Day 26: IFRS 8 – Operating Segments
Introduction
International Financial Reporting Standard (IFRS) 8, “Operating Segments,” provides guidance on how an entity should report information about its operating segments in its financial statements. The standard aims to ensure that financial information is presented in a way that is useful to investors and other stakeholders in understanding the entity’s performance and financial position. This standard is crucial for providing transparency and insight into the different parts of a business.
Determining Reportable Segments
Reportable segments are the operating segments or aggregations of operating segments that meet specific quantitative thresholds. The process of determining reportable segments involves the following steps:
1. Identify Operating Segments: An entity should identify its operating segments based on the way it organizes its internal reporting to the chief operating decision-maker (CODM). The CODM is the person or group responsible for allocating resources and assessing performance.
2. Quantitative Thresholds: An operating segment is reportable if it meets any of the following quantitative thresholds:
- Its revenue from external customers is 10% or more of the entity’s total revenue.
- The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of (a) the total profit of all operating segments that did not report a loss and (b) the total loss of all operating segments that reported a loss.
- Its assets are 10% or more of the entity’s total assets.
3. Aggregation of Operating Segments: If an operating segment does not meet the quantitative thresholds, it may still be reportable if it is aggregated with other operating segments that, in the aggregate, meet the thresholds.
4. Disclosure of Reportable Segments: An entity should disclose information about its reportable segments, including revenue, profit or loss, assets, and liabilities.
Disclosure Requirements
IFRS 8 requires entities to disclose the following information about their reportable segments:
1. General Information:
- Factors used to identify the entity’s reportable segments, including the basis of organization (e.g., whether management has changed the structure of the internal reporting system in the current period).
- The types of products and services from which each reportable segment derives its revenues.
2. Segment Revenue:
- Revenue from external customers for each reportable segment.
- Revenue from transactions with other operating segments.
3. Segment Profit or Loss:
- The profit or loss attributable to each reportable segment.
- The total amount of revenue, profit or loss, and assets for each reportable segment.
4. Segment Assets:
- The total assets of each reportable segment.
- The total amount of liabilities of each reportable segment.
5. Segment Liabilities:
- The total liabilities of each reportable segment.
- The total amount of revenue, profit or loss, and assets for each reportable segment.
6. Segment Expenses:
- The total amount of expenses for each reportable segment.
- The total amount of revenue, profit or loss, and assets for each reportable segment.
7. Inter-segment Transactions:
- The basis of measurement used to determine the revenue and expenses of each reportable segment.
- The nature and amount of any inter-segment transactions.
8. Changes in the Reportable Segments:
- Any changes in the reportable segments during the period.
- The reasons for the changes.
Example of Segment Reporting
Suppose Company XYZ has three operating segments: Segment A, Segment B, and Segment C. The following information is available for each segment:
| Segment | Revenue from External Customers | Segment Profit/Loss | Segment Assets |
|—————|———————————————-|—————————–|———————–|
| Segment A| $500 million | $100 million | $300 million |
| Segment B| $300 million | $50 million | $200 million |
| Segment C| $200 million | ($20 million) | $150 million |
Based on the quantitative thresholds, all three segments are reportable because they each meet at least one of the thresholds (e.g., revenue from external customers is 10% or more of the entity’s total revenue).
Conclusion
IFRS 8 provides a comprehensive framework for reporting information about an entity’s operating segments. By understanding the process of determining reportable segments and the disclosure requirements, entities can ensure that their financial statements provide transparent and useful information to investors and other stakeholders. Compliance with IFRS 8 is essential for providing a clear view of the entity’s performance and financial position across its different business segments.
FAQs
1. What is the purpose of IFRS 8?
The purpose of IFRS 8 is to provide guidance on how an entity should report information about its operating segments in its financial statements.
2. How are reportable segments determined?
Reportable segments are determined based on quantitative thresholds, such as revenue from external customers, profit or loss, and assets. Operating segments that meet these thresholds are considered reportable.
3. What information must be disclosed about reportable segments?
Entities must disclose information about the general information, segment revenue, segment profit or loss, segment assets, segment liabilities, segment expenses, inter-segment transactions, and any changes in the reportable segments.
4. What is the role of the Chief Operating Decision Maker (CODM)?
The CODM is the person or group responsible for allocating resources and assessing performance. The operating segments are identified based on the way the CODM organizes internal reporting.
Glossary
- Operating Segment: A component of an entity that engages in business activities from which it may earn revenues and incur expenses.
- Reportable Segment: An operating segment or aggregation of operating segments that meets specific quantitative thresholds.
- Chief Operating Decision Maker (CODM): The person or group responsible for allocating resources and assessing performance.
- Segment Revenue: The revenue from external customers for each reportable segment.
- Segment Profit/Loss: The profit or loss attributable to each reportable segment.
- Segment Assets: The total assets of each reportable segment.
- Segment Liabilities: The total liabilities of each reportable segment.
- Inter-segment Transactions: Transactions between operating segments within the same entity.
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