IFRS 8 - Operating Segments

Objective

To provide users of financial statements with information about the nature and financial effects of the business activities in which an entity engages.

Operating segments

Scope

• IFRS 8 applies to the separate financial statements of entities whose debt or equity instruments publicly treated (or are int he process  of being issued in a public market)
• IFRS 8 also applies to the consolidated financial statements of a group whose parent is required to apply IFRS 8 to its separate financial statements
• The scope of IAS 33 has been changed to be consistent with that of IFRS 8
• Where an entiy is not required to apply IFRS 8, but chooses to do so, it must not describes information about segments as "segment information" unless it complies with IFRS 8
• Where a parent's separate financial statements are presented with consolidated financial statements, segment information is required only in the consolidated financial statements

Definitions

Operating segment

• This is a component that meets the following three criteria:
• It engages in business activities from which it may earn revenues and incur expenses (including intersegment revenues and expenses arising from transactions with other components of the same entity) - Thus a start - up operation not yet earning revenues may be an operating segment, as revenues would be expected in the future.
• Its operating results are regularly reviewed by the entity's "chief operating decision maker" to make decisions (about resources to be allocated) and to assess its performance; and
• Discrete financial information is available - A component, by definition, should meet this last criterion (see IFRS 5)
• An entity's post-employment benefit plans are not operating segments
• Corporate headquarters or other departments that may not earn revenues (or only incidental revenues) are not operating segments

Chief operating decision maker

This term describes a function (to allocate resources to and assess the performance of operating segments). This may be a chief executive office, a board of directors or others.

An operating segment will generally have a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, etc.

Reportable segments

Separate information

Separate information must be reported for each operating segment that:

• Meets the definition criteria or aggregation criteria for two or more segments and
• Exceeds the quantitative thresholds

Aggregation criteria

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 segment have the similar economic characteristics; and
• The segments are similar in respect of:
• the nature of products and services (e.g. domestic or industrial)
• the nature of the production process (e.g. maturing or production line)
• types or classes of customer (e.g. corporate or individual)
• distribution method (e.g. door-to-door or web sales)
• the regulatory environment (e.g. in shipping, banking, etc)

An operating segment that does not meet a qualitative threshold may be aggregated with another segment that does only if the operating segments have similar economic characteristics and share a majority of the above aggregation criteria.

Quantitative thresholds

Separate information must be reported an operating segment that meets any of the following quantitative thresholds:

• Reported revenue (including both external and intersegment) is 10% or more of the combined revenue (internal and external) of all operating segments;
• Profit or loss is 10% or more, in absolute amount, of the grater of:
• the combined profit of all operating segments that did not report a loss; and
• the combined loss of all operating segments that reported a loss;
• Assets are 10% or more of the combined assets of all operating segments
• At least 75% of the entity's revenue must be included in reportable segments. Thus operating segments that fall below the quantitative thresholds may need to be identified as reportable. (Segments that fall below the threshold may also be considered reportable, and separately disclosed, if management believes that the information would be useful to users of the financial statements)
• Information about other business activities and operating segments that are not reportable are combined and disclosed in an "all other segments" category.
• When an operating segment is first identified as a reportable segment according to the quantitative thresholds, comparative date should be presented. Unless the necessary information is not available and the cost to develop it would be excessive. (The standard suggest ten as a practical limit to the number of reportable segments separately disclosed as segment information may otherwise become too detailed)

Disclosure

Core Principle

• An entry must disclose information to enable users of its financial statements to evaluate.
• The nature and financial effects of its business activities
• The economic environments in which it operates
• This includes;
• General information.
• Information about reported segment profit or loss, segment assets, segments liabilities and the basis of measurement.
• Reconciliations. (This information must be disclosed for every period for which an income statement is presented. Reconciliation of amounts in the statements of financial position are required for each date at which a statement of financial position is presented)

General Information

The factors used to identify reportable segments, including;

• The basis of organization (e.g. around products and services, geographical areas, regulatory environments, or a combination of factors and whether segments have been aggregated)

Information about profit or loss, assets and liabilities

The following must be reported for each reportable segment:

• A measure of profit or loss and total assets.
• A measure of liabilities if such an amount is regularly provided to the chief operating decision maker. (Note that segment cash flow information about is voluntary (IAS 7) and therefore unlikely to be produced as it would provide information to an acquirer to value and target for a takeover bid)

Profit or loss

• The following must also be disclosed if the specified amounts are regularly provided to the chief operating decision maker (even if not included in the measure of segment profit or loss)
• Revenue from external customers
• Intersegment revenues
• interest revenue (this interest revenue may be reported net of its interest expense if the majority of the segment's revenues are from interest and the chief operating decision maker relies primarily on reporting of net interest revenue.
• Interest expense
• Depreciation and amortization
• Other material items of income and expense required by IAS 1 - Presentation of Financial Statements (i.e. write-downs, restructurings, disposals, discontinued operations litigation settlements and reversals of provisions)
• Entity's interest in the profit or loss of associates and joint ventures accounted for by the equity method
• Income tax expense or income
• Material non-cash items other than depreciation and amortization (Impairment losses also have to be disclosed (but as an IAS 36 requirement))
• The following must also be disclosed if the specified amounts are regularly provided to the chief operating decision maker (even if not included in the measure of segment assets)
• The investments in associates and joint ventures accounted for by the equity method
• Additions to non-current assets (other than financial statements, deferred tax assets and post employment benefit assets

Basis of measurement

The amount of each segment item reported is the measure reported to the chief operating decision maker (Segment information is no longer required to confirm to the accounting policies adopted for preparing and presenting the consolidated financial statements)

If the chief operating decision maker uses more than one measure of an operating segment's profit or loss, the segment's assets or the segment's liabilities, the reported measures should be those that are most consistent with those used in the entity's financial statements.

An explanation of the measurements of segment profit or loss, segment assets and segment liabilities must disclose, as a minimum.

• The basis of accounting for intersegment transactions
• The nature of any differences between the measurement of the reportable segments and the entity's financial statements (if not apparent from the reconciliations required)
• Differences could include accounting policies and policies for allocations of centrally incurred costs, jointly used assets or jointly utilized liabilities
• The nature of any changes from prior periods in the measurement methods used and the effect, if any of those changes on the measure of segment profit or loss
• The nature and effect of any asymmetrical allocations to reportable segments
• For example, the allocation of depreciation expense with the related depreciable assets

Reconciliations

Reconciliation of the total of the reportable segments with the entity are required for all of the following

• Revenue
• Profit or loss (before tax and discontinued operations)
• Assets
• Liabilities (if applicable)
• Every other material item

All material reconciling items must be separately identified and described (e.g. arising from different accounting policies)

Restatement of previously reported information

• Where changes in the internal organization structure of an entity result in a change in the composition of reportable segments, corresponding information must be restated unless the information is not available and cost to develop it would be excessive
• An entity should disclose  whether corresponding items have been restated
• If not restated, the entity must disclose the current period segment information on both the old and new bases of segmentation, unless the necessary information is not available and the cost to develop it would be excessive

Entry-wide disclosures

All entities subject to this IFRS are required to disclose information about the following, if it is not provided as part of the required reportable segment information

• Products and services
• Geographical areas
• Major customers

Including those entities that have only a single reportable segment

The only exemption for not providing information about products and services and geographical areas is if the necessary information is not available and the cost to develop it would be excessive, in which case that fact must be disclosed

By product and service

Revenues from external customers for each product and service (or each group of similar products and services) based on the financial information used to produce the entity's financial statements.

By geographical area

Revenues from external customers attributed to

• The entity's country of domicile
• All foreign countries in total
• Individual foreign countries, if material

Similarly, non-current assets (other than financial instruments, deferred tax assets and post-employment benefit assets)

Again based on the financial information used to produce the entity's financial statemets

Major customers

An entity discloses the extent of its reliance on major customers by stating

• If revenues from a single external customer amount to 10% or more of the entity's total
• The total revenues from each such customer
• The segment(s) reporting the revenues

An entity need not disclose the identity of a major customer or the amount of revenues that each segment reports from that customer.

For the purposes of  this IFRS, a group of entities known to be under common control (including entities under the control of a government) is a single customer.