variances at that level on a monthly basis;
• The divisional managers are compensated in accordance with the company’s bonus plan, which sets
targets for each division.
In this case, the entity decides that the operating segments as defined in IFRS 8 comprise the three divisions
as opposed to the six business units, because only the divisions have segment managers.
Proper application of the requirements of IFRS 8 requires a clear understanding of what
information is given to the chief operating decision maker and how the CODM uses that
information, in conjunction with the segment managers. In the above example, the fact
that the CODM receives detailed financial information about activities below the
divisional level could raise doubts about the determination that the divisions represent
the entity’s operating segments, rather than the business units. In these circumstances,
entities would be required to demonstrate that:
• the more detailed information is not used by the CODM to assess performance and
allocate resources;
• segment managers operate only at the divisional level and are not, in effect,
managers for each of the business units in their division. As noted above,
components otherwise meeting the characteristics of an operating segment under
IFRS 8 are not combined simply because they share a segment manager.
It might be evident from the records of the discussions between segment managers and
the CODM that results are monitored at divisional rather than at business unit level. It
might equally be clear from the records of board meetings that more detailed
information is not referred to by the CODM in its deliberations. However, there is
evidence that when regulators and other enforcement agencies assess the quality of an
entity’s compliance with IFRS 8, they adopt the presumption that the CODM uses
whatever detailed information is provided to him/her on a regular basis for decision-
making and assessment purposes.
3.1.3 Availability
of
discrete financial information
As noted above, a component of an entity can only be regarded as an operating segment
if discrete financial information is available about that component. [IFRS 8.5(c)]. This
requirement relates solely to the existence of discrete information that allows the chief
operating decision maker to make decisions about the allocation of resources and to
assess the performance of that component.
Accordingly, a component of an entity is still regarded as an operating segment if the
only information available relates to the profitability of that component. Such
information would be sufficient for the chief operating decision maker to review its
operating results, assess performance and make decisions about resource allocation.
[IFRS 8.5(b)]. The financial information is not rendered useless by the lack of,
Operating
segments
2857
for example, a separate statement of financial position or a separate statement of cash
flows for that component.
However, it would be unlikely that a component of an entity could be regarded as an
operating segment solely because the chief operating decision maker receives
information about revenue from that component. Without a measure of the
component’s operating results it would be difficult to make meaningful assessments of
the effect of allocating more or less resource to that activity. As such, information on
revenue alone would have limited value in decision making. Therefore, the search for
an entity’s operating segments starts with the smallest components of the business for
which a measure of profitability is provided to the entity’s CODM.
3.1.4
When a single set of components is not immediately apparent
For many entities, the search for operating segments is concluded after applying the
three criteria listed at 3.1 above.
However, in cases where a single set of operating segments cannot be identified clearly
by applying the above criteria, for example in an entity where its business activities are
reported internally and assessed in a variety of ways, IFRS 8 states that other factors
should be considered, including the nature of the business activities of each component,
the existence of a manager responsible for it, and the information presented to the board
of directors. [IFRS 8.8]. Therefore, if an entity’s activities are reported internally in a
number of different ways, each with their own set of business components as defined
above, but there is only one set to which segment managers are assigned, then that will
comprise the operating segments to report in the financial statements for IFRS 8
purposes. [IFRS 8.9]. For example, if an entity’s board of directors manages its business
using information on revenues and costs analysed both by product grouping as well as
by geographical market, but the management structure operates only on geographical
lines, then the financial statements would include segmental information on a
geographical basis.
A single set of operating segments must be identified, even where two or more sets of
components of an entity are managed in a matrix structure, for example where financial
information is available and performance is assessed and segment managers assigned
not only on the basis of product and service lines worldwide but also by geographical
area irrespective of products and service lines. In that situation the choice of a single set
of components is a matter of judgement, made by reference to the core principle of the
Standard as set out at 2.1 above. [IFRS 8.10]. This requirement is different to
FASB ASC Topic 280 and ED 8, which proposed that in such circumstances operating
segments be drawn up on product and service lines.3 The IASB agreed with respondents
to the exposure draft that a default position mandating the use of components based on
products and services was inconsistent with a management approach founded on what
is important to the chief operating decision maker. [IFRS 8.BC27].
3.1.5
An equity accounted investment can be an operating segment
The definition of an operating segment focuses on the review of its operating results by
the entity’s chief operating decision maker and the assessment of its performance and
the allocation of resources to it by the CODM. [IFRS 8.5(b)]. This raises the question of
2858 Chapter 32
whether the reporting entity needs to have control over the activities conducted in what
otherwise would meet the definition of an operating segment, or whether it is sufficient
that the CODM reviews its results and this review influences decisions about investment
in those activities. In our view, control over the activities in which the entity is investing
is not a requirement.
The core principle of IFRS 8 requires the disclosure of information relating to the
business activities in which an entity engages and the economic environments in which
it operates. [IFRS 8.1]. No restriction is imposed according to the manner of that
engagement, just the way in which the CODM makes decisions about allocating
resources and assesses its performance.
For example, an equity method investee (i.e. associate
or joint venture) could be
considered an operating segment, if it meets the criteria in IFRS 8. The CODM may
regularly review the operating results and performance of an equity method investee
for the purposes of making additional investments or advances, evaluating financial
performance or evaluating whether to retain its investment. The CODM is not
required to be responsible for making decisions at the investee operating level that
affect the investee’s operations and performance in order for it to be identified as an
operating segment. Further, the definition of an operating segment does not require
that the revenue generating activities of the investee are included in the entity’s
revenue as reported in the IFRS financial statements. Segment performance could be
measured by reference to the amounts included in the entity’s IFRS financial
statements or equally by reference to the financial information prepared by the
investee itself. Any difference between the measures used by the CODM and the
accounting treatment under IFRS would be reported as a reconciling item in the
entity’s disclosures under IFRS 8 (see 5.6 below).
This view is consistent with the disclosure requirements of IFRS 8, which require the
entity’s share of the profits and losses of equity accounted associates and joint ventures
and the amount of investment in equity accounted investees to be presented, if those
amounts are included in the measures reviewed by the CODM of segment profit or loss
and segment assets respectively (see 5.3 and 5.4 below). [IFRS 8.23(g), IFRS 8.24(a)].
3.2
Identifying externally reportable segments
Having identified a single set of internal operating segments, the Standard describes how
reportable segments are determined. As a minimum an entity must separately disclose
information on reportable segments above a certain size (see 3.2.2 below). In addition,
a previously identified reportable segment continues to be disclosed separately in the
current period if management judges it to be of continuing significance, even if it no
longer satisfies the quantitative thresholds. [IFRS 8.17].
Thereafter, an entity is only compelled to give information on other segments (either
individually or in certain circumstances on a combined basis) if the unallocated element
is too large (see 3.2.4 below).
The implementation guidance to IFRS 8 includes a diagram illustrating how to apply the main
provisions of the Standard for identifying reportable segments, which is reproduced below:
Operating
segments
2859
Identify operating segments based on
management reporting system
[IFRS 8.5-10]
Do some
operating segments
Yes
Aggregate segments
meet all aggregation
if desired
criteria?
[IFRS 8.12]
No
Do some
Yes
operating segments
meet the quantitative
thresholds?
[IFRS 8.13]
No
Do some
remaining operating
Aggregate
Yes
segments meet a majority
segments
of the aggregation
if desired
criteria?
[IFRS 8.14]
No
Do identified
reportable segments
Yes
account for 75 per cent
of the entity’s revenue
[IFRS 8.15]
No
Report additional segment if external
revenue of all segments is less than
75 per cent of the entity’s revenue
[IFRS 8.15]
These are reportable segments
Aggregate remaining segments into ‘all
to be disclosed
other segments’ category
[IFRS 8.16]
As indicated in the implementation guidance, the diagram is a visual supplement to the
IFRS. It should not be interpreted as altering or adding to any requirements of the IFRS
nor should it be regarded as a substitute for its requirements. [IFRS 8.IG7].
IFRS 8 does not permit the omission of segment information when management believe
that its disclosure is commercially sensitive or potentially detrimental to the entity’s
competitive position. If the criteria for separate disclosure described at 3.2.2 and 3.2.4
below are met, an entity is compelled to give information on that operating segment in
2860 Chapter 32
the financial statements. The IASB considered both a general ‘competitive harm’
exemption and a ‘comply or explain’ basis for disclosure and rejected both. [IFRS 8.BC43-45].
3.2.1
Aggregation criteria – aggregating internally reported operating
segments into single reportable operating segments
Under IFRS 8, an entity is required to both determine its operating segments and report
operating segment financial information in accordance with the management approach.
However, reporting separate information about every operating segment that the
CODM reviews separately may not enhance the financial statement user’s
understanding of the business, particularly when two or more of the operating segments
are so similar that they ‘can be expected to have the same future prospects.’
[IFRS 8.BC Appendix A73].
As such, regardless of their size, two or more operating segments are permitted to be
aggregated if they have similar economic characteristics (demonstrated, for example, by
similar 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 the products and services;
(d) the methods used to distribute the products or provide the services; and
(e) if applicable, the nature of the regulatory environment. [IFRS 8.12].
At this stage in the process only segments which are similar in all the above respects can
be aggregated into single reportable segments, which can require judgment. Further
aggregation can only be achieved for segments which do not merit separate disclosure
by virtue of their size (see 3.2.2 below).
It is important that entities do not overlook the requirement for operating segments to
exhibit similar economic characteristics before considering the other factors allowing
aggregation. [IFRS 8.BC30]. The fact that certain operating segments have been selected by
management as a separately reportable component of activities in the business would
suggest that there are good commercial reasons why their performance is monitored
separately by the CODM and, therefore, might usefully be reported separately to users
of the financial statements. Only if those components exhibit similar economic
characteristics does their aggregation not compromise the entity’s ability to achieve the
core principle of IFRS 8, to disclose information that is useful to users of its financial
statements. [IFRS 8.BC32].
There is a certain presumption inherent in any standard on segment reporting that
investors would prefer information on a more disaggregated basis. As a result, it may be
questioned whet
her it is consistent with the objective and basic principles of IFRS 8 for
a company to report just one reportable segment or a limited number of reportable
segments, especially if such reportable segments are inconsistent with an entity’s basic
organisational structure. Companies that choose to aggregate operating segments should
be prepared to explain why an operating segment is important enough to be individually
reported to the CODM, but similar enough to other segments to be aggregated when
reported to investors.
Operating
segments
2861
In assessing whether the aggregation criteria are met, it is important to note that the
aggregation criteria are tests, not indicators, of similarity between operating segments.
The operating segments must be similar in each (i.e. all) of the following areas for
aggregation to be permitted:
(a) The nature of the products and services. Similar products or services generally will
have similar purposes or end uses. Thus, they may be similar types and degrees of
risk and similar opportunities for growth. We believe that it often will be
appropriate to evaluate the similarity of products or services based on the range of
activities of the organisation. For example, a highly diversified company that
manufactures a variety of consumer products, provides financial services and has
a construction business may determine that all of its consumer products are similar.
However, an entity that only sells consumer products might determine that not all
of its consumer products are similar;
(b) The nature of the production processes. A similar production process might be
demonstrated by the sharing of common or interchangeable production facilities,
equipment, labour force or service group and by using similar raw materials in the
production process. Likewise, similarity in the nature and type of labour or
amounts of capital required also may be indicative of a similar production process.
The nature of the production process of two different products may be similar,
even if the products do not function similarly. Consider the following example:
Example 32.3: Similar production process
Assume that Life Co., a life sciences company manufactures various pharmaceutical products for commercial
sale. These products include cold medicines and diet pills. Each product is manufactured through the same
production process, even though the products have different applications. Both products consist of various
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 569
