IFRS 8 – OPERATING SEGMENTS
Large entities produce a wide range of products and services, often in several different countries. Further information on how the overall results of entities are made up from each of these product or geographical areas will help the users of the financial statements. Following are the reasons for segment reporting (By product, region or operation).
- The entity’s past performance will be better understood
- The entity’s risks and returns may be better assessed
- More informed judgments may be made about the entity as a whole
An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
This IFRS shall apply to the separate and consolidated financial statements of an entity:
- whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
- that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation
An operating segment is a component of an entity:
- that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
- whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (c) For which discrete financial information is available.
An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations may be operating segments before earning revenues.
The term ‗chief operating decision maker’ identifies a function, not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the operating segments of an entity.
This definition means that not every part of an entity is necessarily an operating segment. IFRS 8 quotes the example of a corporate headquarters that may earn no or incidental revenues and so would not be an operating segment.
Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of this IFRS, the segments have similar economic characteristics, and the segments are similar in each of the following respects:
- The nature of the products and services;
- The nature of the production processes;
- The type or class of customer for their products and services;
- The methods used to distribute their products or provide their services; and
- If applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.
DETERMINING REPORTABLE SEGMENTS
An entity shall report separately information about an operating segment that meets
- I) the definition of an operating segment, and II) any of the following quantitative thresholds:
- Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments.
- The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss.
- Its assets are 10 per cent or more of the combined assets of all operating segments.
If the total external revenue reported by operating segments constitutes less than 75 per cent of the entity‘s revenue, additional operating segments shall be identified as reportable segments until at least 75 per cent of the entity‘s revenue is included in reportable segments.
Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements.
Two or more operating segments below the thresholds may be aggregated to produce a reportable segment if the segments have similar economic characteristics, and the segments are similar in a majority of the aggregation criteria above
Non reportable segments
An entity may combine information about operating segments that do not meet the quantitative thresholds to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria.
DECISION TREE TO ASSIST IN IDENTIFYING REPORTABLE SEGMENTS
The amount of each segment item reported shall be the measure reported to the chief operating decision maker for the purposes of making decisions about allocating resources to the segment and assessing its performance.
DISCLOSURES BY REPORTABLE OPERATING SEGMENTS
IFRS 8 provides a framework on which to base the reported disclosures.
- Entities are required to provide general information on such matters as how the reportable segments are identified and the types of products or services from which each reportable segment derives its revenue.
- Entities are required to report a measure of profit or loss and total assets for each reportable segment. Both should be based on the information provided to the chief operating decision maker. If the chief operating decision maker is regularly provided with information on liabilities for its operating segments then these liabilities should also be reported on a segment basis.
IFRS 8 specifies disclosures that are needed regarding profit or loss and assets where the amounts are included in the measure of profit or loss and total assets:
- Revenues – internal and external.
- Interest revenues and interest expense. These must not be netted off unless the majority of a segment’s revenues are from interest and the chief operating decision maker assesses the performance of the segment based on net interest revenue.
- Depreciation and amortization.
- Material items of income and expense disclosed separately.
- Share of profit after tax of, and carrying value of investment in, entities accounted for under the equity method.
- Material non-cash items other than depreciation and amortization.
- The amount of additions to non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts.
The measurement basis for each item separately reported should be the one used in the information provided to the chief operating decision maker. The internal reporting system may use more than one measure of an operating segment’s profit or loss, or assets or liabilities. In such circumstances the measure used in the segment report should be the one that management believes is most consistent with those used to measure the corresponding amounts in the entity’s financial statements.
Entities are required to provide a number of reconciliations:
- The total of the reportable segments’ revenues to the entity’s revenue
- The total of the reportable segments’ profit or loss to the entity’s profit or loss
- The total of the reportable segments’ assets to the entity’s assets
- Where separately identified, the total of the reportable segments’ liabilities to the entity’s liabilities and
- The total of the reportable segments’ amounts for every other material item disclosed to the corresponding amount for the entity.
Unless otherwise provided in the segment report IFRS 8 requires entities to provide information about its revenue on a geographical and ‘class of business’ basis. Entities also need to provide information on noncurrent assets on a geographical basis, but not on a ‘class of business’ basis.
If revenues from single external customer amount to 10% or more of the total revenue of the entity then the entity needs to disclose that fact plus:
- The total revenue from each customer (although the name is not needed) and The segment or segment reporting the revenues.
The ‘entity-wide disclosures’ are needed even where the entity has only a single operating segment, and therefore does not effectively segment report
Criticisms of IFRS 8
- Some commentators have criticized the ‘management approach’ as leaving segment identification too much to the discretion of the entity.
- The management approach may mean that financial statements of different entities are not comparable.
- Segment determination is the responsibility of directors and is
- Management may report segments which are not consistent for internal reporting and control purposes, making its usefulness questionable.
- For accounting periods beginning on or after 1 January 2005 listed entities within the EU are required to use adopted international standards in their consolidated financial statements. The EU has not yet adopted IFRS 8 and until it does IAS 14 will continue to apply here. Some stakeholders believe the standard to be flawed due to the amount of discretion it gives to management.
- Geographical information has been It could be argued that this breaks the link between a company and its stakeholders.
- There is no defined measure of segment profit or loss.