IFRS 8 Segmental Reporting - Introduction

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Segmental Reporting (IFRS 8) - Introduction

Objective of IFRS 8

The objective of IFRS 8 is to present information by line of business and by geographical area.

It applies to plcs and any entity voluntarily providing segment information should comply with the requirements of the Standard.

So why is it a good thing to have information by line of business and geographical area? 

Well, imagine you are an Apple shareholder. 

You will naturally be interested in how well the company is doing. 

That information would only make real sense though if it was broken down by business area. 

For example, if most of the profits were from i-Pods, then this would be worrying as this market is in decline.

You would want to know how they are doing in the desktop computer market, how they are doing in the smartphone and tablet market as well as any new areas they may be diversifying into.

Key Definitions

Business segment (e.g. i-Phone segment):

A component of an entity that:

  1. provides a single product or service and

  2. is subject to risks and returns that are different from those of other business segments.

Geographical segment (e.g. European market):

A component of an entity that

  1. provides products and services and

  2. is subject to risks and returns that are different from those of components operating in other economic environments.

May be based either on where the entity’s assets are located or on where its customers are located.

Operating Segment

Engages in business (even if all internal), whose results are regularly reviewed by the chief operating decision maker and for which separate financial information is available.

  1. Earns revenue and incurs expenses from a business activity

  2. Is regularly reviewed by the chief decision maker when handing out resources

  3. Has separate financial info available

Therefore the head office is not an operating segment as it is not a business activity.

The idea behind the regular review part is that the entity reports on those segments that are actually used by management to monitor the business

Aggregating Segments

Operating Segments can be aggregated together only if
they have similar economic characteristics such as:

  1. Similar product / service

  2. Similar production process

  3. Similar sort of customer

  4. Similar distribution methods

  5. Similar regulations

Quantitative Thresholds

Any segment which meets these thresholds must be reported on:

  1. Profit is 10% or more of all profitable segments

  2. Assets are 10% or more of the total assets of all operating segments

Reportable Segments

If the total EXTERNAL revenue of the operating segments reported on (meeting the quantitative thresholds) is less than 75% of total revenue of the company then additional operating segments results (those not meeting the quantitative thresholds) are reported upon (until the 75% is met)

Illustration
A B C D E Total
External Revenue 220 300 75 55 60 710
Internal Revenue 60 15 5 10 90
Profit 60 50 20 -11 14 133
Assets 5,000 4,000 300 300 400 10,000

Which of the segments A-E should be reported upon?

A B C D E
Revenue Test 280 / 800 = 35% Pass 315 / 800 = 39% Pass 75 / 800 = 9% Fail 60 / 800 = 7.5% Fail 70 / 800 = 9% Fail
Profit Test 60 / 144* = 42% Pass 50 / 144 = 35% Pass 20 / 144 = 14% Pass 14 / 144 = 9% Fail
Assets Test 5,000 / 10,000 = 50% Pass 4,000 / 10,000 = 40% Pass 300 / 10,000 = 3% Fail 300 / 10,000 = 3% Fail 400 / 10,000 = 4% Fail

*Profitable segments only

A, B and C all pass one of the tests and so would be reported on

External Revenue Test

A + B + C = 595 / 710 = 84% PASS (No more segments needed)

Disclosures for each segment

  • Profit

  • Total Assets and Liabilities

  • External Revenues

  • Internal Revenues

  • Interest income and expense

  • Depreciation

  • Profit from Associates and JVs

  • Tax

  • Other material non-cash items

Measurement

This shall be the same as the one used when reporting to the chief decision maker. 
So it is the internal measure rather than an IFRS one

A reconciliation is then provided between this measure and the entity’s actual figures for:

  1. Profit (e.g. Allocation of centrally incurred costs)

  2. Assets & Liabilities

Also any asymmetrical allocations. 
For example, one segment may be charged depreciation for an asset not allocated to it

IFRS 8 requires the information presented to be the same basis as it is reported internally, even if the segment information does not comply with IFRS or the accounting policies used in the consolidated financial statements.

Examples of such situations include segment information reported on a cash basis (as opposed to an accruals basis), and reporting on a local GAAP basis for segments that are comprised of foreign subsidiaries.

Although the basis of measurement is flexible, IFRS 8 requires entities to provide an explanation of:

  1. the basis of accounting for transactions between reportable segments;

  2. the nature of any differences between the segments’ reported amounts and the consolidated totals.

For example, those resulting from differences in accounting policies and policies for the allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.

In addition, IFRS 8 requires reconciliations between the segments’ reported amounts and the consolidated financial statements.

Entity Wide Disclosures

  1. External revenue for each product/service

  2. Totals for revenue made at home and abroad

  3. NCA totals for those held at home and abroad

  4. If 1 customer accounts for 10%+ of revenue this total must be disclosed alongside which segment it is reported in

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