International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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segment .................................................................................................2857
3.2
Identifying externally reportable segments .................................................. 2858
3.2.1
Aggregation criteria – aggregating internally reported
operating segments into single reportable operating
segments .............................................................................................. 2860
3.2.2 Quantitative
thresholds
– operating segments which are
reportable because of their size ...................................................... 2864
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3.2.3
Combining small operating segments into a larger
reportable segment ............................................................................ 2865
3.2.4
‘All other segments’ ........................................................................... 2865
3.2.5
A ‘practical limit’ for the number of reported operating
segments .............................................................................................. 2866
3.2.6
Restatement of segments reported in comparative periods ..... 2866
4 MEASUREMENT .......................................................................................... 2866
5 INFORMATION TO BE DISCLOSED ABOUT REPORTABLE SEGMENTS ..... 2868
5.1
General information about reportable segments ........................................ 2869
5.1.1
Disclosure of how operating segments are aggregated .............. 2870
5.2
A measure of segment profit or loss, total assets and total liabilities ....... 2871
5.2.1
Other measures of segment performance ..................................... 2871
5.3
Disclosure of other elements of revenue, income and expense .............. 2872
5.4
Additional disclosures relating to segment assets ....................................... 2873
5.5
Explanation of the measurements used in segment reporting ................. 2874
5.6 Reconciliations
...................................................................................................
2876
5.7
Restatement of previously reported information ........................................ 2877
5.7.1
Changes in organisation structure ................................................... 2877
5.7.2 Changes
in
segment measures ........................................................ 2879
5.8
Disclosure of commercially sensitive information ..................................... 2879
6 ENTITY-WIDE DISCLOSURES FOR ALL ENTITIES .................................... 2880
6.1
Information about products and services ..................................................... 2880
6.2 Information
about
geographical areas ............................................................ 2881
6.3
Information about major customers .............................................................. 2882
6.3.1
Customers known to be under common control ........................ 2883
7 RESULTS OF THE POST-IMPLEMENATION REVIEW OF IFRS 8 .............. 2884
List of examples
Example 32.1:
The meaning of ‘public market’ in the context of a fund ........... 2851
Example 32.2:
Identifying operating segments – CODM and segment
manager ............................................................................................... 2855
Example 32.3:
Similar production process ............................................................... 2861
Example 32.4:
Type and class of customer .............................................................. 2861
Example 32.5:
Retail outlets and internet distribution ......................................... 2862
Example 32.6:
Aggregating internally reported operating segments with
similar characteristics into a single reportable operating
segment ................................................................................................ 2862
Operating
segments
2845
Example 32.7:
Identifying reportable segments using the quantitative
thresholds ............................................................................................ 2864
Example 32.8:
Reaching the threshold of 75% of external revenue ................... 2866
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Chapter 32
Operating segments
1 INTRODUCTION
1.1 Background
IFRS 8 – Operating Segments – was published in November 2006. The Standard has
been mandatory since 2009. [IFRS 8.35].
In Europe, the introduction of IFRS 8 was controversial. Opponents shared concerns
expressed in the dissenting opinions of two IASB members that the lack of a defined
measure of segment profit or loss and the absence of any requirement for that measure
to be consistent with the attribution of assets to reportable segments would encourage
the proliferation of non-GAAP measures that could mislead users. [IFRS 8.D01-D04]. These
concerns were raised in the European Parliament together with questions about the
governance of the IASB, as a result of which the process to endorse IFRS 8 in the
European Union was not completed until November 2007, a year after the Standard had
been published.
During this period, the IFRS Foundation announced enhancements to oversight and due
process to include a requirement for the IASB to conduct ‘a review of issues identified
as contentious as part of the consultation process related to all new IFRSs (including
IFRS 8), major amendments to IFRSs and major IFRIC interpretations’. Such a review
would be performed after at least two full years of implementation and be completed
within three years of the pronouncement’s effective date.1 IFRS 8 was the first standard
subject to a post-implementation review, which was completed in 2013 and is further
discussed at 7 below.
1.2
The main features of IFRS 8
IFRS 8 is a disclosure standard. It specifies the way an entity should report information
about its operating segments in annual financial statements and, as a consequential
amendment to IAS 34 – Interim Financial Reporting, requires an entity to report
selected information about its operating segments in interim financial reports (see
Chapter 37 at 4.4). It also sets out requirements for related disclosures about an entity’s
products and services, geographical areas and major customers. The disclosures
required are discussed at 5 and 6 below and include:
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• financial and descriptive information about the entity’s reportable segments, which
are operating segments above a certain size or (where specific criteria are met)
aggregations of operating segments;
• segment revenues and a measure of profit or loss for each reportable segment,
reconciled to the amounts disclosed in the entity’s financial statements;
• a measure of segment assets, segment liabilities and particular income and expense
items to the extent that such information is regularly provided to the chief
operating decision maker of the entity, reconciled to the amounts disclosed in the
entity’s financial statements;
• unless the information is not available and the cost of its development would be
excessive, information about the revenues derived from the entity’s products and
services (or groups of similar products and services), about the countries in which
it earns revenues and holds assets, and about major customers, regardless of
whether this information is used by management in making operating decisions;
and
• descriptive information about the way that operating segments were determined,
the products and services provided by the segments, differences between the
measurements used in reporting segment information and those used in the entity’s
financial statements, and changes in the measurement of segment amounts from
period to period.
The process of identifying operating segments for external reporting purposes begins
with the information used by the entity’s chief operating decision maker to assess
performance and to make decisions about future allocations of resources. [IFRS 8.5].
Entities applying IFRS 8 report on a single set of components according to the way that
the business is sub-divided for management reporting purposes. [IFRS 8.10].
If a component of an entity is managed as a separate segment, IFRS 8 requires it to be
treated as such even if it sells exclusively or primarily to other components of the same
entity. [IFRS 8.5(a)].
IFRS 8 does not go so far as to require an entity to report all the information that is
reviewed by the chief operating decision maker, recognising that such detail may not be
useful to users of financial statements and could be cumbersome in its presentation.
Instead it allows entities to apply certain criteria for aggregating components and to
disclose information only for those segments that exceed certain quantitative criteria.
[IFRS 8.BC Appendix A 72].
Under IFRS 8, the amounts reported about identified segments are prepared according
to the manner in which information is presented to the entity’s chief operating decision
maker. This can be different to the way that the entity applies its accounting policies
used in the preparation of the financial statements under IFRSs.
IFRS 8 requires an entity to describe the factors used to identify the entity’s reportable
segments, including a description of the basis of organisation. This description would explain
whether the organisation is structured according to products and services, geographical
areas, regulatory environments or other factors and state whether operating segments have
been aggregated for reporting purposes. In addition, the entity must describe the types of
products and services from which each reportable segment derives its revenues. [IFRS 8.22].
Operating
segments
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IFRS 8 specifies amounts which should be disclosed about each reportable segment, but
only if those measures are included in the measure of profit or loss used by, or otherwise
regularly provided to, the chief operating decision maker (see 5.2 below). These
specified amounts include a requirement to report separately interest revenue and
interest expense by segment (but only if those measures are included in the measure of
profit or loss used, or otherwise regularly provided to the by the chief operating decision
maker) unless a majority of the segment’s revenues is derived from interest and
performance is assessed primarily on the basis of net interest revenue. [IFRS 8.23].
Certain ‘entity-wide disclosures’ are also required to be provided under IFRS 8, even if
the entity has only one reportable segment [IFRS 8.31] (see 6 below). Entity-wide
information is disclosed for the entity as a whole about its products and services,
geographical areas and major customers, regardless of the way the entity is organised
and the information presented to the chief operating decision maker. The amounts
reported for this entity-wide information is based on the financial information used to
produce the entity’s financial statements. [IFRS 8.32-34].
There is no ‘competitive harm’ exemption in IFRS 8 from the requirement to disclose
segment information, or components of such information, for example on the grounds
of commercial sensitivity, confidentiality or being otherwise detrimental to the entity’s
competitive position. [IFRS 8.BC43-45].
These features are discussed in more detail in this chapter.
1.3
Terms used in IFRS 8
The following terms are used in IFRS 8 with the meanings specified:
Term Meaning
Operating segment
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 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.
[IFRS 8.5, IFRS 8 Appendix A].
Chief operating decision The function of allocating resources to and assessing the performance of
maker
the operating segments of an entity. This is not necessarily a manager with
a specific title, but can be an entity’s chief executive officer, chief operating
officer, a group of executive directors or others. [IFRS 8.7].
Segment manager
The function of being directly accountable to and maintaining regular
contact with the chief operating decision maker to discuss operating
activities, financial results, forecasts, or plans for the segment. [IFRS 8.9].
Reportable segment
An operating segment or a group of two or more operating segments
determined to be eligible for aggregation in accordance with IFRS 8.12;
and which exceeds the quantitative thresholds in IFRS 8.13. [IFRS 8.11].
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Term Meaning
Aggregation criteria
Two or more operating segments may be aggregated into a single operating
segment if aggregation is consistent with the core principle of IFRS 8, they
have similar economic characteristics, such as long-term average gross
margins, and are similar in each of the following respects:
(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;
(e) if applicable, the nature of the regulatory environment, for example,
banking, insurance or public utilities. [IFRS 8.12].
Quantitative thresholds
Information about an operating segment that meets any of the following
criteria:
(a) its reported revenue, including both sales to external customers and
intersegment sales or transfers, is 10% or
more of combined revenue,
internal and external, of all operating segments; or
(b) its reported profit or loss is, in absolute terms, 10% or more of the
greater of, in absolute amount:
(i)
the combined 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; or
(c) its assets are 10% or more of the combined assets of all operating
segments. [IFRS 8.13].
1.4 Transitional
provisions
There are no special arrangements for entities applying IFRS 8 for the first time, with the
Standard requiring comparative information to be restated. Only where the necessary
information is both unavailable and incapable of being developed without excessive cost
is an entity exempt from full restatement. [IFRS 8.36]. Accordingly, an entity should ensure
that internal reporting systems can provide the information needed to meet the disclosure
requirements of IFRS 8 for all periods presented in its financial statements.
2
OBJECTIVE AND SCOPE OF IFRS 8
2.1 Objective
The objective of IFRS 8 is expressed as a ‘core principle’, being that 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. [IFRS 8.1].
Operating
segments
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2.2
Scope of IFRS 8
IFRS 8 applies to both the separate or individual financial statements of an entity and
the consolidated financial statements of a group with a parent:
(a) 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
(b) that files, or is in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of