IFRS 8 on ‘Operating Segments’ sets out requirements for disclosure of information about an entity’s operating segments and also about the entity’s products and services, the geographical areas in which it operates, and its major customers.
(1) Core principle :
The core principle of IFRS 8 is that an entity shall disclose such information as 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.
(2) Applicability of IFRS 8 :
IFRS 8 shall apply to the separate/individual/consolidated financial statements of an entity. IFRS 8 is not applicable to all entities. It is applicable only to those companies whose securities are either listed or are in the process of listing in a public market.
(3) Management approach :
(a) Management approach :
IFRS requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters (the ‘management approach’). Such components (operating segments) are identified on the basis of internal reports that the entity’s Chief Operating Decision Maker (‘CODM’) reviews regularly in allocating resources to segments and in assessing their performance.
The management approach is based on the way in which management organises the segments within the entity for making operating decisions and in assessing performance. Consequently, the segments are evident from the structure of the entity’s internal organisation and the information reported internally to the CODM. The adoption of the management approach results in the disclosure of information for segments in substantially the same manner as they are reported internally (and used by the entity’s CODM) for purposes of evaluating performance and making resource allocation decisions. In that way, financial statements users are able to see the entity ‘through the eyes of management’.
(b) Identifying the CODM :
The term CODM refers to a function, rather than to a specific title. The function of the CODM is to allocate resources to the operating segments of an entity and to assess the operating segments’ performance. The CODM usually is the highest level of management (e.g., CEO or COO), but the function of the CODM may be performed by a group rather than by one person (e.g., a board of directors, an executive committee or a management committee).
For example, an entity has a CEO, a COO and a president. These individuals comprise the executive committee. The responsibility of the executive committee is to assess performance and to make resource allocation decisions related to the individual operations of the entity, and each of these individuals has an equal vote. The executive committee is the CODM because the committee is the highest level of management that performs these functions. The segment financial information provided to and used by the executive committee to make resource allocation decisions and to assess performance is the segment information that would be the basis for disclosure for external financial reporting purposes.
However, the mere existence of an executive committee, management committee or other high-level committee does not necessarily mean that one of those committees constitutes the CODM. Assume the same fact pattern as in the previous example except that the managing director can override decisions made by the executive committee. Because the managing director essentially controls the committee and therefore has control over the operating decisions that the executive committee makes, the managing director will be the CODM for purposes of applying IFRS 8.
(4) Identifying operating segments :
An operating segment is a component of an entity :
(a) 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),
(b) whose operating results are regularly reviewed by the entity’s CODM 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 generally has a segment manager. Essentially, the segment manager is directly accountable for the functioning of the operating segment and maintains regular contact with the CODM to discuss operating activities, forecasts and financial results. Like the CODM, a segment manager is a function, rather than a specific title.
(a) Business activity is essential :
A corporate headquarters would carry out some, or all, of the functions in the treasury, legal, accounting, information systems and human resources areas. However, corporate activities generally would not qualify as operating segments under IFRS 8, because typically they are not business activities from which the entity earns revenues.
(b) Multiple segment information reviewed by CODM :
Apart from the core principle as mentioned above, the additional factors that can be considered in determining the appropriate operating segments are as under :
(a) the nature of the business activities of each component;
(b) the existence of managers responsible for the components;
(c) information presented to the board of directors; and
(d) information provided to external financial analysts and on the entity’s website.
Some entities use a ‘matrix’ form of organisation, whereby business components are managed in more than one way. For example, some entities have segment managers who are responsible for geo-graphic regions, and different segment managers who oversee products and services. If the entity generates financial information about its business components based on both geography and products or services (and the CODM reviews both types of
information, and both have segment managers), then the entity determines which set of components constitutes the operating segments by reference to the core principle to IFRS 8 as mentioned above.
For example, an entity has six business components (A, B, C, D, E and F). Three of these business components (A, B and C) are located in India and each manufactures and sells a different product to customers in India. The CEO (who is the CODM) assesses performance, makes operating decisions and allocates resources to these business components based on financial information presented on a product-line basis. The entity also has three business components in the U.S. (D, E and F), which are organised to mirror the India operations (i.e., each manufactures and sells its products to customers located in the U.S.). However, the CODM assesses performance, makes operating decisions and allocates resources based on the financial information presented for the U.S. as a whole. The entity’s presi-dent of the U.S. operations is responsible for assessing performance, making operating decisions and allocating resources to the business components within the U.S. The entity’s president of the U.S. operations also is directly accountable to the CODM. The entity therefore has four operating segments: Segments A, B and C, which are determined on a product-line basis, and Segment U.S., which consists of business components D, E and F and is determined on a geographic basis. There is no requirement to disaggregate information for segment reporting purposes if it is not provided to the CODM in a disaggregated form on a regular basis.
Further, determination of the industry in which a business component of an entity operates generally is not decisive for purposes of identifying properly all of the operating segments under IFRS 8. For example, an entity historically reported that it had one industry segment (mining), but presented financial information in its MD&A and press releases on the following business components: gold, copper and coal. The entity determines that the CODM does, in fact, make resource allocation decisions based on the financial performance of each of these three business components. Accordingly, each of the three business components is an operating segment under IFRS 8, despite the fact that they all are in the mining industry.
c) Discrete and sufficient financial information :
In order to assess performance and to make resource allocation decisions, the CODM must have financial information about the business component. This information must be sufficiently detailed to allow the CODM to assess performance and to make resource allocation decisions. For example, an entity’s CODM receives revenue information for three different services delivered by segment A (Segment A is one of the five operating units of the entity). However, its operating expenses are reported to the CODM on a combined basis for the entire segment. Because a measure of profit or loss by service is not presented, the CODM might not have enough information to assess the performance or make resource (capital) allocation decisions regarding the individual services. Thus Segment A, in aggregate, is likely to be one operating segment, as opposed to the three individual services delivered by the Segment A.
5) Aggregation of segments :
Two or more operating segments may be aggregated into a single operating segment if
a) aggregation is consistent with the core principle of IFRS 8,
b) the segments have similar economic characteristics, and
c) 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.
6) Reportable segments :
a) Quantitative thresholds :
An entity shall report separately information about an operating segment that meets any of the following quantitative thresholds :
a) Its reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments.
b) The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of
- the combined reported profit of all operating segments that did not report a loss and
- the combined reported loss of all operating segments that reported a loss.
c) Its assets are 10% or more of the combined assets of all operating 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 or more reportable segments need to be identified until at least 75% of the entity’s revenue is included in reportable segments.
The term ‘combined’ in each of the three tests as mentioned above means the total amounts for all operating segments before the elimination of intra-group transactions and balances (i.e., not the entity’s financial statement amounts). It does not include reconciling items and activities that do not meet the definition of an operating segment under IFRS 8 (e.g., corporate activities).
b) Use of different accounting policies for segment reporting :
The measures of the segment amounts are based on the amounts reported to the CODM. As a result, the entity can measure the segment amounts based on segment accounting policies that may be different from the entity’s accounting policy for preparation of financial statements. In such cases, the entity measures the segment amounts based on segment accounting policies and provides additional disclosure reconciling the segment amounts to the entity’s financial statements.
c) Measures for profits, assets or liabilities :
The segment information is based on the actual measure of segment profit or loss that is used by the CODM for purposes of evaluating each reportable segment. Adjustments and eliminations made in preparing the entity’s financial statements, as well as allocations of revenue, expenses, gains or losses, are included in the reported segment profit or loss only if these items are included in the segment profit or loss measure used by the CODM. Additionally, the allocation of amounts included in the measure of segment profit or loss must be on a reasonable basis.
d) Use of multiple measures of profits, assets or liabilities for different segments :
If the CODM uses more than one measure of a segment’s profit or loss, or more than one measure of a segment’s assets or the segment’s liabilities, then the measure disclosed in reporting segment profit or loss, or segment assets or liabilities, should be the measure that management believes is determined in accordance with the measurement principle most consistent with the corresponding amounts in the entity’s financial statements.
For instance, the CODM receives and uses the operating profit, operating profit less corporate charges and operating profit less corporate charges and an allocated cost of capital measures of segment profit or loss for each of the operating segments, the measure of segment profit or loss used to report segment profit or loss should be operating profit because this measure is most consistent with the corresponding amounts in the entity’s financial statements.
e) Operating segments below quantitative thresholds :
An entity is allowed to combine information about two or more such operating segments that do not meet the quantitative thresholds (as discussed above) to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority (but need not be all) of the aggregation criteria listed in point 5 above.
If the total of external revenue reported by operating segments constitutes less than 75% of total consolidated revenue, then additional operating segments are identified as reportable segments (even if they do not meet the quantitative threshold criteria) until at least 75% of the total consolidated revenue is included in reportable segments.
Information about other business activities and operating segments that are not reportable shall be combined and disclosed in an ‘all other segments’ category separately from other reconciling items. The sources of the revenue included in the ‘all other segments’ category shall be described.
7. Change in reportable segments :
a) Operating segment becomes reportable segment only in current period :
If an operating segment is identified as a reportable segment in the current period in accordance with the quantitative thresholds, segment data for a prior period presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the criteria for reportability in the prior period, unless the necessary information is not available and the cost to develop it would be excessive.
b) Operating segment was reportable segment in previous period but does not meet quantitative thresholds in current period :
An operating segment that historically has been a reportable segment might not exceed any of the quantitative thresholds in the current period. In this situation if management expects it to be a reportable segment in the future, then the entity should continue to treat that operating segment as a reportable segment in order to maintain the inter-period comparability of segment information.
c) Change in composition of operating segments :
If an entity changes the structure of its internal organisation in a manner that causes the composition of its reportable segments to change, the corresponding information for earlier periods, including interim periods, shall be restated unless the information is not available and the cost to develop it would be excessive. Following a change in the composition of its reportable segments, an entity shall disclose whether it has restated the corresponding items of segment information for earlier periods.
The entity shall disclose segment information for the current period on both the old basis and the new basis of segmentation, unless the necessary information is not available and the cost to develop it would be excessive.
8) Disclosure of segment information :
a) Disclosures :
An entity shall disclose the following for each period for which a statement of comprehensive income is presented :
- general information as described in point b below
- information about reported segment profit or loss, including specified revenues and expenses included in reported segment profit or loss, segment assets, segment liabilities (refer point c below) and the basis of measurement (refer point d below) and
- reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities and other material segment items to corresponding entity amounts. Reconciliations of the amounts in the statement of financial position for reportable segments to the amounts in the entity’s statement of financial position are required for each date at which a statement of financial position is presented. (refer point e below).
b) General information :
IFRS 8 requires an entity shall disclose the following general information about its segments :
- factors used to identify the entity’s reportable segments, including the basis of organisation (for example, whether management has chosen to organise the entity around differences in products and services, geographical areas, regulatory environments, or a combination of factors and whether operating segments have been aggregated), and
- types of products and services from which each reportable segment derives its revenues.
c) Information about profit or loss, assets and liabilities : Segment profit or loss disclosures :
IFRS 8 requires an entity to report a measure of profit or loss and total assets for each reportable segment, and a measure of liabilities for each reportable segment if such an amount is provided regularly to the CODM. It also requires that an entity disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the CODM or are otherwise provided regularly to the CODM, even if not included in that measure of segment profit or loss :
- revenues from external customers;
- revenues from transactions with other operating segments of the same entity;
- depreciation and amortisation;
- material items of income and expense disclosed in accordance with paragraph 97 of IAS 1 Presentation of Financial Statements (as revised in 2007);
- the entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method;
- income tax expense or income; and
- material non-cash items other than depreciation and amortisation.
If the amounts specified above are inherent in the measure of segment profit or loss used by the CODM, then those amounts are required to be disclosed even if they are not provided explicitly to the CODM.
Segment asset disclosures :
IFRS 8 requires an entity to disclose the following about each reportable segment if the specified amounts are included in the measure of segment assets reviewed by the CODM or are otherwise regularly provided to the CODM, even if not included in the measure of segment assets :
- the amount of investment in associates and joint ventures accounted for by the equity method, and
- the amounts of additions to non-current assets (i.e. PPE and Intangible assets) other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts.
d) Disclosure of measurement basis :
IFRS 8 requires an entity to provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an entity shall disclose the following :
- the basis of accounting for any transactions between reportable segments;
- the nature of any differences between the measurements used for segments reporting (i.e. for profits or losses, assets and liabilities) and the entity’s financial statements (if not apparent from the reconciliations as required under point e below). Those differences could include accounting policies and policies for allocation of common items of income, expenses, assets and liabilities that are necessary for an understanding of the reported segment information.
- the nature of any changes from prior periods in the measurement methods used to determine re-ported segment profit or loss 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, an entity might allocate depreciation expense to a segment without allocating the related depreciable asset to that segment.
e) Reconciliation disclosures :
IFRS 8 requires an entity to provide reconciliations of all of the following :
- the total of the reportable segments’ revenues to the entity’s revenue.
- the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.
- the total of the reportable segments’ assets to the entity’s assets
- the total of the reportable segments’ liabilities to the entity’s liabilities
- the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.
All material reconciling items shall be separately identified and described. For example, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the entity’s profit or loss arising from different accounting policies shall be separately identified and described.
9) Entity-wide disclosures :
Entity-wide disclosures about products and services (refer point a below), geographic areas (including country of domicile and individual foreign countries, if material) (refer point b below) and major customers (refer point c below) for the entity as a whole are required, regardless of whether the information is used by the CODM in assessing segment performance. These disclosures apply to all entities subject to IFRS 8, including entities that have only one reportable segment. However, information required by the entity-wide disclosures need not be repeated if it is included already in the segment disclosures.
a) Information about products and services :
There might be situations in which additional disclosures of external revenue from products and services are necessary on an entity-wide basis when those revenues are not evident from the operating segment disclosures (including situations in which the operating segment disclosures are determined by products and services). For example, an entity might not be organised on the basis of related products and services, and therefore its individual reportable segments include revenues from a broad range of essentially different products and services. In this situation supplemental disclosure of revenues by groups of similar products and services is required, unless the necessary information is not available and the cost to develop it would be excessive. In this case that fact is disclosed.
b) Information about geographical areas :
An entity is required to report the following geo-graphical information :
1. revenues from external customers :
- attributed to the entity’s country of domicile and
- attributed to all foreign countries in total from which the entity derives revenues. If revenues from external customers attributed to an individual foreign country are material, those revenues shall be disclosed separately. An entity shall disclose the basis for attributing revenues from external customers to individual countries.
2. non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts :
- located in the entity’s country of domicile and
- located in all foreign countries in total in which the entity holds assets. If assets in an individual foreign country are material, those assets shall be disclosed separately.
c) Information about major customers :
Revenue from individual external customers that represents 10% or more of an entity’s total revenue must be disclosed. Specifically, the total amount by significant customer and the identity of the segment that includes the revenue must be disclosed. However, IFRS 8 does not require the identity of the customer or the amount of revenues that each segment reports from that customer to be disclosed.
d) Measure of segment profits, assets and liabilities for entity-wide disclosures :
The entity-wide disclosures should be based on the same financial information that is used to produce the entity’s financial statements (i.e., not based on the management approach). Accordingly, the revenue reported for these disclosures should equal the entity’s total revenue. Further, if the necessary information is not available and the cost to develop it would be excessive, that fact shall be disclosed.
10) Issues on first-time adoption :
There is no specific first-time adoption exemption within IFRS 1 for presentation of segment information. However, the reportable segments which, in the past, were identified based on management’s assessment of dominant source and nature of entity’s risks and returns, shall now be identified based on the manner in which the entity’s Chief Operating Decision Maker (‘CODM’) reviews the business components regularly in allocating resources to segments and in assessing their performance.
11) Summary of key differences compared to AS 17 :
