IFRS 8 Determining Reporting segments
Identifying Business and Geographical Segments
An entity must look to its organisational structure and internal reporting system to identify reportable segments.
In fact, the segmentation used for internal reports for the board should be the same for external reports
Only if internal segments are not along either product/service or geographical lines is further disaggregation appropriate.
Primary and Secondary Segments
For most entities one basis of segmentation is primary and the other is secondary (with considerably less disclosure required for secondary segments)
To decide which is primary, the entity should see whether business or geographical factors most affect the risk and returns.
This should be helped by looking at entity’s internal organisational and management structure and its system of internal financial reporting to senior management.
|Product||External Revenue||Internal Revenue||Profit||Assets||Liabilities|
|The Nose picker||2,000||30||(100)||3,000||2,000|
|The Earwax extractor||3,000||20||600||8,000||3,000|
Which segments should be reported upon?
Let’s look at the 3 reportable segment tests:
10% of combined revenue = 1,010
10% of profits = 165
10% of losses = 10
10% of assets = 3,100
The Nose picker only passes the revenue test, it fails the profits test as a loss of 100 is less than 165 (165 is higher than 10), it fails the assets test.
It is still a reportable segment though as only 1 test needs to be passed
The Earwax extractor passes all 3 tests
Other Products These are not separate segments and can only be added together if the nature of the products are similar, as are their customer type and distribution method.
So ordinarily these would not be disclosed. However we need to check whether the 2 reported segments meet the 75% external revenue test:
Currently only 5,000 out of 10,000 (50%).
Therefore additional operating segments (other products) may be added until the 75% threshold is reached