for Accounting Professionals
IFRS 8 Operating segments
2011
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IFRS 8 Operating segments
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TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated
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IFRS 8 Operating SegmentsContents
Background 3
Definitions 4
Main features of IFRS 8 5
IFRS 8 - Core principle 6
Scope 6
Operating segments 7
Reportable segments 8
Quantitative thresholds 10
Disclosure - General information 13
Disclosure - Specific information 13
Disclosure - Information about profit or loss, assets and liabilities 14
Measurement 16
Reconciliations 17
Information about products and services – total undertaking 19
Information about geographical areas – total undertaking 19
Information about major clients areas – total undertaking 19
Multiple choice questions 21
Answers to multiple choice questions 26
Background
Standards of financial statements are published to specify disclosure and/or to move profit from one period to another. IFRS 8 is exclusively about disclosure.
As undertakings become larger, understanding how they operate:
- in different markets,
- with different products and services and
- providing to a growing range of clients
becomes more difficult, unless additional detail is provided.
Information about components of an undertaking, the products and services that it offers, its foreign operations, and its major clients is useful for understanding and making decisions about the undertaking as a whole. Users observe that the evaluation of the prospects for future cash flows is the central element of investment and lending decisions.
The evaluation of prospects requires assessment of the uncertainty that surrounds both the timing and the amount of the expected cash flows to the undertaking, which in turn affect potential cash flows to the investor or creditor. Users also observe that uncertainty results in part from factors related to the products and services an undertaking offers and the geographic areas in which it operates.
Different segments will generate dissimilar streams of cash flows, to which are attached disparate risks and which bring about unique values. Thus, without disaggregation, there is no sensible way to predict the overall amounts, timing, or risks of a complete undertaking’s future cash flows.
EXAMPLE – risk assessment
Your group has invested in a country that has become politically unstable. Segment reporting explains how much (or little) performance depends on that country, and helps measure the risk that any loss of business could have on the group.
The additional detail should:
(1) increase the number of reported segments and provide more information;
(2) enable users to see an undertaking through the eyes of management;
(3) enable an undertaking to provide timely segment information for external interim reporting with relatively low incremental cost;
(4) enhance consistency with the management discussion and analysis or other annual report disclosures; and
(5) provide various measures of segment performance.
Knowledge of the structure of an undertaking’s internal organisation is valuable in itself because it highlights the risks and opportunities that management believes are important.
Segments based on the structure of an undertaking’s internal organisation have at least three other significant advantages:
1. An ability to see an undertaking “through the eyes of management” enhances a user’s ability to predict actions or reactions of management that can significantly affect the undertaking’s prospects for future cash flows.
2. As information about those segments is generated for management’s use, the incremental cost of providing information for external reporting should be relatively low.
3. Practice has demonstrated that the term ‘industry’ is subjective. Segments based on an existing internal structure should be less subjective.
IFRS 8 arises from the IASB’s consideration of (US) FASB Statement No.131 Disclosures about Segments of an Undertaking and Related Information (SFAS 131), compared with (the now-superseded) IAS 14 Segment Reporting.
IFRS 8 achieves convergence with the requirements of SFAS 131, except for minor differences.
Definitions
An operating segment is a component of an undertaking:
(1) 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 undertaking),
(2) whose operating results are regularly reviewed by the undertaking’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.
The term ‘chief operating decision maker’ identifies a function, not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the operating segments of an undertaking. Often the chief operating decision maker of an undertaking is its chief executive officer or chief operating officer but, for example, it may be a group of executive directors or others.
IFRS 8 Operating Segments sets out requirements for disclosure of information about an undertaking’s operating segments and also about the undertaking’s products and services, the geographical areas in which it operates, and its major clients.
Main features of IFRS 8
IFRS 8 specifies how an undertaking should report information about its operating segments in annual financial statements and in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major clients.
IFRS 8 requires an undertaking to report financial and descriptive information about its reportable segments.
Reportable segments are operating segments or aggregations of operating segments that meet specified criteria.
Operating segments are components of an undertaking about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.
IFRS 8 requires an undertaking to report a measure of operating segment profit or loss and of segment assets. It also requires an undertaking to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker.
It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the undertaking’s financial statements.
IFRS 8 requires an undertaking to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major clients, regardless of whether that information is used by management in making operating decisions.
However, IFRS 8 does not require an undertaking to report information that is not prepared for internal use if the necessary information is not available and the cost to develop it would be excessive.
IFRS 8 also requires an undertaking to give descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the undertaking’s financial statements, and changes in the measurement of segment amounts from period to period.
IFRS 8 - Core principle
An undertaking shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
IAS 34 Interim Financial Reporting, requires an undertaking to report selected information about its operating segments in interim financial reports.
Scope
IFRS 8 shall apply to:
(1) the separate or individual financial statements of an undertaking:
(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange, or an over-the-counter market, including local and regional markets), or
(ii) that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
(2) the consolidated financial statements of a group with a parent:
(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange, or an over-the-counter market, including local and regional markets), or
(ii) that files, or is in the process of filing, the consolidated financial statements with a securities commission, or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
If an undertaking that is not required to apply IFRS 8 chooses to disclose information about segments that does not comply with IFRS 8, it shall not describe the information as segment information.
If a financial report contains both the consolidated financial statements of a parent that is within the scope of IFRS 8 as well as the parent’s separate financial statements, segment information is required only in the consolidated financial statements.
EXAMPLES-group accounts
1. You produce consolidated accounts for your listed group. You include the parent company’s full financial statements, and those of the subsidiaries located in your country.
Only the consolidated accounts need provide segment information.
2. You produce consolidated accounts for the group. The parent company is a privately-owned company, that is not listed on any stock exchange. The shares of your largest subsidiary is traded on your national stock exchange. Only the largest subsidiary’s accounts need provide segment information.
EXAMPLE-associates
1. You produce consolidated accounts for your listed group. You include the associate company accounts. The associate is a listed company.
You need provide segment information for group companies, other than the listed associate. The associate will produce segment information in its own accounts.
EXAMPLE - listed securitiesDoes segment reporting apply when an unlisted company has a subsidiary with listed securities?
E plc is a large unlisted company that is required to prepare consolidated accounts.
E plc has a subsidiary, F plc,that has debt listed on the London Stock Exchange.
Do the accounts of E plc fall within the scope of IFRS 8?
IFRS 8 applies to entities whose equity or debt securities are publicly traded (and by entities that are in the process of issuing equity or debt securities in public securities markets).
Although E plc (entity) does not have any publicly-traded securities, the E plc group has listed debt in issue. The question is, then, whether the definition of the entity in the context of consolidated financial statements is the parent company or the consolidated group.
IFRS 10 defines consolidated financial statements as the financial statements of a group presented as those of a single economic entity.
Applying this definition leads us to conclude that the entity for IFRS 8 purposes is the consolidated group and not the solus parent entity.
Thus, the entity (the E plc group) does have listed securities and should make the disclosures required by IFRS 8. In addition, the financial statements of F plc fall within the scope of IFRS 8 and disclosures are also required in that company’s separate financial statements.
Operating segments
An operating segment may engage in business activities for which it has yet to earn revenues, for example, start-up operations may be operating segments before earning revenues.
Not every part of an undertaking is necessarily an operating segment or part of an operating segment. For example, a corporate headquarters or some functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the undertaking and would not be operating segments.
An undertaking’s pension plans are not operating segments.
An undertaking may produce reports in which its business activities are presented in a variety of ways. If the chief operating decision maker uses more than one set of segment information, other factors may identify a single set of components as constituting an undertaking’s operating segments, including the nature of the business activities of each component, the existence of managers responsible for them, and information presented to the board of directors.