14 IFRS 8 Segmental Analysis Flashcards
What is the background for IFRS 8
- Segmental information was previously provided in accordance with IAS 14 Segment Reporting.
- A new standard, IFRS 8 Operating Segments, came into operation from 1 January 2009.
- IFRS 8 arose from a joint project between the IASB and the FASB.
o IFRS 8 is the same as FASB Statement No.131 “Disclosures about Segments of an Enterprise and Related Information” (except for alterations to terminology for consistency with other IFRSs.)
What is the need for IFRS 8s existence
- Large companies often carry out a range of business activities and operate in a number of different economic environments.
- The segments of a company may, for example, be defined in terms of:
o different business activities or
o different geographical areas. - Segments will have different risk and return profiles.
- Analysts will want to consider the characteristics and profiles of the different segments.
- They will also be concerned about the quality of the segment disclosures
What is segmental information and why is it needed
- Segmental breakdowns can be very useful in financial statement analysis.
- They can potentially enable the results and position of diversified enterprises to be compared with operations in each business/area in which they operate
- This would then help to overcome the problems of finding appropriate comparators for diversified operations
What is the management approach to segmental information
- IFRS 8 adopts a ‘Management Approach’ to segment reporting:
- It is consistent with the entity’s own internal management structure.
- Segmental accounting is based on how management accounts are prepared
o For example by region or product - But they are not the same as management accounts as they are for external users
Who must disclose operating segments
IFRS8 applies to the individual FS of entities and consolidated FS of groups:
* Whose debt or equity instruments are traded in a public market
* That file financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instrument in the public market.
o i.e. PLCs
What are operating segments
A component of the entity:
a) That engages in business activities from which it may earn revenues and incur expenses,
b) Whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
c) For which discrete financial information is available
How do you disclose operating segments
IFRS 8 requires an entity to provide information on each of its reportable segments in the notes to the accounts
Can you combine operating segments
2 or more operating segments may be aggregated into a single operating segment if the segments have similar economic characteristics and if they are similar in the following respects:
a) the nature of the products or services
b) the nature of the production processes
c) the type or class of customer for their product or services
d) the methods used to distribute their products or provide their services
e) if applicable, the nature of the regulatory environment, for example banking, insurance or public utilities
How many segments must be disclosed
- IFRS 8 does not give an upper limit for the number of reportable segments that may be disclosed.
- However, the standard does suggest that an entity should consider whether a practical limit has been reached where the number of reportable segments exceeds ten
- Do not want to overburden the company to make this additional reporting
How do you identify reporting segments
IFRS 8 requires the entity to provide separate information for each reportable segment (single or combined segment) using the criteria:
1. The 10% thresholds
2. The 75% rule
What is the 10% threshold rule and the three ways it can be applied
- Total revenue (external customers and internal (other segments)) is at least 10% of total revenue,
or - Profit or loss is at least 10% of the total profit of the segments that reported a profit or the total loss of the segments that reported a loss, whichever is the greater,
or - Assets are at least 10% of total assets of all operating segments.
What is the 75% rule and how is it applied
- If the total external revenue attributable to reportable segments is less than 75% of total external revenue,
- Additional segments must be identified as reportable (even though they are beneath the 10% thresholds) until at least 75% of total external revenue is included in reportable segments
What general disclosure is required by IFRS8
- Factors used to identify reportable segments
o E.g., by product or geographic area - Revenue producing products/services of the segments
- Whether segments are combined and why
What metrics must be disclosed under IFRS 8
At a minimum must provide:
* Profit/loss
And if provided to chief operating decision maker or included in P/L:
(basically if it exists it must be provided)
* Total assets and liabilities
* Internal and external revenue
* Interest expense and interest revenue
* Income tax expense/relief
* Non-cash items e.g. depreciation and amortisation
* Non-current asset additions
What reconciliations must be disclosed under IFRS8
Reconciliations of segment information to entity wide information:
* Total revenue of reportable segments to the entity’s revenue
* Total P/L of reportable segments to the entity’s P/L
* Total assets and liabilities of reportable segments (if disclosed) to the entity’s assets and liabilities
* Any other material items.
