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Segment Reporting under IFRS 8

Reporting practice and economic consequences


Martin Nienhaus

The adoption of IFRS 8 marked a major change in the segment reporting rules under IFRS. This step, however, was heavily criticized and several questions regarding IFRS 8 still remain unanswered. Therefore, this study analyzes the impact of IFRS 8 on segment reporting practice and its economic consequences. The results show that firms report on average more segment information. Moreover, segment reports from the management’s perspective are useful and mitigate information asymmetries, reduce the cost of capital and affect the work of financial analysts. The findings have implications for the IASB, preparers, auditors and users of financial statements as well as enforcement institutions.
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1. Introduction



1.1Research questions and objectives

Understanding the business of multinational and diversified entities is challenging for users of financial statements, especially in light of ongoing globalization and the associated growth of foreign operations. Until the 1970s and early 1980s, investors and other users of financial reporting had to subsist on aggregated financial statements. Considering that firms engage in business activities in different industries and that multinational entities face diverse economic and political environments, aggregated financial disclosures as a single source of information may conceal important facts and prevent a thorough financial analysis. Segment reporting – which can be defined as the disaggregation of financial information of an entity’s business operations by business lines, geographical areas or major customers – can help to overcome the shortcomings of financial statements.

On the one hand, segmental disclosures assist users to take the varying profitability, growth opportunities and risk of different business operations into account. This potentially enhances the users’ ability to assess an entity’s future development. In fact, empirical research has shown that segmental disclosures lead to improved earnings forecasts (e.g., Kinney (1971); Kochanek (1974); Collins (1975); Emmanuel/Pick (1980); Silhan (1983); Baldwin (1984); Roberts (1989); Balakrishnan et al. (1990); Swaminathan (1991); Berger/Hann (2003); Ettredge et al. (2005)). Moreover, numerous studies provide evidence that the availability of segment information affects investors’ risk assessments and leads to a reduction in systematic risk (e.g., Collins/Simonds (1979); Ajinkya (1980); Prodhan (1986); Prodhan/Harris (1989); Dupnik/Rolfe (1990)). Furthermore, there is plenty of evidence that segment...

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