IFRS 8: Operating segments
IFRS 8 replaces IAS 14. It pertains to preparation and provision of segmental results by an entity. IFRS 8 aligns with US FAS 131.
The essence of the Standard it to achieve parity between external reporting of financial statements and internal reporting of performance of the entity for management evaluation purposes. Thus, the Standard requires entities to report information about “operating segments”. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. The Standard requires entities to make disclosures about segment results, that is, profit and loss account, as also segment assets. In addition, the Standard also requires disclosure of revenues from major geographical territories, and major customers.
The key distinction between IAS 14 and IFRS 8 is that IFRS 8 aligns more closely segmentation used for internal reporting purposes. Under IAS 14, segmentation was done based on products and geographical territories – one being primary, and the other being secondary. The distinction between primary and secondary segments has been done away with in IFRS 8, and segmentation on both product and geographical basis is mandated. In addition, the segmentation under IAS 14 was based only on sales to external customers – IFRS 8 considers sales internally as well, if that is the basis of internal management evaluation.
The application of the Standard is limited to entities whose debt or equity instruments are listed or quoted in over-the-counter markets or those that are to file a prospectus for an imminent public offer of debt or equity instruments.
What is operating segment?
An operating segment is defined as a component that satisfies ALL of the 3 features below:
- It engages in business activities from which it may earn revenues and incur expenses (including inter-component revenues and expenses);
- Its 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
- It is a component for which discrete financial information is available.
The idea of segmentation is not to split the assets/resources of the entire entity. For example, the corporate headquarters do not form part of any segment.
The existence of operating segments is commonly demonstrated by a segment manager, who is accountable for operating activities, financial results, forecasts, or plans for the segment.
In case of entities following the matrix form of organisation, that is, some managers managing segments world-wide, and some managing territories, the entity shall determine the existence of operating segments based on the core principle, that is, 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.
Operating segments may be aggregated, if such aggregation would be more consistent with the core principle, and the segments share similar characteristics with reference to
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.
Quantitative criteria for operating segment determination:
The quantitative criteria for determination of segments remains similar to that of IAS 14, with the difference that inter-segment sales are also considered for determination. Accordingly, the quantitative thresholds are:
1. 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.
2. 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.
3. Its assets are 10 per cent or more of the combined assets of all operating segments.
The above thresholds are minimum thresholds. If there are segments that do not meet any of the quantitative thresholds, they may still be considered reportable, if management believes that information about the segment would be useful to users of the financial statements.
While applying the criteria, the 75% minimum test that existed in IAS 14 continues, that is, 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.
The information that does not fall under segments will be clubbed under a residual head called “all other segments” or by a similar name.
Segment disclosures:
The segment disclosures are copious. The key principle is still the same – all information which is used by the decision-maker for performance review of segment profit/loss should be disclosed to external readers. Specifically, the entity shall report a measure of profit or loss and total assets for each reportable segment. An entity shall report a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker. In addition, the following information shall be disclosed:
- revenues from external customers;
- revenues from transactions with other operating segments of the same entity;
- interest revenue;
- interest expense;
- depreciation and amortisation;
- material items of income and expense disclosed in accordance with paragraph 97 of IAS 1 Presentation of Financial Statements
- 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.
Entity-wide disclosures:
This set of disclosures is relevant for entities that either have segment reporting, or have a single reportable segment. That is, even where segment reporting is not applicable, the disclosures required by Para 32-34 of the Standard are applicable.
-
Information about products and services: An entity shall report the revenues from external customers for each product and service, or each group of similar products and services. The only exception is where disclosure of such information would be impractical or too costly.
-
Information about geographical segments: An entity shall disclose separately for the country of domicile and other countries separately revenues from external customers. If foreign jurisdictions are significant, then the information shall be disclosed separately for each geographical segment. An entity shall disclose the basis for attributing revenues from external customers to individual countries. The entity shall also disclose all non-current assets, other than financial assets, deferred tax assets, etc., in country of domicile and in foreign jurisdictions. Information about major customers: An entity shall provide information about the extent of its reliance on its major customers. A group of customers under common control is regarded as single customer. If revenues from transactions with a single external customer amount to 10 per cent or more of an entity’s revenues, the entity shall disclose that fact, the total amount of revenues from each such customer, and the identity of the segment or segments reporting the revenues.