IFRS 8 – Operating Segments

Scope & Objective

• Applies to public entities reporting under IFRS 8 (private entities excluded)
• Goal: give users insight into nature & financial effects of business activities & economic environments

Operating Segment (all 3 must be met)

• Engages in business activities earning revenues & incurring expenses
• Results regularly reviewed by Chief Operating Decision Maker (CODM) for resource allocation & performance assessment
• Discrete financial information available

Reportable Segment – Quantitative Thresholds

An operating segment (or aggregated segments) is reportable if any of the following is \ge 10\% of the combined amount for all operating segments:

1. \text{Revenue (external + internal)}

2. |\text{Profit or Loss}| compared with the greater (absolute) of:
   • \text{total profit of profitable segments}
   • |\text{total loss of loss-making segments}|

3. \text{Assets}

Additional rule: combined external revenue of reportable segments must be \ge 75\% of total external revenue; add more segments until met.

Other Quantitative Rules

• Segment that newly meets criteria → restate prior-year figures
• Segment that temporarily falls below criteria but expected to meet again → continue separate disclosure
• Management may voluntarily disclose other segments if useful

Aggregation Option

May combine two or more operating segments only if they are similar in ALL:
• Nature of products & services
• Production processes
• Type/class of customers
• Distribution methods
• Regulatory environment (if applicable)

Disclosure Requirements (minimum)

• General: factors used to identify segments; basis of organisation; products & services per segment
• For each reportable segment (when regularly provided to CODM):
– Profit or loss
– Assets & liabilities
– Key items e.g. revenue (external & inter-segment), interest rev/exp, depreciation, tax, material non-cash items, equity-method results
• Reconciliations to total entity amounts for: revenue, profit (before tax & discontinued ops), assets, liabilities, other material items
• Additional entity-wide info:
– Products & services revenue breakdown
– Geographic data: external revenue & non-current assets in domicile vs foreign countries (exclude financial instruments, deferred tax, post-employment, insurance rights)
– Major customers (≥10% of revenue): disclose total revenue & segment(s) involved (not customer identity)

ASPE Difference

• Canadian ASPE: no segment guidance (requirement limited to public companies under IFRS)

Here are explanations for the learning outcomes related to Segment Reporting:

Define operating segment.

An Operating Segment is essentially a piece of a larger company that earns its own money and has its own expenses. To be considered an operating segment, it must meet all three of these conditions:

• It does business: It's involved in activities that generate revenue (money coming in) and incur expenses (money going out).

• Results are reviewed by the CODM: Its financial performance (how much money it's making or losing) is regularly looked at by the Chief Operating Decision Maker (CODM). This person, usually a top executive, uses this information to decide how to allocate resources (like budget or staff) to this part of the business and to check how well it's performing.

• Discrete financial information is available: There's separate financial data specifically for this part of the business, which helps the CODM make informed decisions.

Describe the need for disaggregated information within an organization.

Companies often operate in different industries or geographic regions. Providing disaggregated information (breaking down financial data by segments) is super important for several reasons:

• Better Understanding: It helps investors, creditors, and other users of financial statements get a clearer picture of the different business activities and the economic environments the company operates in. For instance, if a company makes phones and also operates coffee shops, seeing the numbers separately helps you understand how each part is doing.

• Informed Decisions: By seeing how individual segments perform, users can better assess the risks and returns of different parts of the company. This helps them make more informed decisions, like whether to invest in the company.

• Performance Assessment: It allows users to evaluate management's performance in different areas of the business more effectively, rather than just looking at the company's overall results.

Identify the quantitative thresholds for reportable segments.

For an operating segment (or a group of similar segments) to be considered reportable (meaning it needs its own separate disclosure), it must meet any one of these quantitative thresholds, which are designed to capture the most significant parts of the business:

An operating segment (or aggregated segments) is reportable if any of the following is \ge 10\% of the combined amount for all operating segments:

1. \text{Revenue (external + internal)}: Its total revenue (sales to external customers plus sales to other parts of the same company) is 10% or more of the combined total revenue of all operating segments.

2. |\text{Profit or Loss}| : Its absolute profit or loss (ignoring positive or negative signs) is 10% or more of the larger of:

   • The total profit of all segments that made a profit, OR

   • The total absolute loss of all segments that made a loss.

3. \text{Assets}: Its total assets are 10% or more of the combined total assets of all operating segments.

Additional Rule: Even if segments meet these thresholds, the combined external revenue (revenue from customers outside the company) of all officially reportable segments must be at least \ge 75\% of the company's total external revenue. If not, the company must add more segments (even if they don't meet the 10% rule) until this 75% threshold is met.

Describe the criteria for aggregating two or more operating segments.

Companies can sometimes combine (or aggregate) two or more operating segments into one reportable segment, but only if they are very similar in ALL five of these areas. This ensures that the combined segment still provides meaningful information:

• Nature of products & services: They offer similar goods or services.

• Production processes: They use similar methods to create their products or deliver their services.

• Type/class of customers: They serve similar groups of customers.

• Distribution methods: They use similar ways to get their products or services to customers (e.g., retail stores, online sales).

• Regulatory environment (if applicable): If they operate in a regulated industry, they are subject to similar laws and regulations.

Describe the disclosure requirements for reportable segments under IFRS.

Under IFRS (International Financial Reporting Standards), companies must provide a lot of specific information for each reportable segment. This helps users truly understand their operations:

• General Information: You need to explain how the company identified its operating segments, how it's organized, and what products and services each segment provides.

• Segment-Specific Financial Information: For each reportable segment, disclose financial items that are regularly reviewed by the CODM. This typically includes:

  • Its profit or loss.

  • Its assets and liabilities.

  • Key revenue details (both from external customers and sales to other segments within the company).

  • Other important items like interest revenue/expense, depreciation, income tax expense, significant non-cash items, and results from investments accounted for using the equity method.

• Reconciliations: The segment numbers must be reconciled (matched up) to the total company-wide amounts for key financial items like total revenue, profit (before tax and discontinued operations), assets, liabilities, and other significant items. This helps users verify the segment information against the main financial statements.

• Additional Entity-Wide Information: Beyond segment breakdowns, the company also needs to provide:

  • A breakdown of revenue by major products and services.

  • Geographic data, showing external revenue and non-current assets (excluding certain financial items like financial instruments, deferred tax assets, etc.) separated between the company's home country and foreign countries.

  • Information about major customers (any single customer that accounts for \ge 10\% of the company's total revenue). You must disclose the total revenue from such customers and the segment(s) involved, but not the customer's actual identity.

Identify that there are no disclosure requirements for operating segments under ASPE.

For companies reporting under Canadian ASPE (Accounting Standards for Private Enterprises), there are no specific disclosure requirements for operating segments. This is because ASPE is designed for private companies, which generally have fewer users of their financial statements and therefore less need for detailed segment information compared to public companies under IFRS. The requirement for segment reporting is specifically limited to public companies following IFRS.

Scope & Objective

• Applies specifically to public entities reporting under IFRS 8 Operating Segments (private entities are explicitly excluded due to generally fewer external users of their financial statements and different reporting objectives).

• The primary goal is to provide users of financial statements (investors, creditors, etc.) with enhanced insight into the distinct nature and financial effects of various business activities a company engages in, as well as the economic environments in which it operates. This allows for a more comprehensive assessment of a company's past performance and future prospects.

Operating Segment (all 3 must be met)

• An operating segment must first engage in business activities that generate revenues and incur expenses. This differentiates it from mere internal cost centers or administrative units.

• Its operating results must be regularly reviewed by the Chief Operating Decision Maker (CODM). The CODM is typically an individual or a group of individuals (e.g., CEO, COO, or a management committee) who allocate resources to and assess the performance of the entity's operating segments. The regularity of review is key to determining its significance.

• Discrete financial information must be available for that component. This means separate financial data (e.g., revenue, expenses, profit/loss, and assets) specific to that segment is maintained and used by the CODM for decision-making. This data does not necessarily have to be prepared under IFRS for internal purposes.

Reportable Segment – Quantitative Thresholds

An operating segment (or aggregated segments) is deemed reportable if any of the following quantitative thresholds are met. Each threshold is compared to \ge 10\% of the combined amount for all operating segments, ensuring that only material segments are separately disclosed:

1. Revenue: The segment's reported revenue, including both external sales (to customers outside the entity) and inter-segment sales (transactions with other segments within the same entity), is \ge 10\% of the combined internal and external revenue of all operating segments.

2. Profit or Loss: The absolute amount (ignoring whether it's a profit or a loss) of the segment's profit or loss is \ge 10\% of the greater (absolute) of:

   • The total combined profit of all operating segments that reported a profit, OR

   • The total combined absolute loss of all operating segments that reported a loss.

   This comparison ensures that both significantly profitable and significantly loss-making segments are identified.

3. Assets: The segment's total assets are \ge 10\% of the combined assets of all operating segments.

Additional rule: To ensure a reasonably comprehensive overview of the entity's external activities, the combined external revenue (revenue from outside customers) of all identified reportable segments must be \ge 75\% of the entity's total external revenue. If this threshold is not met, additional operating segments (even if they individually fall below the 10% quantitative thresholds) must be added as reportable segments until the 75% rule is satisfied. This might involve identifying the next largest segments until the criterion is met.

Other Quantitative Rules

• If a segment newly meets the reportable criteria in the current period, prior-year figures for that segment must be restated for comparative purposes, providing consistency in reporting trends.

• If a segment that was previously reportable temporarily falls below the quantitative criteria but is expected to meet them again in the future, it should continue to be disclosed separately. This avoids confusing fluctuations in segment reporting.

• Management retains the discretion to voluntarily disclose other operating segments, even if they do not meet the quantitative thresholds, if they believe such disclosure would be useful to users of the financial statements in understanding the entity's operations.

Aggregation Option

Two or more operating segments may be combined and reported as a single operating segment only if they are similar in ALL of the following five characteristics. This strict requirement ensures that aggregated segments still provide meaningful, homogeneous information, preventing the obscuring of diverse business activities:

• Nature of products & services: The types of goods produced or services provided are similar (e.g., all segments involved in electronic devices).

• Nature of production processes: The methods used to produce goods or render services are similar (e.g., similar manufacturing techniques).

• Type/class of customers: The types of customers for their products and services are similar (e.g., all segments targeting consumer markets).

• Methods used to distribute their products or provide their services: How products reach customers or services are delivered are similar (e.g., all segments using direct-to-consumer online sales).

• Nature of the regulatory environment (if applicable): If segments operate in regulated industries, they are subject to similar regulatory frameworks (e.g., segments within the same telecommunications regulations).

Disclosure Requirements (minimum)

IFRS 8 mandates specific disclosures to provide a comprehensive view of an entity's segment operations:

• General Information: An entity must clearly describe the factors used to identify its operating segments (e.g., discrete product lines, geographical areas), the basis of its organization (e.g., by products, services, or geography), and the types of products and services from which each reportable segment derives its revenues.

• For each reportable segment: An entity must disclose specific financial information that is regularly provided to the CODM, which usually includes:

– Its reported profit or loss, typically before income tax expense and discontinued operations.

– Its total assets and, if regularly provided to the CODM, its liabilities.

– Key revenue details, distinguishing between external revenue (from customers outside the entity) and inter-segment revenue (from other segments within the entity).

– Other significant financial items such as interest revenue and expense, depreciation and amortization expense, income tax expense, material non-cash items (e.g., impairment losses), and the entity's share of profit or loss from associates and joint ventures accounted for under the equity method.

• Reconciliations: To ensure the segment information aligns with the primary financial statements, comprehensive reconciliations are required. These reconcile the total amounts for reportable segments to the corresponding total entity amounts for key balances and transactions, including total revenues, total profit or loss (before tax and discontinued operations), total assets, total liabilities, and other material items (e.g., depreciation, significant non-cash items).

• Additional entity-wide information: Beyond segment-specific data, IFRS 8 requires broader disclosures, regardless of whether these amounts are used by the CODM to make decisions about the operating segments:

– **Products & services revenue breakdown**: Revenue from external customers for each type of product and service or each group of similar products and services.

– **Geographic data**: External revenue and non-current assets (excluding certain financial instruments, deferred tax assets, post-employment benefit assets, and insurance rights) attributable to the entity's country of domicile and to all significant foreign countries in total.

– **Major customers**: If a single external customer accounts for \ge 10\% of the entity's total revenues, the entity must disclose this fact, the total amount of revenue from such customers, and the segment(s) reporting that revenue. The identity of the customer is explicitly *not* required.

ASPE Difference

• Under Canadian ASPE (Accounting Standards for Private Enterprises), there are no specific segment reporting guidance or requirements. This is a significant difference from IFRS 8, which is applicable to public companies. The rationale is that private entities typically have fewer external stakeholders who require such detailed disaggregated financial information for decision-making, and their reporting objectives are generally less focused on capital market participants compared to public entities.