IFRS 8

Scope

IFRS 8 does not apply to all companies.

It applies only to:

• separate financial statements of a company with debt or equity instruments traded in a public market;

• separate financial statements of a company that files or is in the process of filing, financial statements with a securities regulator for the purposes of issuing instruments for trading in a public market;

• consolidated financial statements of a group with a parent with debt or equity instruments traded in a public market;

• consolidated financial statements of a group with a parent that files or is in the process of filing, financial statements with a securities regulator for the purposes of issuing instruments for trading in a public market.

• Other entities, which provide some information about segments but do not voluntarily comply with IFRS 8, may do so, but must not describe the information as segment information.

• Where group accounts are published with the parent’s separate financial statements then segment information is required only for the group.

Operating Segments

An operating segment is defined by IFRS 8 as a component of an entity:

(a)      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),

(b)      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

(c)      for which discrete financial information is available. (Para. 5)

The standard notes that it is not necessary that revenues are currently being obtained. As a result, it is possible for an operating segment to be in the start-up phase.

Not all parts of company will be operating segments, as there may be central functions, for example, that obtain no (or only incidental) revenues.

The ”chief operating decision maker” may be an individual, but could also be a group of people. It is a function and not a job title.

Where information is reported internally in more than one way then other factors may affect which categorisation is relevant for determining operating segments. This may include the nature of the activities, the existence of segment managers, and the information presented to the board of directors. Again, segment manager is a function not job title, so one person can be segment manager for two or more segments, and the chief operating decision maker can also be a segment manager.

If information is presented in various ways, but only one of those ways for which segment managers are responsible, then that set of components constitute the operating segments.

Reportable Segments

Not all operating segments are necessarily reportable segments.

Operating segments may be aggregated where they have similar economic characteristics. In particular, the IFRS makes reference to similarities in respect of:

• the nature of the products and services;

• the nature of the production processes;

• the type or class of customer for their products and services;

• the methods used to distribute their products or provide their services; and

• if applicable, the nature of the regulatory environment, for example, banking, insurance or public utilities.

There are also quantitative thresholds set, since a company may have far more operating segments than it would be reasonable to disclose.

Operating segments must be individually disclosed if:

• their revenue (including internal revenues) are 10% or more of the total revenues, again including internal revenues;

• their reported profit or loss is 10% or more of the greater of the combined profits of all profitable segments or the combined losses of all loss making segments;

• their assets are 10% or more the combined assets of all operating segments.

Segments that do not meet these criteria may still be reported if the company wishes to do so.

Segments that do not meet these criteria may be combined if they meet a majority (but not all) of the economic characteristics.

However, reportable segments must account for at least 75% of total revenues, and further segments may need to be disclosed even where they do not meet the normal criteria, until the 75% limit is met. There will then be an “all other segments” category.

Where a segment was reported separately in the prior period, then it can continue to be reported separately in the current year even if it fails to meet the normal criteria, if management considers that the information is likely to be of continuing significance.

Where a segment is reportable for the current period, although it did not meet the criteria in the previous year, then the comparative information should be adjusted. There is an exemption if the information is not available, and the costs of obtaining or developing it would be excessive.

Finally, and without it being a strict limit, the standard notes that if under all the criteria above there are still more than ten reportable segments, then for practical reasons the reportable segments may need to be restricted. (It is not entirely clear how this requirement interacts with the others, since it would appear to breach at last one of the other specific requirements. It can only be assumed that this requirement is intended to be overriding.)

Disclosure

Companies must disclose:

• general information on the factors used to identify reportable segments, including the basis of organisation (eg whether by differences in products and services, geographical areas, regulatory environments, or a combination) and whether operating segments have been aggregated; and

• the types of products and services from which each reportable segment derives its revenues.

For each reportable segment, companies must disclose:

• a measure of profit or loss;

• total assets; and

• a measure of liabilities, if such information is provided regularly to the chief operating decision maker.

The measure of profit or loss (and liabilities if relevant) is not specified in the standard, but see below.

If the following information is reviewed by or regularly provided to the chief operating decision maker then it also needs to be disclosed (even if after the measure of profit or loss reported):

• revenues from external customers;

• revenues from transactions with other operating segments of the entity;

• interest revenue;

• interest expense;

• depreciation and amortisation;

• material items of income and expense separately disclosed;

• the entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method;

• income tax expense or income; and

• material non-cash items other than depreciation and amortisation.

Interest revenue and expense must be reported gross, unless a majority of segment revenues are from interest and the chief operating decision maker uses net interest to assess segment performance or decide on allocation of resources to that segment. In such a case, the entity must disclose that it has reported interest net.

If the following information is reviewed by or regularly provided to the chief operating decision maker then it also needs to be disclosed (even if not included in the segment assets reported):

• investments in associates and joint ventures accounted for under the equity method; and

• additions to non-current assets other than financial instruments, deferred tax assets, post-employment benefit and assets and rights arising under insurance contracts.

Measurement

The amount of each segment item reported must be based on the information provided to the chief operating decision maker for the purposes of assessment of performance and allocation of resources. This may include or exclude adjustments (such as consolidation adjustments) depending on whether such adjustments are made in the information presented internally.

Where information is presented internally on more than one basis then for external reporting the company must choose the basis which is most consistent with that used for measurement in the full financial statements.

An explanation of the measurement basis used must be provided in the financial statements. This must include:

• the basis of accounting for transactions between reportable segments;

• the nature of any differences between the measurements of the reportable segments’ profits or losses and the entity’s profit or loss before tax and discontinued  operations (if this is not apparent from the reconciliations);

• the nature of any differences between the measurements of the reportable segments’ assets and the entity’s assets (if this is not apparent from the reconciliations);

• the nature of any differences between the measurements of the reportable segments’ liabilities and the entity’s liabilities (if this is not apparent from the  reconciliations);

• the nature of any changes from prior periods in the measurement methods that have been used to determine reported segment profit or loss and the effect, if any, of  those changes on the measure of segment profit or loss; and

• the nature and effect of any asymmetrical allocations to reportable segments. For example, an entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.

The differences referred to might include differences in accounting policies, or in the allocation of central costs, assets or liabilities, as appropriate.

Reconciliations

The following reconciliations must be provided:

·                the total of the reportable segments’ revenues to the entity’s revenue;

·                the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss. This is normally the profit or loss before tax and discontinued operations, but if an entity allocates to reportable segments items such as tax, then the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after the items which have been included;

•  the total of the reportable segments’ assets to the entity’s assets.

•  the total of the reportable segments’ liabilities to the entity’s liabilities, if segment liabilities are reported;

•  the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity as a whole..

All material reconciling items must be disclosed separately.

Restatement

Where a company changes its internal organisation so that its reportable segments change then, by default, all comparative information must be amended accordingly.

There is an exemption if the information is not available and the costs to develop it would be excessive, but this exemption must be applied at the level of the individual item.

Companies must disclose whether they have amended comparative information.

Where comparative information has not been altered, on the basis above, then the information for the current year must be presented on the basis of both the old and new segments, unless that too is information that is not available and where the costs of developing it would be excessive.

Other Disclosures

While most of IFRS 8 is based on a management approach, there are still minimum disclosures that apply even if the company has only one reportable segment under the basic rules. The only exception is where the information has already been provided in the disclosure of reportable segments.

Companies must report the revenues from external customers for each product and service, or each group of similar products and services, unless the necessary information is not available and the cost to develop it would be excessive, in which case that fact shall be disclosed

Companies must, unless the necessary information is not available and the cost to develop it would be excessive,  report revenues from external customers:

•  attributed to the entity’s country of domicile; and

• attributed to all foreign countries in total from which the entity derives revenues.

If revenues from external customers attributed to an individual foreign country are material, those revenues shall also be disclosed separately.

A company shall disclose the basis for attributing revenues from external customers to individual countries.

Companies must disclose non-current assets (other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts):

•  located in the entity’s country of domicile; and 

•  located in all foreign countries in total in which the entity holds assets.

If assets in an individual foreign country are material, those assets shall be disclosed separately.

If the necessary information is not available and the cost to develop it would be excessive, that fact shall be disclosed. An entity may provide, in addition to the information required by this paragraph, subtotals of geographical information about groups of countries.

Major Customers

Companies must provide details of major customers. If revenues from a single customer amount to 10% or more of total revenues then the financial statements must disclose:

•   that fact;

•   the total amount of revenues from each such customer; and

•   the segment or segments within which the revenues are included.

There is no requirement to name the customer, nor to state the actual amount of revenues included in each separate segment.

For this purpose, entities under common control (as far as the company is aware) are treated as a single customer. All entities under the control of a particular government  (whether national, regional or local)  are also considered to be a single customer.