From IAS 14 to IFRS 8: the role of proprietary and agency costs in shaping financial reporting

ABSTRACT

The relevance of segment reporting has prompted regulatory bodies to place significant efforts in refining the existent segment reporting regulation. The introduction of the IFRS 8 ‘management approach’ in the segment reporting regulation was anticipated to facilitate a better understanding of the company’s diverse businesses and regions, providing an opportunity to improve segment reporting disclosures. However, the effectiveness of segment reporting regulation is heavily influenced by the country regulatory environment and the characteristics of the firms. We exploit the Spanish institutional setting to provide further evidence on the real impact of IFRS 8 adoptions. Our findings support the notion that the adoption of IFRS 8 has yielded few benefits to segment reporting. Importantly, our research reveals that segment disclosures have not exhibited heightened responsiveness to proprietary costs and have shown only a moderate response to agency costs after the adoption of IFRS 8.M41, M48

KEYWORDS:

• Segment reporting
• IFRS8
• IAS 14
• agency costs
• proprietary costs
• management approach

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. IAS 14 R distinguished between business and geographical segments and emphasised the fact that for external reporting purposes the segments were those for which the information was reported to the key management personnel for current and future evaluation purposes (EU, 2007; IAS 14 R). Under IFRS 8, operating segments are broadly defined as those components of the entity that engage in business activities, and whose operating results are reviewed regularly by the Chief Operating Decision Maker (CODM) (IFRS 8). Under IAS 14 R, specific reported line items for each operating segment were required, while under IFRS 8 reportable line items are those reported internally to the CODM leading to the release of non-GAAP performance measures that may affect comparability potentially leading managers to conceal information about non-profitable segments (EU, 2007).

2. An exploratory analysis of the segment-reporting note to the financial statements in the latest annual reports (2020 and 2021) of the sample company provides a similar reporting picture across the sample companies, suggesting a significant stickiness in segment information.

3. We excluded observations in the extreme 1% tails of their respective distributions for all the explanatory and independent variables.

4. Income before taxes divided by total assets.

5. The fixed effects approach has certain caveats and limitations in our research setting. It does not produce any estimate for the effects of variables that do not change over time and its estimates may be imprecise for explanatory variables that vary greatly across individuals but have little variation over time for each individual. Controlling for firm-fixed effects when explanatory variables have little variation within individuals leads to substantially larger standard errors, higher p-values and wider confidence intervals, that is, non-significant results. The best situation for a fixed effects analysis is when all of the variation on a time-varying predictor is within people (Allison, 2006). An ANOVA analysis allowed us to determine the within-firm variation for the different independent variables in our model. For these, most of the variation was between firms and within-firm variation was low: Indepedent_it = 35%, Ownership_it = 35%, Herfindahl_it = 24%, AdjROA_it = 59%, Size_it = 35% Leverage_it = 46%.

Additional information

Funding

We acknowledge financial contribution from Cátedra UAM-Auditores Madrid and the Madrid Government (within the framework of the multi-year agreement with the Universidad Autónoma de Madrid on Line 3: Excellence for University Staff - PRICIT).