZ) Securities Commission of issuers’ financial statements focusing on the application of NZ IFRS 8. The report highlights the importance of identifying the CODM and clarifies that while frequently the CODM is the chief executive officer or the chief operating officer, it may be a group of executive directors. The report cautions that when the CODM is identified as the Board, it normally should be an executive board responsible for making operating and resource allocation decisions. When the Board is identified as the CODM and the directors are non-executive and are stated as being responsible for strategy rather than for making operating decisions, the company will likely be approached by the NZ Securities Commission. Questions may also be forthcoming from the Commission when business segment or geographic disclosures in other parts of the annual report differ from the footnote disclosures. Crawford, Extance, Helliar, and Power (2012) report findings of their examination of the impact on 150 U.K. companies of adopting IFRS 8. The two research questions considered are whether segment disclosures by U.K. companies changed after the introduction of IFRS 8 and whether a small sample of users, preparers and auditors have considered whether IFRS 8 provides more decision-useful information than IAS 14R. Crawford et al.’s analysis reveals, on average, an increase in the number of reportable segments (from 3.30 to 3.56) and an increase in the geographic information by customer location. However, the number of items disclosed for each segment decreases. Specifically, the authors note a decrease in the disclosure of capital expenditures, liabilities and assets. The study also finds that, contrary to expectations, only a small number of companies disclose non-IFRS segment measures. In response to the second research question, Crawford et al. (2012) find that “a majority of the interviewees welcomed the management approach underpinning IFRS 8.” Preparers indicate the strongest support for the new standard.

4. Research questions To examine the impact on European blue chips of adopting IFRS 8 and provide evidence regarding whether the IASB achieved its stated objectives when issuing the standard, we address the following research questions: • • • •

To what extent did companies adopt IFRS 8 early? Are the operating segments reported under IFRS 8 consistent with other parts of the annual report? What types of reportable segments are disclosed under IFRS 8 (line of business, geographic, matrix or mixed)? Has adoption of IFRS 8 resulted in the reporting of a greater number of reportable segments? Has the number of companies claiming to operate in a single segment declined? For those reporting as single segment companies, is this consistent the complete annual report? • What items of information are disclosed for reportable segments under IFRS 8? What items are disclosed for segment profitability? What voluntary disclosures are provided? How does IFRS 8 disclosures compare to those provided under IAS 14R? • Do companies provide appropriate reconciliations of reportable segment profitability, assets, and liabilities to the consolidated financial statements?

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• What items are reported as entity-wide data for products and geographic regions under IFRS 8? How does the IFRS 8 disclosures compare to those provided under IAS 14R? To what extent has adoption of IFRS 8 impacted the fineness of the geographic groupings reported as entity-wide disclosures? • How many companies identify the CODM in their segment footnotes? For those identifying the CODM, what is the title of the decision maker? 5. Sample selection, data collection and sample demographics Our research identifies the impact of reporting under IFRS 8 for companies comprising the top tier index of 14 European stock exchanges. We exclude U.K. companies from our study given Crawford et al.’s (2012) comprehensive study addressing the impact of IFRS 8 on these companies. We obtained the 2008 and 2009 annual reports for companies comprising the top tier index, as of the end of 2009, of the national stock exchange indices in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden, and Switzerland.1 For companies adopting IFRS 8 early, we collected annual reports for the year of early adoption and the year preceding adoption. Appendix A lists the sample companies by country (index). The companies comprising the 14 individual indices yield a total of 361 companies. However, nine of the companies are cross-listed and appear on two of the sample indices. The nine cross-listed companies are assigned to the index in Table 1 associated with their country of domicile and excluded from the index where they are cross-listed. Our total potential sample comprises 352 companies. As shown in Table 1, we exclude three Swiss companies listed in the U.S. and three Norwegian OBX companies headquartered in Bermuda since these six companies publish U.S. GAAP financial statements. We exclude seven companies for which we are not able to obtain English-language financial statements. Four additional companies are deleted for various other reasons (i.e. one company has two classes of stock included on the same index, one company is a listed partnership, etc.). Thus, our final sample includes 335 companies. Each annual report was analyzed carefully and data were hand collected to address the research questions. To promote accuracy, each annual report was reviewed by at least two researchers and any discrepancies were discussed and resolved. Table 1 reports the mean total assets and revenues (in U.S. dollars) for year 2008 for the sample companies in total as well as by country and by industry. The sample includes many of the world’s largest companies. The mean total assets is $U.S. 125,931 million and mean revenues is $U.S. 24,357 million. Manufacturing companies constitute the largest portion of the sample (135 companies, 40%). The second largest category by industry represented in the sample is Finance, insurance, and real estate with 76 companies (23%). 6. Findings 6.1. Extent of early adoption (not tabulated) The IASB encouraged early adoption of IFRS 8, and 32 of our European blue chips responded (six France; five Spain; four Austria; three each Finland, Italy, the Netherlands and Switzerland; two each Germany and Norway; and one Sweden).2 Two companies early adopted in 2006, 10 in 2007, and 20 in 2008. Twenty identify IFRS 8 operating segments as line of business, five as geographic and seven as mixed. A review of the annual reports of early adoptors suggests a rational for why most early adopted. For example, four changed management structure, 11 had no change in reportable segments, two disposed of segments, and six had major acquisitions. TeliaSonera early adopted in 2007 and illustrates reporting under the management approach. In the introductory material to its 2006 annual report, the company states, “On January 1, 2007, TeliaSonera introduced a new organization to capture future growth.” Furthermore, the company notes that its new organizational structure will focus on four international business areas. Appendix B provides a comparison of TeliaSonera’s reporting under IFRS 8 and IAS14R. A graphic in the annual report (p. 21) shows that the head of each of the four areas reports directly to the President and Chief Executive Officer. The 2006 Management Report discusses results based on geographic profit centers. The primary segment footnote information is based on these 10 geographic centers. Second tier sales, operating assets, and investments are presented for three products. TeliaSonera begins its 2007 annual report by illustrating its four business segments. This analysis is followed by a graphic representation of geographic coverage. The Management Report presents results based on the four business segments. In the footnotes, reportable operating segment information is provided for the four segments (three business service areas and

1 IFRS 8 became mandatory for financial years commencing January 1, 2009 and later. Thus, companies with year-ends other than December 31 were first required to follow IFRS 8 during 2010. Therefore, when referring to 2009 year-ends, we are referencing the first year of required IFRS 8 adoption. In other words, for a company with a March 31, June 30, or September 30 year-end, the 2010 IFRS 8 information is included in our 2009 analysis and the 2009 IAS 14R information is included in our 2008 analysis. 2 These include Erste, Immofinanz, Raiffeisen International Bank, Weinerberger, Neste Oil, Pohjala Bank, TeliaSonera, Air Liquide, GAZ de France Suez, Peugeot, PPR, Suez Environment, Technip, Beiersdorf, BMW, Autogrill, Enel, Tenaris, DSM, Royal KPN, TNT, DNB Nor, Telenor, Abengoa, Ebro Foods, Gas Natural, Iberdrola, Iberdrola Removal, Nokia, Julius Baer Group, SwissCom and Syngenta.

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Table 1 European blue chip companies (2009). Sample section process and sample demographics by country (index) and industry.

Top – tier national index By country Austria ATX BEL 20 Belgium Denmark OMXC 20 Finland OMXH 25 CAC 40 France DAX 30 Germany Ireland ISEQ 20 Italy MIB 30 LUXX Luxembourg AEX Netherlands OBX Norway IBEX 35 Spain OMSX 30 Sweden SMI Switzerland Total By industry Agricultural Mining Construction Manufacturing Transportation Communications Electric, Gas & Sanitary Services Wholesale Trade Retail Trade Finance, Insurance, and Real Estate Services a

Sample demographics Companies comprising index

20 20 20 24 40 30 20 40 12 25 25 35 30 20 361

Cross -listed

U.S. GAAP

Annual report not in English

Other deletionsa

1 1 1 1

1 4 1

1

2 1

3 2 1 1 9

1 1 3 6

7

i.e., a company with two classes of stock with both classes listed on the same index, a listed partnership, etc.

4

Total removed

0 1 1 1 1 0 0 1 6 3 3 3 2 4 26

Final sample

2008 US$ Mean assets (in millions)

2008 US$ Mean revenue (in millions)

20 19 19 23 39 30 20 39 6 22 22 32 28 16 335

29,901 46,827 44,954 40,928 273,137 263,286 37,550 131,863 260,474 131,234 22,839 112,892 66,555 247,273 125,931

7,350 8,131 8,251 8,323 47,533 55,452 5,409 24,324 52,805 44,912 8,370 20,063 14,032 24,469 24,357

4 21 16 135 10 22 18 6 10 76 17

3,100 35,060 26,534 26,634 56,634 41,624 95,604 20,906 123,479 429,765 8,790

2,525 44,710 13,521 20,399 23,473 22,092 42,370 26,442 37,041 27,797 7,228

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Sample selection process

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Table 2 Impact of IFRS 8: consistency of segment footnote disclosures with other sectionsa of the annual report. IAS 14R

IFRS 8

Consistent

Not consistentb

No information

Total

Consistent

Not consistent

No informationc

Total

312 (96%)

14 (4%)

0

326

312 (96%)

12 (3%)

2 (1%)

326

a

Includes Management Report/Financial Review/MD&A, shareholder’s letter, business at-a-glance, etc. Reporting on additional or different “segments” in other sections of the annual report in comparison to the primary/operating segments reported on in the segment reporting footnote. c The consolidated financial statements and footnotes are available in English but other sections of the annual report are not. b

Eurasia). The first three segments separate the Western European operations by business service area. The fourth segment includes all business operations in Eastern Europe and Asia. While allowed under IFRS 8, mixed reportable segments are not allowed under IAS 14R. TeliaSonera also discloses entity-wide sales for three products. Net sales by external customer location and non-current assets are presented for three individually material countries. Additionally, net sales by external customer location are disclosed by economic region. By early adopting IFRS 8, TeliaSonera was able to disclose the same information in the segment footnote as provided to the CODM under the new organizational structure. Autogrill early adopted IFRS 8 in 2008. The 2007 introductory annual report material recognizes the interaction between the business and geographic segments. The Management Report describes results and other information by Geoorganisational macro-areas, Business segments (Motorways, Airports, Railway stations, Airports, and Other) and Sectors (Food and beverage; Retail and duty-free; In-flight; and Other). At times, information in the Management Report is presented using matrix reporting (i.e. Sectors by Business segments). The footnote disclosure (see Appendix B) provides primary segment information for so-called ‘geographic’ segments (Italy; U.S. and Canada; Rest of Europe; Aldeasa; and Alpha Group) and detailed second tier information for the same business segments described elsewhere in the annual report. Following adoption of IFRS 8 in 2008, Autogrill reports its operating segments using a matrix approach that aligns with its organizational structure. The segment footnote indicates that the adoption of IFRS 8 results in a restatement of financial information to disclose operating segments that are consistent with the internal reporting to management. Autogrill’s footnote discloses operating segment data for five reportable segments with Food and Beverage separated into three geographic segments (see Appendix B).3 Separating the business line into three geographic segments provides the financial statement user with a level of information not previously provided. Again using matrix reporting, Autogrill presents entity-wide revenue disclosures for six geographic areas within each of the three operating segments/products, thereby providing the user with revenue information separated into 18 categories. In addition to the 32 companies noted above, early adopters of IFRS 8 include six that issued their first IFRS statements in 2007 and two that issued their first IFRS statements in 2008.4 For all eight, the type of operating segments reported under IFRS 8 is consistent with the previous year’s reporting (four lines of business, one geographic, one matrix based primarily on line of business and one mixed based primarily on geographic, and one single segment). This consistency in the type of segments reported is not surprising since all eight companies reported under U.S. GAAP and SFAS 131 prior to moving to IFRS. 6.2. Consistency of segment information with introductory annual report In the IFRS 8 Basis for Conclusions, the IASB references academic findings on applying SFAS 131. This research provides evidence that in the U.S. the management approach of SFAS 131 “enhanced consistency with the management discussion and analysis or other annual report disclosures” (IFRS 8, BC6 (d), see also Street et al., 2000). However, research by Nichols and Street (2002) regarding the adoption of IAS 14R indicates that 81% of their sample companies report segment information consistent with the introductory annual report material and 86% report primary segment information consistent with the Management Report/Financial Review after adopting IAS 14R. Given the level of post-IAS 14R consistency, we do not expect to find a further significant increase in consistency following adoption of IFRS 8. For our sample of European blue chips, we review the primary/reportable segments disclosed in the IAS 14R and IFRS 8 footnotes and the “segments” described and discussed in other sections of the annual report. We define “not consistent” as reporting on additional or different “segments” in other sections of the annual report in comparison to the primary/operating segments reported on in the footnote. As shown in Table 2, in their last year of reporting under IAS 14R, most sample companies report segment information that is consistent with other sections of the annual report; only 14 (4%) exhibit inconsistencies. Single segment companies are the most problematic with six (26%) exhibiting inconsistencies between the segment footnotes and other annual report sections.

3 Matrix reporting would have been acceptable under IAS 14R as Autogrill provides full reportable operating segment (primary segments under IAS 14R) disclosures for three lines of business and additionally for three geographic areas within the food and beverage line of business. 4 Five of the companies are Norwegian: Acergy, Norsk Hydro, Petroleum Geo-Serv, Songa Offshore, and Statoil Asa. Three are German: E.ON, Fresenius SE, and SAP.

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Following adoption of IFRS 8, for most companies, the reportable segments in the footnotes continue to be consistent with other sections of the annual report with only 12 companies (3%) providing inconsistent disclosures. Four of the six single segment companies exhibiting inconsistencies under IAS 14R continue to report in an inconsistent manner under IFRS 8. A few of our sample companies reporting inconsistent information under IAS 14R changed their disclosures in the first year of IFRS 8 adoption to yield consistent disclosures. One company changed its Management Report disclosures and three changed their segment footnote disclosures to achieve consistency. For example, in 2008, KBC Group’s segment footnote includes reportable segment information for three line of business segments (Banking, Insurance, and European private banking). The Management Report discusses four mixed segments (Belgium; Central and Eastern Europe and Russia business unit; Merchant banking and European private banking). Following adoption of IFRS 8, KBC’s segment footnote provides reportable segment information for the same four business units discussed in the 2008 and 2009 Management Reports (see Appendix B). In summary, under IAS 14R, most European blue chips had already achieved consistency between their primary segments and other sections of the annual report. Hence, the IASB’s expectation of increased consistency upon adoption of IFRS 8 did not materialize. It is, however, important to note that Nichols and Street (2002) identify several companies reporting primary segments on a basis inconsistent with the introductory section of the annual report (13%) and MD&A (11%) in their study of the first year of IAS 14R adoption. In contrast, we identify considerably lower levels of inconsistency in both the last year of IAS 14R use and the first year of IFRS 8 adoption. This decline in inconsistent reporting may be attributed to improved compliance with IFRS disclosures and/or the greater scrutiny that blue chip companies are subject to from auditors and regulators. 6.3. Types of reportable operating segments under IFRS 8 6.3.1. Single segment companies In 2009 (the first year IFRS 8 was mandatory), 21 (6%)5 of the 335 European blue chips in our sample report as a single segment (see Table 3). Our review of these companies’ annual reports suggests most are appropriately classified as single segment. Reporting as a single segment company, Wartsila discloses net sales for three products (Ship power, Power plants, and Services). The 2009 segment footnote explains why the company does not provide segment disclosures specifically stating that the Group President assesses the business as a whole, the Group is highly integrated, and that any segmented information would be of limited value to the user. While a detailed discussion of each of Wartsila’s three products is included in the Management Report, the only financial information provided is for net sales; this treatment is consistent with the company’s segment reporting. Two single segment companies, William Demant and Kone, do not provide segment information by product in their footnotes but include some product information in the Management Report. William Demant provides net revenue for three products (Hearing aids, Diagnostic instruments and Personal communication) in the Management Report. However, the only segment information disclosed in the footnotes is entity-wide geographic information. The 2009 policy footnote states, Based on the internal reporting model used by Management for the assessment of results and the use of resources, we have identified one operating segment, the development, manufacture and sale of products and equipment designed to facilitate people’s hearing and communication, which complies with our approach to the organisation and management of activities. In its 2009 policy footnote, Kone attempts to justify reporting as a single entity. The company argues that it provides services throughout the lifecycle of the equipment since most of the sales are converted to long-term maintenance contracts. However, within its annual report Kone includes sales by product (Services and New equipment) and market area (EMEA (Europe, Mid-East, and Africa), Americas, and Asia Pacific). 6.3.2. Multiple reportable operating segments As shown in Table 3, 64 (19%) of our sample companies determine operating segments based primarily on geographic location (includes mixed and matrix versions of geographic segmentation). Most companies, 250 (75%), determine operating segments based primarily on lines of business (includes mixed and matrix versions of line of business segmentation). Twentyone line of business companies and 15 geographic companies report using a matrix format. Eight primarily line of business and eight primarily geographic companies report mixed operating segments (i.e. a combination of line of business and geographic location); as noted previously, IAS 14R did not allow mixed primary segments. Table 3 provides the breakdown of reportable segment type by country and by industry. Previously, we discussed the matrix reporting of Autogrill. Electrolux provides another illustration of matrix reporting which is allowed under both IAS 14R and IFRS 8. In 2008 while reporting under IAS 14R, Electrolux’s segment footnote states,

5 These include: Intercell, Groupe Bruxelles Lambert, Telenet Group, H Lundbeck, William Dement, Kone, Wartsila, Atlantia, Azimut Holding, Enel Green Power, Tod’s, ASML, Bankinter, AstraZeneca, Red Electrica Group, Dragon Oil, RyanAir, Golden Ocean, Prosafe, Songa Offshore and UCB.

All Continental European blue chips By country/index Austria Belgium Denmark Finland France Germany Ireland Italy Luxembourg Netherlands Norway Spain Sweden Switzerland By industry Agricultural Mining Construction Manufacturing Transportation Communications Electric, gas & sanitary services Wholesale Trade Retail Trade Finance, Insurance, and Real Estate Services

Pure line of business

Matrix line of business

Mixed line of business

All line of business

Pure geographic

Matrix geographic

Mixed geographic

All geographic

Single segment

Total

221 67%

21 6%

8 2%

250 75%

41 12%

15 5%

8 2%

64 19%

21 6%

335 100%

15 8 14 19 28 23 12 26 2 13 9 22 17 13 3 13 15 93 8 10 6 5 7 52 9

1 1 2 2 2

2 4 3 4 1

1 1 2 2 0 1

1 9

3

2 2

1 1

7 1

2

15 9 14 20 30 26 15 28 4 15 13 25 22 14

4 5 2 1 4 1 0 4 1 5 6 3 3 2

3 14 15 105 8 13 9 5 7 61 10

1 4

2 1 4 2 2 1 1 0 2

1 3 1 1

0 2

15

4

2

4 2 1 2 7 5

4 3

2

4

1 1 2

4 7 3 1 9 4 3 7 2 6 6 5 5 2

1 3 2 2 0 0 2 4 0 1 3 2 1 0

20 19 19 23 39 30 20 39 6 22 22 32 28 16

1 4 0 21 0 8 7 1 3 12 7

0 3 1 9 2 1 2 0 0 3 0

4 21 16 135 10 22 18 6 10 76 17

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Table 3 Types of IFRS 8 operating segments reported by European blue chip companies (in the year of IFRS adoption). The italicized columns are totals of the prior columns and are ultimately added together for the total column.

89

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Table 4 European blue chip companies. Changing reportable operating segment type when adopting IFRS 8. Panel A: From IAS 14R single segment to IFRS 8 multiple segments IFRS 8 pure line of business From IAS 14R Single Segment to

IFRS 8 line of business matrix

3 Colorplast Amadeus IT Holding Criteria CaixaCorp

1 Gas Natural

Panel B: From IAS 14R line of business or geographic to IFRS 8 mixed segments IFRS 8 mixed line of business From IAS 14R line of business to RTL group SSAB From IAS 14R geographic to

IFRS 8 mixed geographic

2

2 RWE Paddy Power

0

2 Carrefour Italcementi

One company (UCB) changed from reporting multiple geographic segments under IAS 14R to reporting as a single segment under IFRS 8. For companies reporting pure line of business primary segments under IAS 14R, changes under IFRS 8 reportable segments in the year of adoption are based on: five pure geographic, eight matrix line of business, eight matrix geographic, two mixed line of business, and two mixed geographic. For companies reporting pure geographic primary segments under IAS 14R, changes under IFRS 8 reportable segments in the year of adoption are based on: seven pure line of business, one matrix line of business, four matrix geographic, two mixed geographic and one single segment.

“The segment reporting is divided into primary and secondary segments, where the five business areas6 serve as primary segments and geographical areas as secondary segments.” Under the heading “Primary reporting format – business areas” Electrolux’s footnote states, The Group has operations in appliances, floor-care products and professional operations in food-service equipment and laundry equipment. The operations are classified in five business segments. Products for the consumer-durables market, i.e., appliances and floor-care products, are reported in four geographical segments: Europe; North America; Latin America and Asia/Pacific, while professional products are reported separately. Electrolux’s 2009 description of the company’s segment reporting more clearly illustrates its matrix format: The Group has five reportable segments. Products for the consumer-durables market, i.e., appliances and floor-care products, have four reportable segments: Europe; North America; Latin America and Asia/Pacific. Products within appliances comprise mainly of refrigerators, freezers, cookers, dryers, washing machines, dishwashers, room airconditioners and microwave ovens. Professional products have one reportable segment. Matrix reporting is very useful. In both 2008 and 2009, Electrolux provides full primary/reportable segment data for not only its two lines of business (Consumer-durables and Professional markets) but also for four geographic regions within the Consumer-durables primary segment. Fig. 1 illustrates Electrolux’s matrix format. In a policy footnote regarding adoption of IFRS 8, the company states, “Electrolux did not change the reporting of operating segments as a consequence of the standard and the main impact was additional disclosures, e.g., sales per country.” In 2008 and 2009, the introductory annual report material and segment reporting are consistent. In its 2009 segment footnote, Electrolux states that its five reportable segments are regularly reviewed by the President and CEO, the Group’s CODM. Under the IFRS 8 management approach, detailed information is provided for all five segments. Under IAS 14R, Electrolux could have alternatively reported detailed primary segment data for only the company’s two lines of business. Upon adopting IFRS 8, several European blue chips changed their operating segment type. The most notable changes (i.e. to or from single segments and from line of business or geographic primary to mixed) are summarized in Table 4. As noted previously, IAS 14R requires companies with a mixed management structure to select either line of business or geographic regions as the basis of primary segments. The reporting of mixed operating segments is, however, now allowed under IFRS 8. RWE provides another illustration of a change to reporting under the now allowed mixed segment structure. In 2008, RWE reports five primary segments under IAS 14R based on line of business; the primary segments in the footnotes are consistent with other sections of the annual report. In 2009, RWE changes to a mixed management structure. Reflective of its new structure, RWE reports eight IFRS 8 segments based on a mix of regional markets, product lines within the regional markets, and separate business units (see Appendix B). This mix of geographic and line of business segments is consistent with other sections of the 2009 annual report. RWE’s 2009 mixed reporting would not have been allowed under IAS 14R.

6 Emphasis added. The ‘five business areas’ represent two lines of business. A matrix is used to provide information for four geographic areas within one of the lines of business.

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6.4. Has IFRS 8 increased the number of segments reported? 6.4.1. Has the number of companies claiming to operate in a single segment declined? When issuing IFRS 8, the IASB expected an increase in the number of reportable segments. Hence, it is important to determine if fewer companies report as a single segment under IFRS 8. In their last year of IAS 14R reporting, 23 sample companies report as single segments. In the year of IFRS 8 adoption, 197 of the 23 continue to report as single segments, and as reported in Table 4, four move to reporting multiple segments. Three of the four moving to reporting multiple segments disclose information for pure line of business segments (Colorplast, Amadeus IT Holding, and Criteria Caixa Corp). The remaining company (Gas Natural) reports using a matrix (based primarily on line of business). When adopting IFRS 8, only one company (UCB) moves from reporting multiple segments to reporting as a single segment. In summary, the number of companies previously reporting as a single segment under IAS 14R drops slightly from 23 to 20 under IFRS 8.8 Criteria Caixa Corp illustrates the move from single segment to multiple segment reporting. A 2008 footnote defines the company as engaged in the acquisition, sale and management of investments in other companies and indicates that the company’s internal management is not based on business segments. An executive summary in the 2008 annual report provides an overview of the company’s holding portfolio by Services, Insurance and specialized financial services and International banking. The three areas are consistent with an organization chart provided in the annual report. In 2009, Criteria Caixa’s segment footnote indicates that adoption of IFRS 8 requires the company to report segment information in the same manner as it is provided to management. Accordingly, the company discloses information for four reportable line of business segments (see Appendix B). The executive summary introducing the 2009 annual report is consistent with 2008 introductory material. The 2009 annual report discusses two business lines: Financial sector (including International banking) and Services. The organization chart includes Services – listed companies, Insurance, Services – nonlisted companies, International banking and Specialized financial services as business segments. In 2009, Criteria Caixa also discloses geographic information at the entity-wide level. Chr. Hansen Group (not tabulated)9 does not include a segment footnote in its statements for the year ended August 31, 2009. A footnote discussing new IFRSs states, IFRS 8 “Operating Segments” which was issued by the IASB and adopted by the EU in 2007. Disclosure of operating segments is only required for listed entities. The Standard will for that reason not have any effect on the Group’s annual report. On June 3, 2010, Chr. Hansen re-listed on NASDAQ OMX Copenhagen after five years of private ownership. Accordingly, when adopting IFRS 8 for the year ended August 31, 2010, the accounting policies footnote states, IFRS 8 “Operating Segments” according to which information regarding segments is requested on the basis of the management’s review. Implementation of the standard implies that in future segment information must be given for the three operating segments. The implementation of the standard has led to further specifications in the notes, but no changes in recognition and measurement. The 2009/2010 IFRS 8 footnote reports on three operating segments (see Appendix B). The company explains that the segments are based on the internal financial information received by senior management. The IFRS 8 operating segments are consistent with the introductory material and organization charts provided in the 2008/2009 and 2009/2010 annual reports. At the entity-wide level under IFRS 8, Chr. Hansen discloses revenue and non-current asset information for five geographic regions. As noted above, only one sample company previously reporting on multiple segments moves to reporting as a single segment under IFRS 8. In 2008, UCB provides IAS 14R disclosures for three primary geographic segments (see Appendix B). Addressing second tier reporting, UCB indicates that the Group operates in one business – Biopharmaceuticals. Both the company’s 2008 financial and operating review and its accounting policy footnote state that when the company adopts IFRS 8 in 2009 it will present one operating segment, biopharmaceuticals. UCB’s 2009 segment footnote provides support for reporting one operating segment. It states that the CODM reviews operating results and operating plans and makes resource allocation decisions on a company-wide basis. Under IFRS 8, UCB reports on major customers and provides additional entity-wide data for net sales by product (11 drugs and other) and net sales and assets for eight geographic areas (see Appendix B). The 2009 segment footnote is in line with the Management Report where matrix reporting is used to disclose product sales by geographic region. This later finding is highly relevant as it provides evidence that in part refutes concerns that adoption of IFRS 8 will result in a loss of geographic segment disclosures. First, only one company in our sample of European blue chips moves

7 These include: Intercell, Groupe Bruxelles Lambert, Telenet Group, H Lundbeck, William Dement, Kone, Wartsila, Atlantia, Azimut Holding, Enel Green Power, Tod’s, Bankinter, ASML, AstraZeneca, Red Electrica Group, Dragon Oil, RyanAir, Golden Ocean and Prosafe report as single segment companies during both their last year of reporting under IAS 14R and their first year of reporting under IFRS 8. 8 Songa also reports as a single segment under IFRS 8. Before adopting IFRS 8, the company reported under U.S. GAAP and SFAS 131. 9 Chr Hansen Group is not included in Table 3 because the company was not listed the year preceding IFRS 8 adoption. IAS 14R is not applicable for non-listed companies.

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Table 5 Impact of IFRS 8 adoption on European blue chip companies. A comparison of the number of primary segments disclosed during the last year of IAS 14R reporting and the number of reportable operating segments disclosed during the first year of IFRS 8 reporting.

All companies By country/index Austria Belgium Denmark Finland France Germany Ireland Italy Luxembourg Netherlands Norway Spain Sweden Switzerland

No change

Increase

Decrease

Number of companies in sub-sample (n)

Average number of primary segments IAS 14R (mean)

Average number of reportable segments IFRS 8 (mean)

Average increase significant at

201 62%

88a 27%

37b 11%

326 100%

3.84

4.19

p = .0001c

0 4 1 4 3 3 0 4 1 2 0 6 5 4

20 19 18 23 39 27 20 39 6 22 17 32 28 16

3.20 4.00 2.83 3.43 4.31 4.26 2.75 4.15 3.67 3.77 4.18 3.72 4.29 4.19

3.50 4.50 2.89 3.48 5.00 4.70 3.75 4.54 4.33 4.00 4.59 4.09 4.29 3.94

16 9 15 13 19 14 12 24 3 15 13 17 19 12

4 6 2 6 17 10 8 11 2 5 4 9 4 0

a

For the 88 companies with an increase in the number of segments, the increase on average (mean) is 1.90 segments. For the 37 companies with a decrease in the number of segments, the decrease on average (mean) is 1.51 segments. A t-test (t = 9.36) indicates the mean increase from the last year of reporting under IAS 14R to the first year of reporting under IFRS 8 is significant at p = 0.0001. Excluding the pre-adoption single segment companies (n = 303), the average number of reportable segments increases from 4.06 under IAS 14R to 4.40 under IFRS 8. A t-test (t = 8.78) again indicates the increase is significant at p = 0.0001. b c

from reporting on geographic operating segments to reporting as a single segment. Furthermore, the decision usefulness of UCB’s IAS 14R geographic segment disclosures is questionable given the broad groupings (North America, Europe and Rest of World (including Japan and Emerging Markets)). In contrast, the entity-wide geographic disclosures provided under IFRS 8 are based on finer groupings (including six individual European countries) and hence are likely more decision useful, especially in light of the matrix reporting provided in the Management Report. Furthermore, only seven sample companies move from pure geographic primary segments under IAS 14R to pure line of business reportable segments under IFRS 8. Of these, one provides identical information (the same geographic areas and the same items of geographic information disclosed) under both IAS 14R and IFRS 8 (Erste). For the other six companies, the number of items of geographic information disclosed decreases with the change from primary segment information to entity-wide information. One of the six companies decreases the number of geographic areas disclosed from nine countries to three countries (TeliaSonera), one retains the same geographic areas (Grafton), one increases the number of geographic areas by including additional regions (Fresenius Medical Care) and three increase the number of geographic areas by including country specific information (Autogrill, Schneider Electric, and Glanbia). For example, under IAS 14R, Glanbia provides primary segment information (seven items) for Ireland and International. Under IFRS 8, Glanbia provides revenue and asset information for Ireland, U.K., Rest of Europe, USA and Other. Again, these findings refute concerns regarding the widespread loss of geographic information under IFRS 8, and provide additional evidence of an improvement in the fineness of the geographic disclosures provided by several companies. 6.4.2. Overall increase in the number of reportable operating segments The IASB’s expectation, as articulated in the IFRS 8 Basis for Conclusions, is that moving to the management approach will result in an increase in the number of reportable segments. Table 5 summarizes the change in the number of operating segments reported by European blue chips moving from IAS 14R to IFRS 8. In the year of adoption, the majority of our sample companies (201; 62%) report the same number of segments. As anticipated by the IASB, over one-quarter (88; 27%) report more segments. However, 37 (11%) report fewer operating segments. The only country/index with a decline, on average, in reportable segments is Switzerland (4.19 to 3.94). On average, the number of operating segments reported under IFRS 8 increases from 3.84 to 4.19. A one-tail t-test indicates the increase is statistically significant (p = .0001; t = 9.36). Excluding companies reporting as single segments under IFRS 8 (n = 303), the average number of reportable operating segments increases from 4.06 under IAS 14R to 4.40 under IFRS 8. A t-test (t = 8.78) again indicates that the increase is statistically significant (p = 0.0001). Prysmian illustrates an increase in segments. In 2008, Prysmian reports two primary segments: Energy cables and systems and Telecom cables and systems. In 2009, the company reports on five operating segments. A 2009 footnote explains, The criteria used for identifying reportable segments are consistent with the way in which management runs the Group. In particular, the information is structured in the same way as the report periodically reviewed by the Board of Directors for the purposes of managing the business. The Board of Directors reviews operating performance by macro

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type of business (Energy and Telecom) and, in the case of the Energy segment, by sales channel (Utilities, Trade & Installers, Industrial). Thus, disaggregation of the Energy segment by sales channel explains the increase in reportable segments (see Appendix B). In the 2009 annual report, the Directors’ Report is consistent with five operating segments. The same disaggregation of Energy appears in the 2008 Directors’ Report. In its first year of IFRS 8 adoption, RTL Group also reports on more segments. In 2008, RTL reports on three primary segments. The Directors’ Report discusses revenue and EBITA results for the three segments. Additionally, the Report discusses revenue and EBITA for 10 profit centers and reviews the performance of each center in detail. In 2009, under IFRS 8, RTL reports on seven mixed segments (see Appendix B). A 2009 footnote explains, The Group has 16 profit centres, each one led by a CEO managing the operations in television, radio and diversification businesses in one of the 11 countries where the Group owns interests in 45 channels and 30 stations; FremantleMedia and UFA Sports operate an international network in the content business. All the reported segments meet the quantitative thresholds required by IFRS 8. The 2009 Directors’ Report is consistent with the segment footnote and provides a detailed performance assessment for each of the seven mixed segments. Again, a move to matrix reporting enables users to better see the RTL group through the eyes of management. In 2008 under IAS 14R, Allianz reports on five primary line of business segments that where appropriate, were subsequently organized by geographic area. A 2009 footnote explains the move to reporting on 11 segments (matrix format) under IFRS 8. The 2009 matrix format results in Allianz reporting five operating segments in the Property-Casualty line of business and five segments in the Life/Health line of business (see Appendix B). Asset management is the 11th reportable segment. In the 2009 annual report (p. 60), Allianz presents its segment and business division structure; the organization chart is consistent with the 2009 IFRS 8 disclosures. In 2008, the Management Report is also consistent with the IAS 14R primary segments. While Allianz’s IFRS 8 reporting appears more consistent with the way the company is managed and more decision useful, it is important to note that the same reporting was appropriate under IAS 14R. Although mixed segments are prohibited under IAS 14R, matrix reporting is in compliance with IAS 14R as primary segment data for Allianz would have been provided for each line of business. While the geographic split of the Property-Casualty and Life/Health line of business primary segments is not required by IAS 14R, the additional disclosures would likely have better enabled users to see the company through the eyes of management. Our review suggests some companies may have interpreted matrix reporting as mixed and accordingly unacceptable under IAS 14R. It is also plausible that a few companies utilized the IAS 14R requirement that companies report primary segments based on either line of business or geography to limit their segments disclosures. 6.5. Information reported for primary/reportable segments under IAS 14R and IFRS 8 – Sales and Profitability For our sample companies (excluding single segment), Table 6 summarizes the specific items of primary segment data disclosed during the last year of applying IAS 14R and the items of reportable operating segment data disclosed during the first year of applying IFRS 8. Including multiple measures of segment profitability, a total of 2673 items are disclosed under IAS 14R (average of 8.79 items) and a total of 2572 items are disclosed under IFRS 8 (average of 8.38 items). The decrease is significant (t = 1.82, p = 0.035). Hence, at the reportable segment level, our findings do not support the IASB’s expectation that IFRS 8 will result in the disclosure of more items of segment information. Following IFRS 8 adoption, as required by the standard, all multi-segment companies in our sample disclose at least one measure of profitability and sales/revenues from external customers. Unlike IAS 14R, IFRS 8 does not define the measure of reportable segment profitability to be disclosed. As summarized in Table 7 (Panel A), 236 of 314 companies (75%) disclose one measure of segment profitability while two measures are disclosed by 58 (19%) companies and three measures are disclosed by 20 (6%) companies. In the year prior to adopting IFRS 8, 250 companies (82% of 303) report one measure of segment profitability, 41 companies (14%) report two measures and 12 companies (4%) report three measures. The increase in the number of companies reporting more than one measure of segment profitability is significant (t = 2.38, p = 0.017). This finding supports the IASB’s expectation that under IFRS 8, companies will report more information regarding segment profitability. Most of the segment profitability measures disclosed are non-IFRS measures. Of these, the most common are: operating profit (segment result or operating income – 180; 57%), EBIT (earnings before interest and tax – 73; 23%), EBT (earnings before tax – 56; 18%), and EBITDA (earnings before interest, tax, depreciation, and amortization – 50; 16%). Only 53 companies (17%) disclose a segment profitability measure defined by IFRS – net income. This finding is relevant, as some commentators on ED 8 as well as the EU have expressed concerns regarding the reporting of non-IFRS segment profitability measures. In comparison, in their last year of reporting under IAS 14R, 57% disclose operating profit, 19% EBIT, 20% EBT, 8% EBITDA and 16% net income. It is important to highlight that under IAS 14R operating profit is defined; this is not the case under IFRS 8.

94 Table 6 Number of European blue chip companies disclosing specific items of primary/reportable segment information. Based on last year of IAS 14R reporting and first year of IFRS 8 reporting (excludes single segment companies). Item disclosed

a

IFRS 8

Number of companies disclosing

Percentage of companies n = 303a

Number of companies disclosing

Percentage of companies n = 306b

303 291 264

100% 96% 87%

306 284 216

100% 93% 71%

303 169 64 34 257 125 49 173

100% 56% 21% 11% 85% 41% 16% 57%

306 165 69 43 263 92 62 170

100% 54% 23% 14% 86% 30% 20% 56%

125 244

41% 81%

92 223

30% 73%

90 55 32 11 11 8

30% 18% 11% 4% 4% 3%

86 44 29 9 10 5

28% 14% 9% 3% 3% 2%

335 – 8 U.S. GAAP companies prior to adopting IFRS 8 – 1 company not listed prior to adopting IFRS 8 – 23 single segment IAS 14R companies. 335 – 8 U.S. GAAP companies prior to adopting IFRS 8 – 1 company not listed prior to adopting IFRS 8 – 20 single segment IFRS 8 companies. c See Table 6 for more detailed information on the specific items disclosed and reconciliation to the consolidated income statement. d The disclosure of segment liabilities (t = 5.09, p = 0.0001), equity method income and equity method investment (t = 2.90, p = 0.004), and capital expenditures (t = 2.22, p = 0.03) decline significantly in the first year of IFRS 8 adoption. e Profit/loss information is required under IFRS 8 if it is included in the measure of segment profit/loss reviewed by chief operating decision maker, or otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment profit/loss. f Balance sheet information is required under IFRS 8 if it is included in the measure of segment assets reviewed by chief operating decision maker, or otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment assets. b

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Items required under IAS 14R and IFRS 8 Profitability measurec Segment assets (under IFRS 8, if regularly provided to chief operating decision maker) Segment liabilities (under IFRS 8, if regularly provided to chief operating decision maker)d Profit/loss information required under IFRS 8 if certain conditions mete Revenue from external customers (also IAS 14R) Revenues from transactions with other operating segments of the same entity (also IAS 14R) Interest revenue Interest expense Depreciation/amortization (also IAS 14R) Equity method income (also IAS 14R)d Income tax expense/benefit Material non-cash items other than depreciation and amortization (impairment) (also IAS 14R) Balance sheet information required under IFRS 8 if certain conditions metf Equity method investmentd Additions to non-current assets (capital expenditures required under IAS 14R)d Voluntary disclosures Additional income statement detail Additional balance sheet detail Cash flow information R&D expense Restructuring expense Exceptional items

IAS 14R

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Table 7 Reportable operating segment disclosures under IFRS 8 and reconciliation to consolidated financial statements. Profitability measures, total assets and total liabilities. Panel A: Profitability measure Number of profitability measures reported by each company (n = 314)a

One 236 (75%)

Two 58 (19%)

Non-IFRS measure

Specific profitability measures disclosedb

a. Number of companies disclosing b. Segment profitability measure same as an item on the consolidated income statement c. Segment profitability measure does not agree to a line item on consolidated income statement/(a–b)c d. Segment profitability measure reconciled in footnote to consolidated income statement/(if amount did not agree in c)

Three 20 (6%) IFRS measure

Operating profit

EBIT

EBT

EBITDA

Net income

180 (57%) 169

73 (23%) 68

56 (18%) 55

50 (16%) 33

53 (17%) 53

11

5

1

17

0

10

4

0

17

0

Panel B: Total assets

Assets disclosed reconciled to total assets

Assets disclosed not reconciled

Assets not disclosed footnote comment

Assets not disclosed no comment

Total

Number of companies

238

49d

13e

14

314

Panel C: Total liabilities

Liabilities disclosed reconciled to total liabilities

Liabilities disclosed not reconciled

Liabilities not disclosed footnote comment

Liabilities not disclosed no comment

Total

Number of companies

173

45f

22g

74

314

a

335–21 IFRS 8 single segment companies. Operating profit includes segment result and operating income; EBITDA: earnings before interest, taxes, depreciation and amortization; EBIT: earnings before interest and taxes; EBT: earnings before taxes. c The 34 non-IFRS profitability measures not appearing on the consolidated income statement are reported by 30 companies. Of the 30, 15 report a second profitability measure that is also reported on the consolidated income statement. Of the remaining 15, 13 provide a separate reconciliation of the segment profitability measure to a measure reported on the consolidated income statement (e.g., EBIT, EBT or net income). Two companies do not reconcile any of their segment profitability measure(s) to the consolidated income statement: Linde (operating profit and EBIT) and Banca Monte Dei Paschi (EBT). d Of the 49 companies disclosing assets that do not reconcile to total assets on the consolidated balance sheet: 12 include a footnote describing the assets included in the disclosed amount, 29 report specific assets rather than total assets, three provide average total assets, and five do not comment. e Thirteen companies that do not disclose a segment asset measure comment that segment assets are not reviewed by management. f Of the 45 companies disclosing segment liabilities that do not reconcile to total liabilities on the consolidated balance sheet: nine describe the liabilities included in the segment measure, 24 report specific liabilities rather than total liabilities, six disclose liabilities and equity combined, and six do not comment. g A statement is made along the line of liabilities are “not allocated” or “not reported” by segment, “debt is managed centrally,” etc. b

6.6. Reconciliation of segment profitability measure to the consolidated income statement As noted above, some commentators to ED 8 express concern that, unlike IAS 14R, the new standard does not specify/define a measure of profitability; they believe that as a result comparability is diminished. The IASB believes the required reconciliation to the consolidated income statement addresses this concern. As shown in Table 7, most of the non-IFRS segment profitability measures tie directly to a number reported on the consolidated income statement (Panel A, item b). Most of the remaining non-IFRS segment profitability disclosures are, as required by IFRS 8, reconciled to the consolidated income statement (Panel A, item c). Only two sample companies do not reconcile their measure(s) of segment profitability to the consolidated income statement: Linde (operating profit and EBIT) and Banca Monte Dei Paschi (EBT). 6.7. Information reported for primary/reportable segments under IAS 14R and IFRS 8 – Segment assets and liabilities – and reconciliation to consolidated amounts As noted previously, some commentators to ED 8 express concern that reportable segment disclosures will decline, most notably segment liabilities. As shown in Table 6, a comparison of reporting under IAS 14R and IFRS 8 confirms this expectation. Since these disclosures are now required only if regularly reported to the CODM, IFRS 8 results in a slight decline in disclosure of segment assets (96–93%) and a significant decline in disclosure of segment liabilities (87–71%; t = 5.09, p = 0.0001). Disclosure of equity method income and equity method investment (41–30%; t = 2.90, p = 0.004) as well as capital expenditures (81–73%; t = 2.22, p = 0.03) also decline significantly. Table 7 summarizes the reconciliation (or absence thereof) of segment assets (Panel B) and liabilities (Panel C) to the consolidated balance sheet. Of the 287 companies (238 + 49) providing a segment asset measure, 49 do not provide a

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reconciliation to the balance sheet. Of the 314 multi-segment companies, 218 (173 + 45) disclose a measure of segment liabilities, yet 45 of these do not reconcile the segment measure to the consolidated balance sheet. Only 13 of the companies that do not disclose a segment asset measure specifically comment that assets are not reviewed by management at the segment level. Twenty-two of the companies not disclosing segment liabilities specifically comment that liabilities are not reviewed by management. For example, Schneider Electric states, . . . performance assessments are notably based on Earnings Before Interest, Taxes, Amortisation of purchase accounting intangibles and Restructuring costs (EBITAR) . . . The Management Board does not review assets and liabilities by Business. 6.8. Information reported for primary/reportable segments under IAS 14R and IFRS 8 – Voluntary Disclosures As reported in Table 6, during their first year of IFRS 8 reporting, several sample companies provide voluntary reportable segment disclosures. For example, 86 (28%) report on additional income statement items, and 44 (14%) provide information on additional balance sheet items such as multiple measures of segment assets. Despite user claims that the information is relevant, only nine (3%) disclose research and development (R&D) information by reportable segment.10 This disclosure represents a slight decline from 11 (4%) during their last year of reporting under IAS 14R. An AICPA 1994 Special Committee Report and AIMR 1993 position paper argue in favor of disclosing R&D by segment, and prior to issuing SFAS 131, the FASB (1996) noted that disclosure of R&D provides users with information about the operating segments in which a company is focusing product development. However, neither SFAS 131 nor IAS 14R requires disclosure of R&D; the same holds for IFRS 8. Since a considerable number of the companies comprising our sample are in the manufacturing industry (see Table 1), more companies would be expected to disclose R&D by reportable segment to provide relevant information to users. IAS 7, Cash Flow Statements, encourages disclosure of segment cash flow information noting that this information is relevant to understanding the enterprise’s overall financial position, liquidity, and cash flows (IASC, 1997, (50(d)). The findings of Street and Stanga (1989) support this position. However, in the first year of IFRS 8 adoption, only 29 (9%)11 sample companies voluntarily disclose segment cash flow data. This number represents a slight decline from the 32 (11%) reporting segment cash flow data during their last year of IAS 14R reporting. To illustrate, Ackermans & van Haaren provides extensive voluntary reportable segment information under IFRS 8. The 2009 reportable segments are based on lines of business (see Appendix B). For each segment, the company provides a detailed income statement, balance sheet and cash flow statement presenting the same categories and detail found in the consolidated statements. Thus, each major category of required reportable segment information is further disaggregated. For example, other operating income is separated into four sub-classifications. Operating expenses are separated into eight sub-classifications. In line with the recommendations of IAS 7, Ackermans & van Haaren’s segment cash flow statement provides information disaggregated into operating, investing, and financing activities. GN Store Nord also provides extensive voluntary reportable segment disclosure. For each reportable segment (GN Netcom and GN ReSound), the company provides a complete income statement, a detailed balance sheet (with 11 asset and six liability classifications) and cash flow from operating and investing activities. GN Store Nord also provides a reconciliation of expensed development costs detailing incurred development costs, capitalized development costs, and amortization and depreciation. 6.9. Entity-wide disclosures under IFRS 8 compared to IAS 14R second tier disclosures IFRS 8 requires entity-wide segment disclosures about products and services, geographic areas and major customers, even if the company reports as a single operating segment. Entity-wide disclosures are not required to be reported separately if the information is already included in the reportable segment disclosures. Table 8 indicates that entity-wide geographic, product/services, and major customer disclosures are provided by 257 (77%), 56 (17%), and 19 (6%) of the 335 sample companies, respectively. In the year of IFRS 8 adoption for those companies reporting on line of business based primary/reportable segments, on average, the number of geographic areas reported on as second tier/entity-wide data increases significantly from 4.68 (IAS 14R) to 5.35 (IFRS 8) (t = 2.19, p = 0.014, not tabulated). This finding refutes concerns that IFRS 8 will result in a loss of geographic segment information. Under IAS 14R, for companies reporting line of business primary segments, geographic second tier disclosures are required for sales/revenues, assets, and capital additions/expenditures. IFRS 8 drops the capital expenditures requirement of IAS 14R. The impact is illustrated in Table 9, which provides a comparison of disclosures provided by sample companies during their last year of IAS 14R reporting and their first year of IFRS 8 reporting. While the percentage of companies reporting

10 These include: four German companies (BASF, Bayer, Beiersdorf and Fresenius Medical Care), one Dutch company (DSM), one French company (Euro Aeronautic Defence), two Swiss companies (Lonza and Roche Holdings) and one Swedish company (Volvo). 11 These include seven German companies (Bayer, Beiersdorf, E.ON, Fresenius Medical Care, K&S, Merck, and Siemens), five Swedish companies (Electrolux, Scania, Securitas, Skanska, and SSAB), four French companies (Bouygues, Cie de Saint-Gobain, Renault, and Veolia Environment), three Spanish companies (Abengoa, Endeda, and Obrascon), three Belgium companies (Ackermans & van Haaren, Fortis, and Solvay), three Danish companies (AP Moller, GN Store, and NKT Holdings), two Italian companies (Exor and Mediaset), one Finnish company (Orion) and one Swiss company (Holcim).

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Table 8 European blue chip companies providing entity wide segment disclosures in year of IFRS 8 adoption. Product disclosures All companies 56 (17%) By type of reportable operating segment 26 (12%) Line of business Geographic 12 (29%) Matrix or Mixed 12 (23%) Single segment 6a (29%)

Geographic disclosures

Major customer disclosures

Total companies in sample/subsample

257 (77%)

19 (6%)

335

202 (91%) 7 (17%) 36 (69%) 12 (57%)

11 (5%) 3 (7%) 0 (0%) 5 (24%)

221 41 52 21

a See for example Telenet. Although the company operates in a single line of business segment and one geographic area, at the entity-wide level, Telenet discloses revenues for six products.

Table 9 European blue chip companies disclosing specific items of entity-wide geographic information. Comparison of disclosures under last year of applying IAS 14R and first year of applying IFRS 8. Item disclosed:

IAS 14R Number of companies

Required under both IAS 14R and IFRS 8 243 Sales/revenue Assets 221 Item required only under IAS 14R 154 Capital additionsb Voluntary disclosures 40 Profitability measure 24 Liabilities 12 Specific asset(s) Detailed income statement items 12 Depreciation 12 2 Research and development Other 16

IFRS 8 Percentage of companies n = 326a

Number of companies

Percentage of companies n = 326

75% 68%

250 220

77% 67%

47%

42

13%

12% 7% 4% 4% 4% 1% 5%

18 9 4 6 6 2 4

6% 3% 1% 2% 2% 1% 1%

Under IAS 14R, 20 companies report line of business (products) as secondary segment information in the year prior to adopting IFRS 8. Of these, in the first year of IFRS 8 adoption, two no longer report product information; five report only sales information; two change to line of business reportable segments; five change to matrix reporting; and six provide the same items of product information as they did under IAS 14R. a 335 – 8 U.S. GAAP companies prior to adopting IFRS 8 – 1 company not listed prior to adopting IFRS 8. b The disclosure of capital additions (t = 10.30, p = 0.0001) declined significantly in the first year of IFRS 8 adoption.

geographic sales/revenues, assets, and various voluntary disclosures remains relatively comparable, disclosure of capital expenditures drops significantly (t = 10.30, p = 0.0001) from 154 (47%) to 42 (13%). This finding is relevant since it supports the position of commentators on ED 8, as well as the EU, that the adoption of IFRS 8 will yield a decline in geographic segment disclosures. A new feature of IFRS 8 is the requirement to provide entity-wide geographic disclosures for the country of domicile and for any individually material countries. The effect is shown in Table 10 (Panel A), which compares the types of geographic groupings utilized by sample companies during their last year of reporting under IAS 14R and their first year of reporting under IFRS 8. The number of companies utilizing only the broad, vague groupings for which IAS 14 and IAS 14R were criticized drops significantly (t = 2.12, p = .035) from 41 (17%) to 25 (10%). This decline is attributable primarily to several companies moving to country specific disclosures at least for the country of domicile. Companies reporting country specific disclosures increases from 32 (13%) to 44 (18%), and companies reporting a mix of country specific disclosures and regions increases from 59 (25%) to 69 (29%). An overall test of improved fineness via an increase in country specific disclosures is significant (t = 2.05, p = 0.04). Examples of the geographic groupings used for this analysis appear in Panel B of Table 10. Since opponents of IFRS 8 have expressed concern regarding the potential loss of geographic data following its adoption, it is important to note that in their first year of IFRS 8 adoption nine companies with reportable segments based on geographic regions disclose additional geographic entity-wide disclosures. For example, Bekaert provides disclosures for four reportable geographic segments under IFRS 8 (see Appendix B). For each reportable segment, the company reports 17 separate items.12

12 The items disclosed include net sales; operating result before non-recurring items; non-recurring items; EBIT; depreciation and amortization; impairment losses; EBITDA; segment assets; segment liabilities; capital employed; average capital employed; return on average capital; capital expenditures on property, plant and equipment; capital expenditures on intangible assets; share in the results of joint ventures and associates; investment in joint ventures and associates; and employees at year end.

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Table 10 Comparison of geographic segment disclosures under IAS 14R and IFRS 8 (includes companies reporting as single segment or line of business primary segment companies under IAS 14R).

Panel A: Types of geographic disclosures None Country of domicile/other Country specific Mix of countries and regions Country of domicile/regions Broad regionsa Total Company

Country

Panel B: Country of domicile/other Italy Atlantia Luxembourg Foyer Panel C: Country specific EAD France Abertis Spain Panel D: Mix of country specific and regions Austria OMV Switzerland UBS Panel E: Country of domicile and regions France Accor Volkswagen Germany Panel F: Broad regions Denmark DSV Finland Konecranes

IAS 14R

IFRS 8

28 (12%) 14 (6%) 32 (13%) 59 (25%) 64 (27%) 41 (17%) 238 (100%)

28 (12%) 11 (5%) 44 (18%) 69 (29%) 61 (26%) 25 (10%) 238 (100%) Examples of geographic segment disclosures Italy/Rest of World Luxembourg/Rest of Europe France/Germany/U.K./Spain/Other Countries Spain/France/U.K./Chile/Others Austria/Germany/Romania/Rest of CEE/Rest of Europe/Rest of World Switzerland/U.K./Rest of Europe/USA/Asia Pacific/Rest of World France/Other Europe/North America/Latin America & Caribbean/Rest of World Germany/Other Europe/North America/South America/Asia & Oceania Europe/North America/Rest of World Europe, Middle East & Africa/Americas/Asia-Pacific

Panel A: n = 238 (244 – 6), see Table 1: single segment companies 21 + line of business operating segment companies 223 = 244. Pre-IFRS 8 adoption U.S. GAAP companies: single segment 1 + line of business 5 = 6. a The number of companies using broad, vague groupings declined significantly in the first year of IFRS 8 adoption (t = 2.12, p = 0.35).

Bekaert also provides entity-wide geographic disclosures (revenues and non-current assets) for the country of domicile and two material countries.13 In 2008 under IAS 14R Bekaert reports on three primary lines of business segments. Second tier information (net sales, total assets and capital expenditures) is provided for four broad geographic regions (i.e. the 2009 operating segments); no individual country specific information is provided. Thus, for Bekaert, adoption of IFRS 8 results in more, not less, geographic information. Furthermore, the country specific entity-wide data provided under IFRS 8 is likely more decision relevant to financial statement users than the broad geographic groupings provided as second tier data under IAS 14R. As shown in Table 8, 19 (6%) of the sample companies report on major customers. For example, the Roche Group (2009) discloses that, The US national wholesale distributor, AmerisourceBergen Corp., represented approximately 6 billion Swiss francs (2008: 6 billion Swiss francs) of the Group’s revenues. Approximately 82% of these revenues were in the Pharmaceuticals operating segment, with the residual in the Diagnostics segment. The Group also reported substantial revenues from the US national wholesale distributors. Several additional sample companies mention major customers simply noting that, while the company has significant customers, it does not receive revenue from a single external customer equaling 10% or more of total revenue (e.g., UCB).

6.10. Disclosure of the identity of the CODM Based on preliminary reviews of IFRS 8 disclosures, some regulators caution companies on specific aspects of their disclosures. Addressing the findings of the NZ Securities Commission, Ng (2010) highlights the importance of identifying the CODM. Ng posits that when the CODM is identified as the Board of Directors, it should be normally an executive board responsible for operating and resource allocation decisions. If the Board is identified as the CODM and the directors are non-executive and responsible for strategy rather than for making operating decisions, the company may receive questions from the NZ Securities Commission.

13

See also Schaeller-Bleckmon, Hennes & Mauritz, Holcim, Schibsted, Subsea 7, Synthes, Unilever and Vestas Wind Systems.

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Of our 335 sample companies, 120 (36%) disclose the identity of the CODM(s) in the segment footnotes. The specified identities include the Board of Directors, a high-level management group (e.g., executive committee, management board, executive board, executive management team, etc.), and an individual (Chief Executive Officer, president, general manager). Nine (3%) sample companies specify only the Board of Directors as the CODM.14 Most of these provide explanations in line with Ng’s recommendations. For example, Cargotec indicates the company’s CODM, “is the Board of Directors, who makes the strategic decisions. The Board of Directors is responsible for allocating and assessing performance of operating segments.” Dragon Oil, a single segment company, states, The Group is managed as a single business unit and the financial performance is reported in the internal reporting provided to the Chief Operating Decision-maker (“CODM”). The Board of Directors (“BOD”), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CODM that makes strategic decisions. Another example (e.g. Prysmian) of identifying the Board of Directors as the CODM and explaining the rationale thereof is provided in Section 6.4.2.

7. Summary and conclusions In 2006, IFRS 8 was issued amid concerns regarding adoption of what the Economic and Monetary Affairs Committee of the European Parliament labeled the ‘alien’ U.S. management approach. The IASB responded in part by agreeing to a postimplementation review. In 2008, the impetus for a review of IFRS 8 gained momentum when the IFRS Foundation Trustees amended the IASB’s Due Process Handbook to, inter alia, formalize the process of conducting post-implementation reviews of major projects. Presently, the IASB is conducting a post-implementation review of IFRS 8. Thus, the findings of our review of the segment disclosures of European blue chips during their last year of IAS 14R reporting and first year of IFRS 8 reporting are policy relevant as they may inform the post-implementation review. Our study addresses how convergence with the North American management approach changed segment reporting in Europe. Our research questions focus on the anticipated benefits articulated by the IASB in the Basis for Conclusions for IFRS 8. Our research questions also consider concerns expressed by regulators including the European Commission. Our study provides several findings relevant to the assessment of IFRS 8 by the IASB. Under IFRS 8, on average, companies report significantly more operating segments. However, the majority of European blue chips report the same number or fewer segments. We also find a significant decrease in the average number of items of reportable segment information disclosed. While the largest decline is for segment liabilities, equity method income, equity method investment and capital expenditures also decline significantly. We find a significant increase in companies reporting more than one measure of segment profitability. While most of the profitability measures reported are non-IFRS measures, the majority tie directly to a number reported on the consolidated income statement. Almost all the remaining non-IFRS segment profitability disclosures are, as required by IFRS 8, reconciled to the consolidated income statement. While we do not identify an improvement in consistency of reportable segment disclosures with other sections of the annual report under IFRS 8, this is due to the high level of consistency previously achieved under IAS 14R (e.g. 97% versus 96%). Refuting critics’ claims regarding the potential loss of geographic segment data under IFRS 8, we find a significant improvement in the fineness of geographic groupings disclosed at the entity-wide level. Specifically, the number of companies utilizing only the broad, vague groupings for which IAS 14R was criticized drops significantly; the decline is primarily attributable to providing country specific disclosures at least for the country of domicile. For companies reporting line of business reportable segments under IFRS 8, on average, the number of geographic areas reported on as entity-wide data increases significantly. We identify only one company moving from reporting multiple geographic segments under IAS 14R to reporting as a single segment under IFRS 8. Furthermore, an argument can be made that the IFRS 8 entity-wide geographic disclosures for this company are more decision useful than the information based on the broad, vague groupings reported on as IAS 14R operating segments. While the percent of European blue chips reporting entity-wide geographic revenues, assets, and various voluntary disclosures remains relatively comparable, disclosure of capital expenditures drops significantly. A limitation of our study is that we examine the segment disclosures of European blue chips. These companies are subject to substantial regulatory scrutiny and audited by the world’s largest international firms. As such our findings may not be generalizable to smaller European companies and companies in other regions of the world. Accordingly, future research is needed to examine the application of IFRS 8 by smaller European companies and companies applying IFRS in other regions of the world. Future research is also needed to address the application of IFRS 8 beyond its first year of adoption and to expand the vast body of academic research on the application of the SFAS 131 management approach to non-North American samples.

14

These include Grafton, Dragon Oil, Swisscom, Abertis, Prysmian, Metso Corp, Kone, TDC, and Cargotec.

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Appendix A. European Blue Chip sample companies by country stock index Austria (ATX) Andritz Austrian Post CA Immoblien Invest Conwert Immoblien Invest Erste EVN Immofinanz Intercell OMV Raiffeisen International RHI Schaeller-Bleckmon Semperit Strabag SE Telekom Austria Verbund Vienna Insurance Group Voestalpine Weinerberger Zumtobel Belgium (BEL 20) Ackermans Anheuser-Busch Befimmo-Sicafi Belgacom Cofinimmo Colruyt Delhaize Group Dexia Fortis Groupe Bruxelles Lambert KBC Bank Mobistar Nat Porte Deville NV Bekaert Omega Pharma Solvay Telenet Group UCB Umicore Denmark (OMXC 20) AP Moller Carlsberg Chr Hansen Holding Coloplast Danske Bank DS Norden DSV FL Smiath GN Store H Lundbeck NKT Holding Novo Nordisk Novozymes Sydbank TDC Topdanmarks TrygVesta Vestas Wind Systems William Demant Finland (OMXH 25) Cargotec Elisa Group Fortum Kemeria Kesko Kone Koneranes Metso

Neste Oil Nokian Tyres Nordea Orion Outokumpu Oyj Outotec Oyi Pohjala Bank Rautaruuki Sampo Sanoma Stora Enso TeliaSonera Tieto Enator UPM Wartsila France (CAC 40) Accor Air Liquide Alcatel-Lucent Alstom AXA BNP Paribas Bouygues CapGemini Carrefour Credit Agricole Electricite de France Essilor Euro Aeronautic Defence FR Vallourec France Telecom Gaz de France Group Danone Lafarge L’Oreal LVMH Michelin Natixis Pernod-Ricard Peugeot PPR Publicis Groupe Renault Saint-Gobain Sanofi-Aventis Schneider Electric Societe Generale STMicroelectronics Suez Environment Technip Total Unibail-Rodamco Veolia Environment Vinci Vivendi Germany (DAX 30) Adidas Allianz BASF Bayer Beiersdorf BMW Commerzbank Daimler Chrysler Deutsche Bank Deutsche Boerse Deutsche Lufthansa Deutsche Post Deutsche TeleKom E.ON

Fresenius Medical Care Fresenius SE Heidelberg Cement Henkel Infeon Technologies K&S Linde MAN Merck Metro Munich Re RWE SAP Siemens ThyssenKrupp Volkswagen Ireland (ISEQ 20) Allied Irish Banks Aryzta Bank of Ireland C&C Group CRH DCC Dragon Oil Elan FBD Holdings Glanbia Grafton Greencore Independent News Irish Life Kerry Group Kingspan Group Paddy Power Ryanair Smurfit Kappa United Drug Italy (MIB 30) A2A Ansaldo STS Assicurazioni General Atlantia Autogrill Azimut Holding Banca Intesa Banca Monte Dei Paschi Banca Popolare di Milano Banco Popolare Societa Bulgari Buzzi Unicem Campari Group DiaSorin Enel Enel Green Power ENI Exor Fiat Finmeccanica Fondiaria-Sai Impregilo Italcementi Lottomatica Luxottica Mediaset Mediobanca Mediolanum Parmalat Pirelli Prysmian Saipem

Snam Rete Gas Telecom Italia Tenaris Terna Tod’s UBI Banca UniCredito Italiano Luxembourg (LUXX) Arcelor Mittal Dexia Foyer KBC Group RTL Group SES Netherlands (AEX) AEGON Ahold Air France KLM Akzonobel ASML Boskalis Corio DSM Fugro Heineken ING Group Philips Randstad Holding Reed Elsevier Royal KPN SBM Offsore Shell TNT TomTom Unibail Unilever Wolters Kluwer Norway (OBX) Acergy Aker Solutions DNB Nor DNO International Fred Olsen Energy Golden Ocean Marine Harvest Norsk Hydro Norweigian Property Orkla Petroleum Geo-Serv Prosafe Renewable Energy Schibsted Sevan Marine Songa Offshore Statoil Storebrand Subsea 7 Telenor TGS Nopec Geophysic Yara International Spain (IBEX 35) Abengoa Abertis Acciona Acerinox ACS Amadeus IT Holding Banco Popular Banco Sabadell Banco Santander

Bankinter BBVA BME Criteria Caixa Ebro Foods Enagas Endeda FCC Ferrovial Gamesa Gas Natural Grifols Iberdrola Iberdrola Renovables Inditex Group Indra Mapfre Mutualidad Obrascon Huarte Lain Red Electrica Group Repsol Sacyr Vallehermoso Tecnicas Reunidas Telefonica Sweden (OMSX 30) ABB Alfa Laval ASSA ABLOY Astra Zeneca Atlas Copco Boliden Electrolux Ericsson Getinge Handelsbanken Hennes & Mauritz investor Lundin Petroleum Modern Times Group Nokia Nordea Notes Grop Sandvik SCA Scania SEB Securitas Skanska SSAB Swedbank Swedish Match Tele 2 Volvo Switzerland (SMI) Credit Suisse Holcim Julius Baer Group Lonza Nestle Novartis Group Richemont Roche Holding SGS Swatch Group Swiss com Swiss Reinsurance Syngenta Synthes UBS Zurich Financial Services

Appendix B. Segment reporting under IFRS 8 and IAS 14R for a selection of sample companies

Standard (year) Segment type

Reportable segments (IFRS 8) Primary segments (IAS 14R)

Entity-wide disclosures (IFRS 8) Secondary segments (IAS 14R)

TeliaSonera

IFRS 8 (2007) Mixed Line of business

Mobility services Broadband services Integrated enterprise services Eurasia Other

Products: Mobile communications Fixed communications Other Geographic: Sweden Norway Products: Mobile communications Fixed communications Other

Autogrill

IAS 14R (2006) Geographic

Sweden Finland Norway Denmark Baltic countries

IFRS 8 (2008)

Food & beverage–Italy

Matrix Line of business

Food & beverage–HMS Host Food & beverage – Other Travel retail & duty-free In-flight Italy US and Canada Rest of Europe Aldeasa (mostly Spain) Alpha (mainly U.K.)

IAS 14R (2007) Geographic

KBC Group

IFRS 8 (2009) Mixed Line of business

IAS 14R (2008) Line of business

RWE

IFRS 8 (2009) Mixed Line of business

IAS 14R (2008) Line of business

Spain Eurasia Turkey Russia Other

Finland All other countries

Matrix: Three products (Food & beverage, Travel retail & duty-free and In-flight) each split into geographic regions: Italy Spain USA and Canada Other Europe United Kingdom Other world Products: Motorways Airports Railway stations

Belgium business unit CEER business unit Merchant banking business unit European private banking business unit Banking Insurance European private banking

Geographic: Belgium Central & Eastern Europe and Russia Rest of the world Geographic: Belgium Eastern Europe and Russia Rest of World

Germany power generation Germany sales & distribution networks Netherlands/Belgium UK Central & Eastern Europe Renewables Upstream gas & oil Trading/Gas mid-stream Power Energy Dea Npower Supply and trading

Geographic: Germany UK Other EU

Geographic: Germany UK Other EU

Shopping centres In-flight Others

Rest of Europe Other

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Company

Rest of Europe America Other 101

102

Appendix B (Continued ) Standard (year) Segment type

Reportable segments (IFRS 8) Primary segments (IAS 14R)

Entity-wide disclosures (IFRS 8) Secondary segments (IAS 14R)

Criteria Caixa Corp

IFRS 8 (2009) Line of business

Insurance Specialized financial service Banking Listed utilities Single segment

Geographic: Spain Other

IFRS 8 (2009) Line of business

Cultures and enzymes Health and nutrition Colors and blends

Geographic: Denmark Rest of Europe Asia Pacific

IAS 14R (2008)

Disclosure not required since company was privately held

IFRS 8 (2009) Single

Single segment: Biopharmaceuticals

IAS 14R (2008) Chr Hansen Group

UCB

Prysmian

IAS 14R (2008) Geographic

North America Europe Rest of World

IFRS 8 (2009) Matrix Line of business

Energy Utilities Trade and installers Industrial Other Telecom Energy cables and systems Telecom cables and systems

IFRS 14R (2008) Line of business RTL Group

IFRS 8 (2009) Mixed Line of business

IAS 14R (2008) Line of business

Mediengruppe RTL Deutschland Groupe M6 FremantleMedia TRL Nederland Five Group RTL Belgium French radio Other segments Television Content Radio Other operations

None

Products: 11 drugs & other Geographic: North America Germany France Italy None

Geographic: EMEA other EMEA Italy North America

Geographic: EMEA North America

Middle East & Africa North America South America

Spain UK and Ireland Belgium Rest of world

Latin America Asia Pacific

Latin America Asia Pacific

Geographic: Germany France U.K. Netherlands Other regions

Geographic: Germany France Netherlands UK

Other regions

N.B. Nichols et al. / Journal of International Accounting, Auditing and Taxation 21 (2012) 79–105

Company

Allianz

IFRS 8 (2009) Matrix Line of business

Property-casualty business: German speaking countries Europe I including South America Europe II including Africa Anglo broker markets/Global lines

Ackermans & van Haaren

IAS 14R (2008) Line of business

Property-casualty Life-health Banking Asset Management Corporate

IFRS 8 (2009) Line of business

Contracting, dredging & concessions Real estate and related services Financial services Private equity Energy & materials

N.B. Nichols et al. / Journal of International Accounting, Auditing and Taxation 21 (2012) 79–105

Growth Markets Life-health business: German speaking countries Europe I including South America Europe II including Africa Anglo broker markets/Global lines Growth Markets Asset management

Matrix economic sectors by country: Germany Corporate customers Wholesale and retail trade Financial institutions (excluding banks) and insurance companies Service providers Other Public authorities Private customers Other Corporate customers Wholesale and retail trade and service providers Financial institutions (excluding banks) and insurance companies Other Public authorities Private customers Matrix reporting within line of business segments Property-casualty by geographic regions: Europe Germany UK Italy Spain Switzerland France Western and Southern Europe New Europe South America NAFTA Other Asia Pacific Property-casualty by product Allianz global corporate and specialty Credit insurance Travel Insurance and Assistance Services Life-health by geographic regions: Europe France German life Switzerland German health Spain Italy Western and Southern Europe New Europe NAFTA South America Other Asia Pacific Banking by geographic regions: Germany France New Europe Italy Geographic: EU member states Other European countries Rest of the world

103

104

Company

Bekaert

Standard (year) Segment type

Reportable segments (IFRS 8) Primary segments (IAS 14R)

Entity-wide disclosures (IFRS 8) Secondary segments (IAS 14R)

IAS 14R (2008) Line of business

Contracting, dredging & concessions Real estate and related services Financial services Private equity

Geographic: EU member states Other European countries Rest of the world

IFRS 8 (2009) Geographic

EMEA North America Latin America Asia Pacific Other

Product: Steel wire products Stainless products Coatings & other Geographic: Belgium USA Geographic: Europe North America Latin America Asia Other regions

IAS 14R (2008) Line of business

Advanced wire products Advanced materials Advanced coatings Other

China Other Countries

N.B. Nichols et al. / Journal of International Accounting, Auditing and Taxation 21 (2012) 79–105

Appendix B (Continued )

N.B. Nichols et al. / Journal of International Accounting, Auditing and Taxation 21 (2012) 79–105

105

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