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IFRS 8 Operating Segments Disclosure

This publication provides information about the requirements of the newly issued IFRS 8 Operating Segments Disclosure, which becomes effective for annual reporting periods beginning on or after 1 January 2009. It has been designed to help those responsible for preparing IFRS-based financial statements apply and understand the new requirements.

IFRS 8 Operating Segments Disclosure

IFRS 8 Operating Segments Disclosure

Our commentary and analysis of the Standard is divided into four sections:

• Section 1: Provides an analysis of the key differences between the requirements of IFRS 8 and the standard it will replace, IAS 14 Segment Reporting.

• Section 2: Explains how to identify re-portable operating segments, using flowcharts to highlight the decisions that need to be made. It also contains a number of examples to illustrate what is intended by the Standard.

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• Section 3: Provides an illustration of the disclosures required by IFRS 8, with commentary highlighting when the disclosures may differ from those required by IAS 14.

• Section 4: Answers some frequently asked questions (FAQs) about the application of IFRS 8.

IFRS 8 differs from its predecessor because it introduces a management reporting approach to identifying and measuring the results of reportable operating segments. As the measurement of the segment results reported is no longer dictated by the measurement and recognition criteria of financial reporting standards, reconciliations are required where information being presented to management differs from IFRS information in the primary financial statements. Some entities may need to develop new processes in order to address these reconciliation requirements.

As entities manage their businesses in different ways, segment reporting disclosures made by similar-sized entities in similar industries are unlikely to be directly comparable. Our publication, Observations on the Implementation of IFRS, indicated that there was diversity in the way entities reported their segments using IAS 14. Disclosures may be even less comparable when IFRS 8 comes into effect. The disclosure requirements in IFRS 8 are extensive, and we encourage all entities to study the Standard carefully well ahead of its adoption.

IFRS 8 Operating Segments Disclosure: Background

Segment reporting was identified as part of the International Accounting Standards Board’s (IASB or Board) shortterm project to reduce the differences between International Financial Reporting Standards and US GAAP.

In January 2005 the IASB decided the best way to achieve convergence in relation to segment reporting was to adopt the approach of the equivalent US standard (SFAS 131: Disclosures about Segments of an Enterprise and Related Information). As a result ED 8 Operating Segments was issued in January 2006, and the final Standard, IFRS 8, was released in November 2006. IFRS 8 will replace IAS 14 for reporting periods beginning on or after 1 January 2009.

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However, comparative information is required when IFRS 8 becomes effective, which means that entities need to capture IFRS 8 segment information from 1 January 2008.

IFRS 8 Operating Segments Disclosure:

Aspect of IFRS 8 is the requirement to disclose information that is actually being used internally by management. The IASB maintains that, because the segment information required to be disclosed will be readily available, it should help entities save time and money. Although adopting the management approach does have benefits, in commenting on ED 8, some, including Ernst & Young, argued that it is inferior to IAS 14 because segment information does not have to be reported on the same basis as the financial statements (using IFRS) and that key terms such as ‘segment revenue’ and ‘segment assets’ are not defined.

To counter this criticism the final Standard requires increased disclosure regarding the basis on which the information has been prepared. Overall, the IASB believes the benefits of the management approach, together with some expanded disclosure, will outweigh the lack of comparability that might arise, which is why the decision to adopt the US GAAP approach was made.

IFRS 8 Operating Segments Disclosure: 

Core principle—An entity 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. This IFRS shall apply to:

(a) the separate or individual financial statements of an entity:

(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).

(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.

(b) 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).

(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.

The IFRS specifies how an entity should report information about its operating segments in annual financial statements and, as a consequential amendment to IAS 34 Interim Financial Reporting, requires an entity to report selected information about its operating segments in interim financial reports.

It also sets out requirements for related disclosures about products and services, geographical areas and major customers. The IFRS 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.

Operating segments are components of an entity 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. The IFRS requires an entity to report a measure of operating segment profit or loss and of segment assets.

IFRS 8 Operating Segments Disclosure

It also requires an entity 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 report able segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for report able segments to corresponding amounts in the entity’s financial statements.

The IFRS requires an entity 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 customers, regardless of whether that information is used by management in making operating decisions. However, the IFRS does not require an entity 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 Operating Segments Disclosure

The IFRS also requires an entity 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 entity’s financial statements, and changes in the measurement of segment amounts from period to period.

IFRS 8 Operating Segments Disclosure

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