IFRS 8 Operating segments

Scope and objective of IFRS 8 Operating segments

IFRS 8 requires quoted companies to disclose information about their different operating segments.

Many companies operate in several different industries (or ‘product markets’) or diversify their operations across several geographical locations. A consequence of diversification is that companies are exposed to different rates of profitability, different growth prospects and different amounts of risk for each separate ‘segment’ of their operations.

Without segment information, good performance in some segments may ‘hide’ very poor performance in another segment. If an entity includes some segment information in the annual report that doesn’t comply with IFRS 8, it cannot call it ‘segmental information.’

Reportable segments (Accounting for Operating segments)

An entity MUST report separately information about each operating segment that:

1. has been identified in accordance with the definition of an operating segment.
2. or is aggregated with another segment.
3. or exceeds the quantitative thresholds.

If the total external revenue reported by operating segments constitutes less than 75% of the entity’s total revenue, then additional operating segments must be identified as reporting segments, even if they do not meet the criteria, until 75% of revenue is included in reportable segments.

Operating segments (Definition)

IFRS 8 defines an operating segment as a component of an entity:

1. that engages in business activities from which it earns revenues and incurs expenses
2. whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
3. for which discrete financial information is available.

Aggregation of segments

Two or more operating segments may be aggregated into a single operating segment if they have similar economic characteristics, and the segments are similar in each of the following respects:

1. the nature of the products and services
2. the nature of the production process
3. the type or class of customer for their products and services
4. the methods used to distribute their products or provide their services, and
5. if applicable, the nature of the regulatory environment, for example, banking insurance or public utilities.

Quantitative thresholds

An entity must report separately information about an operating segment that meets ANY of the following quantitative thresholds:

1. its reported revenue, including external sales and intersegment sales is 10% or more of the combined internal and external revenue of all operating segments.
2. its reported profit is 10% or more of the greater of the combined profit of all segments that did not report a loss and the combined reporting loss of all segments that reported a loss.
3. its assets are 10% or more of the combined assets of all operating segments.

Non-Reportable Segments

• Operating segments that do not meet any of the quantitative thresholds may be reported separately if management believes that information about the segment would be useful to users of the financial statements.
• Non-reportable segments are required by IFRS 8 to be combined and disclosed in an ‘all other segments’ category separate from other reconciling items in the reconciliations required by IFRS 8.
• Entities must disclose the sources of revenue in the ‘all other segments’ category.

IFRS 8 Operating segments Disclosure

The information that is to be disclosed is:

• a measure of profit or loss and total assets liabilities for each reportable segment.
• information about:
  • revenues from external customers
  • revenues from transactions with other operating segments of the same entity
  • interest revenue and interest expense
  • income tax expense or income
• reconciliation of the totals of segment revenues to the entity’s revenue
• reconciliation of the total of reported segment profits or losses to the entity’s profit before tax and discontinued operations
• reconciliation of the total of the assets of the reportable segments to the entity’s assets
• reconciliation of the total of the liabilities of the reportable segments to the entity’s liabilities