IFRS 8 - Operating Segments Flashcards
What entities does IFRS 8 apply to?
IFRS 8 only applies to listed companies
What is the definition of an operating segment?
This is a component of an entity - :
- that engages in business activities from which it may earn revenues and incur expenses
- Whose operating results are regularly reviewed by the entity’s chief operating decision maker.
Why are operating segments required?
The financial performance & position of a large business maybe difficult to analyse if faced with the overall totals - different segments have different rates of profitability, growth and risk/returns.
Disaggregated information allows for better analysis
What are the limitations of segment information?
The entities management defines it segments & therefore significant judgements are required.
What is aggregation and when can it be applied?
Aggregation is where two or more operating segments are combined where the segments are similar in the following 5 ways:
1) nature of products / services
2) nature of production process
3) type of class of customer
4) method used to distribute their products / services
5) if applicable the nature of the regulatory environment i.e banking, insurance etc
How do you determine what is a reportable segment?
TEST 1 - THE 10% TEST ~
An entity must report separate information about each operating segment where at least one of the following reaches a >10% threshold : -
* the revenue is >10% of the total revenue
* the profit and loss is > 10% of the total profit or loss
* the assets are >10% of the total assets
TEST 2 - THE 75% TEST ~
The external revenue of reportable segments must be at least 75% of the total external revenue.
What are the disclosures for IFRS 8?
1) The factors used to identify the reportable segments
2) Types of product/service each reportable segment derives it revenue
3) Report a measure of profit or loss for each reportable segment
4) Report a measure of assets & liabilities for each reportable segment.
5) Report further details re revenues from external customers, revenues from other operating segments, interest, depreciation & tax IF this is regularly provided to the chief operating decision maker.
NOTE THE AMOUNTS SHOULD BE THE AMOUNTS REPORTED TO THE CHIEF OPERATING DECISION MAKER
What are entity wide disclosures?
These apply to information that should always be disclosed, even if the entity has a single reportable segment.
The information required is the - :
1) External revenue for each group of products and services
2) Foreign countries from which entity derives revenue
3) Information about reliance on major customers (external customers who represent >10% of entity’s revenue)
What does the term ‘chief operating decision maker’ mean?
Chief operating decision maker identifies a function not necessarily a manager with a specific title.
That function is to allocate resources to and assess the performance of the operating segments of an entity.
What reconciliations should the entity disclose under IFRS 8?
An entity should provide reconciliations on the following
1) Reconcile total segments revenue to entity total revenue.
2) Reconcile total segments profit & loss to the entity total profit & loss
3) Reconcile total segments assets & liabilities to the total entity assets & liabilities.
What are the judgments required in IFRS 8 that accountants should consider?
1) The Allocation of expenses, assets & liabilities
2) Dressing up of profitability of a business segment that management is trying to dispose of
3) Segment revenue may be strongly influenced by managements desire to minimise tax liabilities since transfer prices may be set to minimise tax liabilities.
What are the comparison of IFRS 8 and SSAP 25 under UK GAAP?
UNDER IFRS 8 : -
Non-disclosure of segment reporting is NOT permitted.
UNDER SSAP 25 : -
Non-disclosure of segment reporting IS permitted on the following grounds ….
* If the disclosure would be seriously prejudicial to the interests of the company
* If the entity is not required to disclose turnover, such as small/medium company under UK law
* If the entity is the unlisted subsidiary of a listed parent where the parent has provided segment information
UNDER IFRS 8 : -
Disclosure is required for entities whose operating results are regularly reviewed by the chief operating decision maker
UNDER SSAP 25 : -
Requires disclosure for segments identified on the basis of business activities & geographic area
