IFRS 8 OPERATING SEGMENTS
1 INTRODUCTION
Segment reporting according to IFRS 8 aims at enabling users of financial statements to see an entity through the eyes of its management. Therefore, in the segment report, the entity has to report segments that correspond to internal management reports. Similarly, the amounts disclosed according to IFRS 8 are derived from internal management reports and therefore do not necessarily have to be determined in accordance with IFRSs.
2 SCOPE
IFRS 8 applies 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 organization for the purpose of issuing any class of instruments in a public market (IFRS 8.2). If a financial report contains both the consolidated financial statements of a parent (within the scope of IFRS 8) and the parent's separate financial statements, segment information is required only in the consolidated financial statements (IFRS 8.4).
IAS 34 includes disclosure requirements with regard to segment information in interim financial reports (IAS 34.16Ag).
3 OPERATING SEGMENTS AND CHIEF OPERATING DECISION MAKER
An operating segment is a component of an entity that meets all of the following criteria (IFRS 8.5 and IFRS 8.Appendix A):
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 (IFRS 8.5).
Not every part of an entity is necessarily an operating segment or part of an operating segment. For example, a corporate headquarters or some functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the entity. Therefore, they do not represent operating segments (IFRS 8.6).
In the above definition of the term “operating segment,” the term “chief operating decision maker” is used. The latter term identifies a function, not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the entity's operating segments. Often the CODM is the entity's chief executive officer or chief operating officer. However, the CODM may also be a group of executive directors or others (IFRS 8.7).
Determination of the operating segments is based on the entity's internal management reports. Therefore, the segments presented in the financial statements may be based, for example, on product categories, geographical regions or customer groups or a mixed segmentation (e.g. product categories are presented as segments for one part of the entity, whereas customer groups are presented as segments for the remaining part of the entity) may be presented, provided that the same segmentation is also used in the entity's internal management reports.
Many entities, in particular multinational entities with diverse operations, organize and report financial information to the CODM in more than one way. As a result, identifying the appropriate operating segments might not be obvious. In such cases, judgment will be necessary in determining the operating segments and will depend on the individual facts and circumstances of the entity. In these situations, the operating segments are determined by reference to the core principle of IFRS 8, which requires the disclosure of information that enables users of an entity's financial statements to evaluate the nature and financial effects of the business activities in which the entity engages and the economic environments in which it operates. The following additional factors may identify the appropriate operating segments (IFRS 8.8–8.10):1
Some entities use a matrix organization whereby business components are managed in more than one way. For example, there may be segment managers who are responsible for geographic regions as well as 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), the appropriate operating segments are determined by reference to the core principle of IFRS 8 described above (IFRS 8.10).2
4 REPORTABLE SEGMENTS
4.1 Overview
It is necessary to report separately about each operating segment that (IFRS 8.11):
Other situations in which separate information about operating segments may be reported or has to be reported are described in Section 4.4 (IFRS 8.14–8.19).
4.2 Aggregation of Operating Segments
Two or more operating segments may be aggregated into a single operating segment if all of the following criteria (aggregation criteria) are met (IFRS 8.12):
4.3 Quantitative Thresholds
It is necessary to separately report information about an operating segment that meets any of the following quantitative thresholds (IFRS 8.13):
The measures of the segment amounts used for these tests are based on the amounts reported to the CODM.3
4.4 Remaining Operating Segments
Operating segments that do not meet any of the quantitative thresholds (see Section 4.3) may be considered reportable if management believes that information about the segment would be useful to users of the financial statements (IFRS 8.13).
Operating segments that do not meet the quantitative thresholds may be combined to produce a reportable segment if the operating segments have similar economic characteristics and share a majority of the aggregation criteria listed in IFRS 8.12 (IFRS 8.14).
If the total external revenue reported by operating segments is less than 75% of the entity's revenue, additional operating segments have to be identified as reportable segments until at least 75% of the entity's revenue is included in reportable segments (IFRS 8.15). Which segments are chosen is at the entity's discretion.
Other business activities and operating segments that are not reportable are combined in an “all other segments” category separately from other reconciling items in the reconciliations required by IFRS 8.284 (IFRS 8.16).
The entity should consider whether a practical limit to the number of reportable segments presented is reached when their number increases above 10. In that case, segment information may become too detailed (IFRS 8.19). However, that rule must not be used by the entity to depart from the mandatory requirements of IFRS 8 for determining reportable segments.
5 SEGMENT DISCLOSURES
5.1 Determination of the Amounts to be Disclosed
The amount of each segment item reported is based on internal management reports. More precisely, these amounts are the measures reported to the CODM for the purposes of making decisions about allocating resources to the segment and assessing its performance. If amounts are allocated to reported segment profit or loss, assets or liabilities, those amounts have to be allocated on a reasonable basis (IFRS 8.25).
If the CODM 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 are those that management believes are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity's financial statements (IFRS 8.26).
IFRS 8 does not require the allocations to reportable segments to be symmetrical. For example, depreciation expense may be taken into account when determining profit or loss of a particular segment, whereas the related depreciable assets are not allocated to that segment (IFRS 8.27f).
5.2 Disclosure Requirements
5.2.1 Segment Profit or Loss
IFRS 8 requires the reporting of a measure of segment profit or loss (IFRS 8.23). The measure disclosed has to be the measure reported to the CODM for the purposes of making decisions about allocating resources to the segment and assessing its performance (IFRS 8.23 and 8.25). Hence, if the CODM does not use the same measure of segment profit or loss for all segments, the segment report according to IFRS 8 also includes different measures for the segments presented. If the CODM uses more than one measure of a segment's profit or loss, the reported measure is the one that management believes is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity's financial statements (IFRS 8.23 and 8.25–8.26). Examples of measures of segment profit or loss are revenue, gross profit, results of operating activities, EBIT, and EBITDA.
It is also necessary to disclose the following amounts about each reportable segment if they are included in the measure of segment profit or loss reviewed by the CODM, or are otherwise regularly provided to the CODM even if they are not included in that measure of segment profit or loss (IFRS 8.23):
The measurement of these amounts has to correspond with their measurement in the entity's internal management reports (IFRS 8.25).
Interest revenue has to be reported separately from interest expense. However, a segment's interest revenue may be reported net of its interest expense if (IFRS 8.23):
In addition, the amounts of impairment losses and reversals of impairment losses recognized in profit or loss and in other comprehensive income during the period have to be disclosed for each reportable segment (IAS 36.129).
5.2.2 Segment Assets and Segment Liabilities
A measure of segment assets and segment liabilities has to be reported for each segment if such amounts are regularly provided to the CODM (IAS 8.23).
If the CODM uses only one measure of the segment's assets or the segment's liabilities in assessing segment performance and deciding how to allocate resources, the assets and liabilities are reported at those measures. If the CODM uses more than one measure of the segment's assets or the segment's liabilities, the reported measures are those that management believes are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity's financial statements (IFRS 8.26).
5.2.3 Reconciliations
According to IFRS 8, an entity has to provide several reconciliations of the total of the reportable segments' amounts to the amounts included in the financial statements. For example, it is necessary to reconcile the total of the reportable segments' revenues to the entity's revenue or to reconcile 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 the 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 (IFRS 8.28).
All material reconciling items have to be separately identified and described (IFRS 8.28). Information about other business activities and operating segments that are not reportable has to be combined and disclosed in an “all other segments” category separately from other reconciling items. The sources of the revenue included in that category have to be described (IFRS 8.16).
5.2.4 Other Disclosures
The entity has to disclose the factors used to identify its reportable segments including the basis of organization. Moreover, the types of products and services from which each reportable segment derives its revenues have to be disclosed (IFRS 8.22).
IFRS 8 requires further disclosures, e.g. about the basis of accounting for any transactions between reportable segments and about the nature and effect of any asymmetrical allocations to reportable segments (IFRS 8.27).
6 ENTITY-WIDE DISCLOSURES
The entity-wide disclosures have to be made by all entities subject to IFRS 8 including those entities that have a single reportable segment. However, they have to be provided only if they are not provided as part of the reportable segment information required by IFRS 8. These disclosure requirements have to be implemented, irrespective of whether the information is regularly provided to the CODM. The amounts reported are based on the financial information that is used to prepare the entity's financial statements (IFRS 8.31–8.34).
The entity has to report the revenues from external customers for each product and service, or each group of similar products and services, unless the necessary information is not available and the cost to develop it would be excessive (in which case that fact has to be disclosed) (IFRS 8.32).
The following geographical information has to be reported, unless the necessary information is not available and the cost to develop it would be excessive (in which case that fact has to be disclosed) (IFRS 8.33):
If revenues from transactions with a single external customer amount to 10% or more of the entity's revenues (major customer), the entity has to disclose this fact, the total amount of revenues from each such customer, and the identity of the segment or segments reporting the revenues. To this end, a group of entities known to the reporting entity to be under common control has to be considered a single customer (IFRS 8.34).
7 EXAMPLES WITH SOLUTIONS
Total of the (unadjusted) EBITs of A, B, and C | 350 |
Elimination of A's, B's, and C's depreciation charge presented in E's internal management reports | 45 |
Depreciation expense according to IFRS (A, B, and C) | −36 |
Elimination of intragroup profits and losses (A, B, and C) | 3 |
Interest expense (of A, B, and C) | −40 |
Interest revenue (of A, B, and C) | 5 |
Recognition of the provision for litigation | −10 |
Fair value gain | 15 |
Category “all other segments” (IFRS 8.16) (D and headquarters) | −59 |
Profit before tax | 273 |
1 See KPMG, Insights into IFRS, 7th edition, 5.2.120.10–5.2.120.20.
2 See KPMG, Insights into IFRS, 7th edition, 5.2.130.10.
3 See KPMG, Insights into IFRS, 7th edition, 5.2.150.30.
4 See Section 5.2.3.