Operating Segments: IFRS 8

Wiecek and Young

IFRS Primer
Chapter 34
 Operating Segments

 Related standards
 IFRS 8
 Current GAAP comparisons
 IFRS financial statement disclosures
 Looking ahead
 End-of-chapter practice

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 Related Standards

 FAS 131 Disclosures about Segments of an

Enterprise and Related Information

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 IFRS 8 – Overview

 Objective and scope

 Operating segments
 Reportable segments
 Disclosure
 Measurement
 Entity-wide disclosures

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 IFRS 8 – Objective and Scope
Purpose
 Provide external users with a glimpse of how management views its operations in
terms of resource allocation and performance measurements

 Present information about the various business and geographical segments of the
entity so users can better assess the risks and returns of each segment

 Ensure that sufficient information is disclosed to allow users to evaluate the nature and
financial effects of the entity’s business and the economic environment

Application
 Separate as well as consolidated statements of entities that have debt or equity
instruments traded in a public market

 Entities that file or are in the process of filing financial information with a securities
regulator

 Private companies may voluntarily adopt

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 IFRS 8 – Operating Segments
Operating segment
 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 (CODM) to make decisions about resources to be allocated to the
segment and assess its performance, and

(c) For which discrete financial information is available

 An operating segment may engage in business activities for which it has yet
to earn revenues
– E.g., start-up operations may be operating segments before earning revenues

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 IFRS 8 – Operating Segments
 Operating segments have three defining characteristics:

1. They must engage in a business activity

• Head office function would likely not qualify
- Does not earn revenues from a specific business itself
- Supports the rest of the business

2. The operating results must be reviewed by senior management for resource

allocation and performance evaluation
• Often the CEO or COO but it may be a group of senior executives
• Operating segment usually has a segment manager who manages the segment and
reports to the CODM

3. Separate information must be available

• If not available, it is unlikely that the segment will meet the first two criteria
• If it were a separate segment from a business perspective, the entity should be
managing it, including capturing and assessing financial information

7  Matrix organization = entity that has overlapping segments

 IFRS 8 – Reportable Segments
Aggregation criteria

 Where two or more operating segments have similar economic

characteristics, they may be combined for reporting purposes

 The entity reviews certain aspects when making this assessment:

• Nature of products/services

• Nature of the production processes

• Type of customer

• Distribution methods

8 • Nature of the regulatory environment

 IFRS 8 – Reportable Segments
Quantitative thresholds

 The entity reports only those operating segments that exceed a size test

 The following are quantitative thresholds:

1. Reported revenue is equal to or greater than 10% of the combined revenues of all
operating segments
- Includes intersegment sales

2. Absolute amount of profit or loss is equal to or greater than the higher of

combined profits (for those operating segments reporting profits) and combined
losses (for those operating segments reporting losses)

3. Assets are equal to or greater than 10% of the combined assets of all operating
segments

9  If an operating segment meets any one of the above criteria, it is reportable

 IFRS 8 – Reportable Segments
Quantitative thresholds

 Next steps once management have identified the reporting segments

– Assess whether additional segments shall be reported

 The test
– If the total external revenues for the reportable segments are less than 75% of
the entity’s revenues, the entity identifies additional reportable segments

– Minimum that is reported is 75%

 Once the 75% threshold has been met

– Entity has identified sufficient reportable segments
– Rest of the non-reportable segments are added together under “other operating
segments” and disclosed

10  The entity presents comparatives, which include all reportable segments

 IFRS 8 – Disclosure
 The entity should present the following categories of information:
• General information

• Information about the reported segment’s profit or loss, assets and liabilities, and
bases of measurement

• Reconciliations of segment revenues to reported revenues

General information
 The following general disclosures are required:

• Factors used to identify the reportable segments

– How did management choose to organize the entity in order to make key
resource allocation decisions and to assess performance?

• Types of products/services
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 IFRS 8 – Disclosure
Information about profit or loss, and assets/liabilities

 Must present the amount of profit/loss and total assets for each reportable segment

 Information is disclosed where it is regularly presented to the CODM as follows:

• liabilities
• revenues (external and intersegment)
• depreciation and amortization
• material items of income and expense
• income tax expense income
• material non-cash items other than depreciation and amortization
• investment in associates/joint ventures accounted for by the equity method
• additions to non-current assets

 This adheres to the general principle that if the CODM thinks the information is
important for decision-making, it should be presented to the external users

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 IFRS 8 – Measurement
 Numbers should be measured the way they are measured for presentation to CODM

 To understand how these numbers are put together, the following is relevant and
should therefore be disclosed:

• Basis of accounting for intersegment transactions

• Nature of any differences between the segment profit or loss and the entity
profit or loss

• Nature of any differences between the segment assets/liabilities and the entity
assets/liabilities

• Nature of any changes from prior periods

• Nature and effect of asymmetrical allocations to reportable segments

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 IFRS 8 – Measurement
Reconciliations
 Most users focus on the consolidated numbers

 Required reconciliations between reportable segments and financial

statement numbers:
• Revenues
• Profit and loss
• Assets
• Liabilities (if liabilities are presented for the segments)
• Any other material segments amounts presented

 The entity should identify and describe material reconciling items

Restatement of previously reported information

 Where the entity restructures or reorganizes the information presented to its CODM, it
presents the new information and restates the comparative information
– Unless the costs to produce it are excessive or the information is not available
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 IFRS 8 – Entity-wide Disclosures
 The basics
– Information is developed unless the costs to produce it are excessive or
the information is not available
– Would be based on information used to produce the entity’s financial
statements

 The following are required to be disclosed by all entities including

those that have only a single segment:
– Information about products and services
– Information about geographical areas
– Information about major customers

Information about products and services

• External revenues by product/service (or group thereof)

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 IFRS 8 – Entity-wide Disclosures
Information about geographical areas
 External revenues attributed to the entity’s
– Domestic operations (entity’s country of domicile)
– Foreign operations in other countries
– If revenues from external customers attributed to a specific country are material, this
should be disclosed also

 Non-current assets (other than financial instruments, deferred tax assets,

post- employment benefit assets, and rights under insurance contracts)
– Domestic (located in country of domicile)
– Foreign (located in foreign countries)
– If non-current assets in certain countries are material, this should also be disclosed

Information about major customers

 If revenues to a customer amount to 10% or more, this fact should be
disclosed along with the amount
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 Current GAAP Comparisons

Page 130 of 164 of

http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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 IFRS Financial Statement
Disclosures
Siemens

http://w1.siemens.com/annual/07/pool/download/pdf/e07_00
_gb2007.pdf

Description of Business Segments page 313 of 336

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 Looking Ahead
IASB
 Issued IFRS 8 in November 2006

 No further work is planned on the standard at this time

IFRS 8
 Standard eliminated all material differences in the accounting
treatment of operating segments between IFRSs and U.S. GAAP

 IFRS 8 is effective for fiscal years beginning on or after January 1,

2009 and earlier application was encouraged

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 End-of-Chapter Practice

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 End-of-Chapter Practice
34-3 Refer to the excerpt from the Siemens’ financial statements presented in the chapter.

Instructions
Explain why each of the separately disclosed segments meets the definition of an operating
segment. Is there another test that has to be passed before these segments are reported
separately in the financial statements?

34-4 Litton Inc. is in the research and development business. It operates in the U.S. only, and
the research and development division accounts for about 60% of its combined revenues.
There are a number of small divisions, each of which has very few assets and contributes
between 1% and 5% of combined revenues. The following is a list of what each division does:
Division 1 – produces generic drugs
Division 2 – does website development
Division 3 – manufactures medical equipment
Division 4 – runs a small medical center

Instructions
Discuss whether these divisions should be presented as operating segments.

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 End-of-Chapter Practice

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