IFRS8 Operating Segments

What is it all about? Many companies are global in operation and operate in many different markets. Many companies have huge product portfolios. (E.g. 3M has 55,000 products involving 40 core technologies.) The Income statement cannot given the level of detail needed, so segmental information is needed in the notes.)

The Core Principle of IFRS8 An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environment in which it operates. i.e. it complies with true and fair, relevance, reliability, comparability and understandability. (Framework Document)

Why is a standard needed? Users need to: Evaluate managerial performance Evaluate the corporate strategy Estimate future performance Estimate future cash flows Therefore the evidence of corporate performance in the various markets with its product range is important.

The General Approach of IFRS8 The “managerial” approach. This means:- An entity should report to shareholders using the same criteria it uses when it makes its decisions at Board Meetings. It should not change its segmental analysis to mislead readers of financial statements.

“Chief Operating Decision Maker” Something new in IFRS! The standard refers to “Chief Operating Decision Maker” This is not a manager with a specific title It may be one person (Chief Executive Officer ) or a group (The Board of Directors)

An operating segment is a component of an entity Engages in business activities from which it may earn revenues and incur expenses Whose operating results that are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources allocated to segments and its performance. For which discrete financial information is available.

What is reported under IFRS 8? Operating segment profit or loss Operating segment assets. (If liabilities are reviewed by the Chief Decision maker then those are reported as well.) Revenues derived from products and services and countries in which it operates and about major customers, regardless whether the information is used by management in making operational decisions.

An entity must Reveal, using descriptive information, how the segments were determined. The products and services provided by the segments. Reveal differences, in measurements used in the segments and those used in the financial statements ( if any .)

The 75% rule The sum of the segments must constitute at least 75% of the operating revenue of profit. If the segments add up to less than 75% then more operating segments must be added. The cost of the head office is not a segment.

The 10% rule If any single customer/product/revenue is less than 10% of revenues then do not report separately . If the customer/product/revenue is over 10% of revenues than it has to be disclosed but the name of the customer does not have to be revealed. The customer might be “government” and several segments may deal with the same “customer”

A firm does not have to report if:- A firm does not report information on a regular basis for decision makers internally So, information produced to analyses a product profitability in a special report does not have to be revealed. The standard does not mean a company has to reveal confidential profitability information.

An improvement on IAS 14 The previous standard only required an entity to report a “result.” This standard forces companies to report revenues/ profit/ assets/liabilities. The standard is the same as FASB 131 IFRS8 was deliberately made the same as the USA standard for (political) harmonisation reasons

Wrap up The standard forces companies to be more open in the way they give segmental details in the notes. The standard is the same as the FASB std and so is harmonised internationally. But firms might change their operating segments to reduce the detail revealed about their profits.