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In this article, we explore the key accounting principles to disclose information relating to an operating segment under IFRS 8. IFRS 8 Operating Segments defines an operating segment as a component of an entity:
- That engages in business activities from which it may earn revenues and incur expenses;
- Whose operating results are regularly reviewed by the entity’s chief operating decision-maker to make a decision about resources to be allocated to the segment and assess its performance; and
- For which discrete financial information is available.
The objective of the standard is to enable the users to evaluate the nature and financial effects of the business activities in which an entity engages and the economic environment in which it operates.
Let us now explore how entities should disclose information relating to their operating segments.
#1: Which entities need to disclose information on operating segments?
Not all entities applying the IFRS framework need to apply this standard. IFRS 8 clarifies that entities with the following conditions apply the standard:
- Whose debt or equity instruments are traded in a public market; or
- An entity 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 instruments in a public market.
Entities not meeting the criteria above do not need to disclose information on operating segments. However, if an entity wishes to disclose, it should not describe such information as segment information unless it complies with the requirements of IFRS 8.
The disclosure of information on the operating segment applies to:
- the separate or individual financial statements of an entity; or
- the consolidated financial statements of a group with a parent meeting the conditions above.
#2: Who is the chief operating decision-maker?
From the definition of an operating segment, one of the criteria is the operating segments’ results are regularly reviewed by the chief operating decision-maker. Who is the chief operating decision-maker?
The term ‘chief operating decision-maker’ refers to a function in the entity. Note that it is not necessarily a manager with a specific title. It refers to a function that is responsible to allocate resources to and assess the performance of the operating segments. Accordingly, it is possible for a group of executive directors or others to be the chief operating decision-maker.
#3: Can we aggregate two or more segments?
IFRS 8 allows an entity to aggregate two or more operating segments into a single operating segment. This is only if the segments have similar economic characteristics, and are similar in each of the followings:
- The nature of the products and services
- The nature of the production processes
- The type or class of customers for their products and services
- The method used to distribute their products or provide their services; and
- The nature of the regulatory environment.
The aggregation is, however, subject to the quantitative thresholds.
#4: What is the quantitative threshold?
A quantitative threshold stipulates the limit in which an entity needs to report an operating segment separately from other segments. The threshold sets by IFRS 8 is 10% or more.
An entity needs to report an operating segment separately if it meets any of the following thresholds:
- Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all the operating segments.
- The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:
- The combined reported profit of all operating segments that did not report a loss; and
- The combined reported loss of all reporting segments that reported a loss.
- Its assets are 10% or more of the combined assets of all operating segments.
There is no limit on the number of the reportable segment that an entity needs to disclose, so long it meets the quantitative threshold. Nevertheless, if the number of reportable segments increases above ten, an entity may consider, as a practical limit, not to disclose further segments so that such disclosure is not too detailed.
#5: Can an entity report an operating segment that is not meeting the quantitative threshold separately?
Yes. An entity may consider presenting an operating segment that is not meeting the threshold separately. This is when it believes the information about that operating segment is useful to the users of the financial statements.
In fact, if the total external revenue reported by operating segments is less than 75% of the entity’s revenue, an entity must identify additional operating segments as reportable segments, even though they do not meet the quantitative threshold criteria. An entity identifies additional reportable segments until at least 75% of its revenue is included in reportable segments.
Additionally, if management believes that an operating segment identified as a reportable segment in the immediately previous period is of continuing significance, it should continue to report such segment separately in the current period even if it no longer meets the quantitative threshold.
#6: Do we need to present comparative information on an operating segment that was not a reportable segment in the prior period?
Yes. IFRS 8 clarifies that when an operating segment is identified as a reportable segment in the current period but not in the prior period, an entity must restate, for comparative purpose, segment data for the prior period. This is to reflect the newly reportable segment in the current period. An exception, however, applies if the necessary information is not available and the cost to develop it would be excessive for the entity.
#7: What is the information that entities need to disclose for the reportable operating segments?
The following are information that entities need to disclose for the reportable segments:
A. General information
With regard to the general information, an entity discloses:
- Factors used to identify the reportable segments including the basis of organisation.
- The judgements made by management in applying the aggregation criteria, including a brief description of the operating segments that have been aggregated and economic indicators that have been assessed in determining similar economic characteristics.
- Types of products and services from which each reportable segment derives its revenues.
B. Information about profit or loss, assets and liabilities
IFRS 8 requires an entity to disclose:
- A measure of total assets and liabilities for each reportable segment if they are provided regularly to the chief operating decision-maker.
- Information that is regularly reviewed or provided to the chief operating decision-maker:
- Revenues from external customers.
- Revenue from transactions with other operating segments of the same entity.
- Interest revenue.
- Interest expense.
- Depreciation and amortisation.
- Material items of income and expense.
- 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.
- Material non-cash items other than depreciation and amortisation
- The amount of investment in associates and joint ventures accounted for by the equity method
- The amounts of additions to non-current assets other than financial instruments, deferred tax assets, net defined benefit assets and rights arising under insurance contracts.
#8: What are the measurement consideration in disclosing operating segments?
IFRS 8 generally requires an entity to measure the amount of each segment item reported to be the same measure as reported to the chief operating decision-maker. For this, the standard requires an entity to explain the measurement of segment profit or loss, segment assets and segment liabilities for each reportable segment. It includes at a minimum, disclosure of:
- Basis of accounting for any transactions between reportable segments.
- Nature of any differences between:
- Firstly, the measurements of the reportable segments’ profits or losses and the entity’s profit or loss before income tax expense or income and discontinued operations
- Secondly, the measurements of reportable segments’ assets and the entity’s assets.
- Thirdly, the measurements of the reportable segments’ liabilities and the entity’s liabilities.
- The nature of any changes from prior periods in the measurement method used to determine reported segment profit or loss and the effect of those changes.
- The nature and effect of any asymmetrical allocations to reportable segments.
Additionally, IFRS 8 also requires entities to disclose reconciliations of the following:
- Firstly, the total of the reportable segments’ revenue to the entity’s revenue
- Secondly, the total of the reportable segments’ measure of profit or loss to the entity’s profit or loss before/after tax expense or income and discontinued operations.
- Thirdly, the total of the reportable segments’ assets to the entity’s assets.
- Fourthly, the total of the reportable segments’ liabilities to the entity’s liabilities.
- Lastly, the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.
#9: Any other disclosure considerations for operating segments?
In addition to the above required disclosures, the following disclosures are required for all entities that are subject to the standard including those that have a single reportable segment:
- The revenues from external customers for each product and service or each group of similar products and services. However, if the information is unavailable and the cost to develop is excessive, entities do not need to disclose it and the fact should also be stated.
- The extent of its reliance on its major customers. If revenue from a single external customer constitutes 10% or more of the entity’s revenues, the standard further requires entities to disclose that fact, the total amount of revenue from each customer and the identity of the segment(s) reporting the revenues.
- The following geographical information, unless the information is unavailable and the cost of obtaining it is excessive:
- Revenue from customers attributed to the entity’s country of domicile and attributed to all foreign countries from which the entity derives revenues.
- Non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts located in the entity’s country of domicile and located in all foreign countries in which the entity holds assets.
The above explained the key principles in providing information relating to operating segments. The full standard is available on the IASB’s website.
We will continue to bring more technical articles in the future. Meantime, you can read other relevant articles in the Financial Accounting section.