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Ifrs 8 Operating Segments 1

IFRS 8, Operating Segments, mandates companies to disclose detailed information about their operating segments to enhance transparency and assist users in assessing performance and risks. It defines an operating segment as a part of the business that generates revenue and incurs expenses, with specific criteria for reportable segments based on revenue, profit or loss, and assets. The standard requires disclosures such as segment revenue, profit or loss, and major customer information to provide clarity and consistency in financial reporting.

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18 views3 pages

Ifrs 8 Operating Segments 1

IFRS 8, Operating Segments, mandates companies to disclose detailed information about their operating segments to enhance transparency and assist users in assessing performance and risks. It defines an operating segment as a part of the business that generates revenue and incurs expenses, with specific criteria for reportable segments based on revenue, profit or loss, and assets. The standard requires disclosures such as segment revenue, profit or loss, and major customer information to provide clarity and consistency in financial reporting.

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rishanecezar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Name: Allysa Jane C.

Arbiol

IFRS 8 Operating Segments

Introduction

IFRS 8, Operating Segments, is an international accounting standard that requires companies to


disclose detailed information about the different parts of their business known as operating
segments. These segments represent the major activities of the company that generate revenue
and incur expenses. The purpose of IFRS 8 is to help users of financial statements understand
how a company earns money, which segments perform well, and where business risks come
from.
Purpose of IFRS 8

 To provide transparency about the company’s different lines of business.


 To help users assess performance, because some segments may be more profitable or
riskier than others.
 To improve decision-making by giving investors and management clearer information
about how the company operates and where income is generated.
By presenting disaggregated information, IFRS 8 enables users to evaluate the financial health
and risk profile of each significant segment of the business.

What is an Operating Segment?

 It generates revenue and incurs expenses through its activities.


 Its results are regularly reviewed by the Chief Operating Decision Maker (CODM), who
is responsible for allocating resources and assessing performance.
 It has separate financial information available internally.
Operating segments reflect how management views and manages the business.

Reportable Segments (10% Test)

 Revenue Test: Its revenue is 10% or more of the total combined segment revenue.
 Profit or Loss Test: Its profit or loss, in absolute value, is 10% or more of the total
combined segment profit or loss.
 Asset Test: Its assets are 10% or more of the total segment assets.
Required Disclosure for Each Reportable Segment

 Revenue earned by the segment


 Profit or loss generated
 Segment assets and liabilities (only if these are reviewed by the CODM)
 Information on major customers, if any customer contributes 10% or more of total
company revenue
 Reconciliations between segment totals and the overall amounts presented in the financial
statements, such as total revenue and total profit
These disclosures ensure clarity and consistency across different companies and industries.

Simple Numerical Illustration:

Example:

SEGMENT REVENUE REPORTABLE?


OR MEETS THE
10% TEST?
A 50M YES
B 30M YES
C 20M YES
So how the segments become reportable? Here’s the explanation why.

 Segment A = 50M
 Segment B = 30M
 Segment C = 20M

Let’s compute the total revenue

 50M + 30M = 80M


 80M + 20M = 100M

Total Revenue = 100M

Let’s apply the 10% test

 100M x 0.10 = 10M

All three segments meet’s the 10% revenue test, so all three are considered reportable.

Conclusion
IFRS 8 enhances transparency by requiring companies to disclose meaningful and relevant
information about their operating segments. By identifying segments through management’s
internal reporting and applying the 10% quantitative tests, IFRS 8 ensures that users understand
how a company operates, the performance of each segment, and the risks associated with each
business activity. This information is essential for investors, creditors, and other stakeholders
who rely on accurate and detailed financial reporting.

Common questions

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IFRS 8 impacts comparability by standardizing the approach to segment reporting across industries, ensuring that all companies follow the same criteria and format for segment disclosures. This consistency aids stakeholders in comparing companies’ performance and risk profiles across different sectors, enhancing their ability to make cross-sector analyses and investment decisions .

Under IFRS 8, a segment is considered reportable if it meets any of the following quantitative thresholds: its revenue is 10% or more of the total combined segment revenue, its profit or loss (in absolute value) is 10% or more of the total combined segment profit or loss, or its assets are 10% or more of the total segment assets .

IFRS 8 enhances transparency by requiring companies to disclose detailed information about their operating segments, which includes revenue, profit or loss, assets and liabilities, and significant customers. This segmented information helps users assess the performance and risks of different parts of the business, providing a clearer view of how a company earns money and the potential risks involved .

The CODM plays a crucial role in IFRS 8 as their evaluations and decisions directly influence the identification and management of operating segments. The CODM's review of segment results for resource allocation and performance assessment determines which segments are defined as reportable. This internal perspective ensures that segment reporting reflects the company's strategic management and operational focus, providing meaningful insights for external users .

Reconciliations are important in IFRS 8 to ensure consistency and accuracy of financial reporting across segments and the company as a whole. By aligning segment totals with overall amounts in the financial statements, stakeholders can verify that the detailed segmented data integrates correctly with the company’s total financial performance, providing a comprehensive view of the company’s financial health and eliminating potential discrepancies .

A segment might have significant profits but still be considered non-reportable if it does not meet any of the quantitative thresholds of the 10% test under IFRS 8. For example, even if the profit is notable, if it does not represent 10% or more of the total combined segment profits, and neither its revenue nor assets meet the 10% criteria, it will not be classified as reportable in the financial disclosures .

An operating segment under IFRS 8 is defined by three key criteria: it must generate revenue and incur expenses through its activities, its results are regularly reviewed by the Chief Operating Decision Maker (CODM) for resource allocation and performance assessment, and it has separate financial information available internally .

In IFRS 8, the 10% test is applied to determine whether a segment's revenue qualifies it as reportable. If a segment's revenue constitutes 10% or more of the total combined revenue of all operating segments, it meets the threshold to be classified as reportable. This ensures that significant segments are identified and disclosed, providing a transparent view of the company’s revenue sources .

IFRS 8 facilitates risk assessment by mandating the disclosure of information about a company's operating segments, including financial performance and major customers. This disaggregated data allows investors and creditors to identify which segments are more volatile or exposed to specific risks, enabling them to make informed decisions related to investment or credit terms .

IFRS 8 improves decision-making by providing investors and management with clearer and more detailed information about the company's various operating segments. This allows for better assessment of which segments are more profitable or risky, aiding in strategic planning and investment decisions. The standard's disaggregated data enables a deeper understanding of the business’s performance and operational dynamics .

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