IFRS 8 – Operating Segments

Scope

IFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated financial statements of a group with a parent):

• whose debt or equity instruments are traded in a public market or
• that files, or is in the process of filing, its (consolidated) financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market

However, when both separate and consolidated financial statements for the parent are presented in a single financial report, segment information need be shown only on the basis of the consolidated financial statements

Operating segments

IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity:

• that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity)
• whose operating results are reviewed regularly by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and
• for which discrete financial information is available

Reportable segments

IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria: [IFRS 8.13]

• its reported revenue, from both external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments, or
• the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss, or
• its assets are 10 per cent or more of the combined assets of all operating segments.

Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principles of the standard; the segments have similar economic characteristics and are similar in various prescribed respects. [IFRS 8.12]

If the total external revenue reported by operating segments constitutes less than 75 per cent of the entity’s revenue, additional operating segments must be identified as reportable segments (even if they do not meet the quantitative thresholds set out above) until at least 75 per cent of the entity’s revenue is included in reportable segments. [IFRS 8.15]

Disclosure requirements

Required disclosures include:

• general information about how the entity identified its operating segments and the types of products and services from which each operating segment derives its revenues [IFRS 8.22]
• judgements made by management in applying the aggregation criteria to allow two or more operating segments to be aggregated
• information about the profit or loss for each reportable segment, including certain specified revenues* and expenses* such as revenue from external customers and from transactions with other segments, interest revenue and expense, depreciation and amortisation, income tax expense or income and material non-cash items
• a measure of total assets* and total liabilities* for each reportable segment, and the amount of investments in associates and joint ventures and the amounts of additions to certain non-current assets (‘capital expenditure’)
• an explanation of the measurements of segment profit or loss, segment assets and segment liabilities, including certain minimum disclosures, e.g. how transactions between segments are measured, the nature of measurement differences between segment information and other information included in the financial statements, and asymmetrical allocations to reportable segments [IFRS 8.27]
• reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets*, segment liabilities* and other material items to corresponding items in the entity’s financial statements [IFRS 8.21(b) and 28]
• some entity-wide disclosures that are required even when an entity has only one reportable segment, including information about each product and service or groups of products and services
• analyses of revenues and certain non-current assets by geographical area – with an expanded requirement to disclose revenues/assets by an individual foreign country (if material), irrespective of the identification of operating segments
• information about transactions with major customers

Conclusion

In order to improve the comparability of financial statements and disclosures across entities, IFRS 8 Operating Segments was issued. The standard requires disclosure of information about an entity’s operating segments, including segment revenue and profit or loss.