DipIFR Syllabus C. Presentation and additional disclosures - IFRS 8 Segmental Reporting - Introduction - Notes 1 / 3
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:
provides a single product or service and
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
provides products and services and
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.
Earns revenue and incurs expenses from a business activity
Is regularly reviewed by the chief decision maker when handing out resources
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:
Similar product / service
Similar production process
Similar sort of customer
Similar distribution methods
Similar regulations
Quantitative Thresholds
Any segment which meets these thresholds must be reported on:
Profit is 10% or more of all profitable segments
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)
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:
Profit (e.g. Allocation of centrally incurred costs)
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:
the basis of accounting for transactions between reportable segments;
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
External revenue for each product/service
Totals for revenue made at home and abroad
NCA totals for those held at home and abroad
If 1 customer accounts for 10%+ of revenue this total must be disclosed alongside which segment it is reported in