ifrs 8: operating segments

OVERVIEW


Most of the entities are involved in a wide of business activities and in different economic environments. Since each business activity is different and operates in a different economic environment, therefore, every business activity is subject to different growth rates, business risks, and interest and exchange rates. Therefore the business shall classify the business segments in the financial statements to help the users to understand the financial statements better in respect of each separate business activity.


Key Takeaway Points


=> IFRS 8 states that different business entities are operating under one entity and that different business entities are generating revenues and profits and incurring expenses independently. Such business entities are called the business segments.


=> IFRS 8 requires that the information about the business segments shall be disclosed in the notes to the financial statements.


=> There should be a separate official responsible for the management of the business segment and such official is often called the segment manager and such segment manager shall report to the immediate next highest level of the segment about its operation, preferably called the chief operating officer.


=> Every business activity is not constituted of a business segment. For example, the head office may not be involved in the business operations so may not count as the business segment.


OPERATING SEGMENTS


IFRS 8 adopts the management approach in the segment reporting and defines the segment in a way that is consistent with the internal management structure of an entity. The operating segment is defined as the component of an entity which is:


=> Engages in the business activities and it earns the revenue and expenses independently but it relates to the part of the business.

=> The operating results of the business operation are independently reviewed by the higher authority in the business.

=> The business discrete information is available with respect to the component of the business.

=> Here it should be noted that every component is not necessarily a business segment. For example, the headquarter of a business entity may not involve in the business operations and may not be generating profits directly so the headquarter of a business entity is not an operating segment for this purpose.

=> Each reporting shall be managed by a separate high-level official in a business often called the segment manager and such segment manager shall report the next higher level management preferably the chief operating officer of the segment or other higher level official in a business.


REPORTABLE SEGMENT


IFRS 8 requires that an entity shall provide separate information about each of the reporting segments. The information about the reporting segment shall be disclosed in notes to the financial statements. Following are the rules which must be followed in order to identify the reportable segments:


Two or more operating segments are combined into one operating segment if the two or more segment shares similar economic characteristics and are also similar in each of the following aspects too:


=> The nature of the products and services of the two operating segments are the same

=> The natures of the production of the two segments are the same

=> The type or class of the customers are almost the same in the case of the two reporting segments.

=> The distribution methods of the two reporting segments are the same.

=> The regulatory environment for two reporting segments is the same or operating under the same economic environment.

=> A reporting segment is a single or combined operating system that meets any of the following qualitative characteristics:

=> The total revenue of the separate business segment is equal to or more than 10% of all operating segments.

=> The total profit or loss of the separate business segment is equal to 10% or more than all combined operating segments.

=> The total assets of the separate business segment are equal to or more than 10% of the total assets of combined business reporting segments.


DISCLOSURES


IFRS 8 requires the following disclosures at minimum regarding the reportable business segment:


=> The information about each of the reportable segments shall be disclosed.

=> The entity shall prepare certain reconciliations regarding the business reportable segment.

=> The business entity-wide reportable segment information shall be disclosed.