Segment Reporting Through the Eyes of Management


Peter Kajüter
Martin Nienhaus


Time to read

2 Minutes

Despite the widely acknowledged relevance of segment reporting, there are different views about the approach that is best suited to provide useful segment information. During the 1990s, the International Accounting Standards Board (‘IASB’) and the Financial Accounting Standards Board (‘FASB’) discussed various concepts for segment reporting (namely the risk and reward approach versus the management approach) but could not agree on a common standard. In 1997, the IASB issued IAS 14 following the risk and reward approach, whereas the FASB published SFAS 131 following the management approach.

In 2006, however, as a result of the short-term convergence project with the US Generally Accepted Accounting Principles (‘US-GAAP’), the IASB replaced IAS 14 with IFRS 8 and thereby adopted SFAS 131 with only minor differences. Segment reporting requirements were substantially changed with the adoption of IFRS 8. According to the new standard, companies with publicly traded debt or equity instruments must apply IFRS 8 for fiscal years beginning on or after 1 January 2009. By ostensibly adopting US-GAAP, there was a fundamental change in the principles of segment reporting from the risk and reward approach (ie, IAS 14) to the management approach (ie, IFRS 8 and SFAS 131). The latter allows users of financial statements to see the entity ‘through the eyes of management.’

This step has been met with both support and criticism. Two members of the IASB, for instance, expressed dissenting opinions and voted against the new standard. While they supported the management approach for defining reportable segments, they believed that the standard should require the disclosure of segment data in line with IFRS as non-GAAP measures might mislead users. Moreover, the European Parliament expressed concerns about IFRS 8 which delayed the endorsement for almost one year. The European legislator criticised the discretion and potential lack of comparability associated with IFRS 8 and expressed concern about adopting a US accounting standard without assessing the impact for EU law. After the European Commission had analysed the potential consequences of IFRS 8, the European Parliament finally endorsed IFRS 8.

Given the relevance of segment information, the major changes to segment reporting introduced by IFRS 8 and the controversial views about the management approach inherent in the new standard, we use a unique data-set and analyse whether the introduction of IFRS 8 was beneficial to investors. Based on a difference-in-differences analysis, we find that the introduction of IFRS 8 and its use of the management approach improved the value relevance of segment reporting and decreased information asymmetries among investors. Our results are robust to a number of sensitivity tests and alternative specifications.

Our paper contributes to the literature by providing evidence of a superior usefulness of segment reports prepared in accordance with IFRS 8 compared to IAS 14 – a result which supports the findings of the IASB’s post-implementation review and confirms that the new standard improved the value relevance of financial reporting. This finding may also be of interest for national standard setters contemplating a change in segment reporting rules. Furthermore, we expand the literature by explicitly comparing the suitability of different fundamental approaches to segment reporting (ie, the management approach versus the risk and reward approach) rather than focusing on the usefulness of segment reporting compared to consolidated financial statements as prior work has done. Moreover, some prior studies have analysed the impact of introducing the management approach to segment reporting (SFAS 131) in a US setting (eg, Hossain, 2008; Hope et al., 2008). The introduction of SFAS 131, however, meant an increase in segment information compared to the preceding standard (SFAS 14).  Thus, it is impossible to disentangle the impact of the change in underlying approaches from a mere increase in the quantity of segment information supplied. In our sample, the level of segment information under IAS 14 and IFRS 8 remained quite similar. IFRS 8 requires a comparable amount of segmental narratives and even fewer line items. Hence, the adoption of IFRS 8 did not mean an increase in segmental disclosures, but rather a change in the underlying rationale so that segments are identified the same way as they are used internally. This allows us to isolate the effect to the change in fundamental principles.

Peter Kajüter is a Full Professor at the University of Münster and the Chair of International Accounting, and Martin Nienhaus is an Assistant Professor at the University of Münster. 


With the support of