IFRS 8: OPERATING SEGMENTS

Introduction

Many companies operate in several different industries (or ‘product markets’) or diversify their
operations across several geographical locations. A consequence of diversification is that companies are
exposed to different rates of profitability, different growth prospects and different amounts of risk for
each separate ‘segment’ of their operations.

Objective of IFRS 8

IFRS 8 requires quoted companies to disclose information about their different operating segments, in
order to allow users of the financial statements to gain a better understanding of the company’s
financial position and performance.

Users are able to use the information about the main segments of the company’s operations to carry
out ratio analysis, identify trends and make predictions about the future. Without segment information,
good performance in some segments may ‘hide’ very poor performance in another segment, and the
user of the financial statements will not see the true position of the company.

Scope of IFRS 8

Segment reporting is required for any entity whose debt or equity is quoted on a public securities
market (stock market) and also entities that are in the process of becoming quoted. If an entity includes
some segment information in the annual report that doesn’t comply with IFRS 8, it cannot call it
‘segmental information.’

Operating segments

IFRS 8 defines an operating segment as a component of an entity:

 that engages in business activities from which it earns revenues and incurs expenses
 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
 for which discrete financial information is available.

Not every part of an entity is necessarily an operating segment. For example a corporate head office
may not earn revenue and would not be an operating segment.

The standard requires a segment to have its results reviewed by the chief operating decision maker. The
reason for this part of the definition of an operating segment is to ensure that an entity reports
segments that are used by management of the entity to monitor the business.

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Aggregation of segments

Two or more operating segments may be aggregated into a single operating segment if they have similar
economic characteristics, and the segments are similar in each of the following respects:

 The nature of the products and services

 The nature of the production process
 The type or class of customer for their products and services
 The methods used to distribute their products or provide their services, and
 If applicable, the nature of the regulatory environment, for example, banking insurance or public
utilities.

Quantitative thresholds

An entity must report separately information about an operating segment that meets any of the
following quantitative thresholds:

 Its reported revenue, including external sales and intersegment sales is 10% or more of the
combined internal and external revenue of all operating segments
 Its reported profit is 10% or more of the greater of the combined profit of all segments that did not
report a loss and the combined reporting loss of all segments that reported a loss
 Its assets are 10% or more of the combined assets of all operating segments

Reportable segments

An entity must report separately information about each operating segment that:

 Has been identified in accordance with the definition of an operating segment shown above;
 is aggregated with another segment; or
 exceeds the quantitative thresholds.

If the total external revenue reported by operating segments constitutes less than 75% of the entity’s
total revenue, then additional operating segments must be identified as reporting segments, even if
they do not meet the criteria, until 75% of revenue is included in reportable segments.

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Question 1:
The following information relates to a quoted company with five divisions of operation:

Profit Loss

Rs.m Rs.m

Division 1 10 -

Division 2 25 -

Division 3 - 40

Division 4 35 -

Division 5 40 -_

110 40

Which of the divisions are reportable segments under IFRS 8 Operating segments?

Answer 1:

Since Profit figure is higher, we will take 10% of that amount.

Profit Loss Reportable segment

Rs.m Rs.m (results > Rs. 11m
Division 1 10 - No

Division 2 25 - Yes

Division 3 - 40 Yes

Division 4 35 - Yes

Division 5 40 - Yes

110 40

Greater of the two 110

Materiality threshold (10%) 11

Note: Division 3 is reportable as the loss of Rs. 40m is greater than Rs. 11m (ignoring the sign).

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Question 2:
The following information relates to Oakwood, a quoted company with five divisions of operation:

Wood Furniture Veneer Waste Other Total

Sales Sales Sales Sales Sales
Rs.m Rs.m Rs.m Rs.m Rs.m Rs.m
Revenue from external 220 256 62 55 57 650
customers
Inter segment revenue 38 2 - 5 3 48
Reported profit 54 45 12 9 10 130
Total assets 4,900 4,100 200 400 600 10,200

Which of the business divisions are reportable segments under IFRS 8 Operating segments?

Answer 2:

IFRS 8 states that a segment is reportable if it meets any of the following criteria:

1. its internal and external revenue is more than 10% of the total entity internal and external revenue.

2. its reported profit is 10% or more of the greater of the combined profit of all segments that did not
report a loss.

3. its assets are 10% or more of the combined assets of all operating segments.

From the table above, only the Wood and Furniture department sales have more than 10% of revenue,
assets and profit and meet the requirements for an operating segment. The other three divisions do not
meet the criteria: none of them pass the 10% test for assets, profit or revenue.

Additionally IFRS 8 states that if total external revenue reported by operating segments constitutes less
than 75% of the entity’s revenue then additional operating segments must be identified as reporting
segments, until 75% of revenue is included in reportable segments

The total external revenue of Wood and Furniture is Rs.476m and the total entity revenue is Rs.650m,
which means that the revenue covered by reporting these two segments is only 73%.

This does not meet the criteria so we must add another operating segment to be able to report on 75%
of revenue. It doesn’t matter that any of the other entities do not meet the original segment criteria.

In this case, we can add on any of the other segments to achieve the 75% target. If we add in

Veneer sales, this gives total sales of Rs.538m, which is 83% of the sales revenue of Rs.650m.

This is satisfactory for the segmental report.

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Disclosure

IFRS 8 states that an entity must disclose information so that users of the financial statements can
evaluate the nature and financial effects of the business activities in which it engages and the economic
environments in which it operates.

The information that is to be disclosed is:

 A measure of profit or loss for each reportable segment

 A measure of total assets and liabilities for each reportable segment if such an amount is reported
regularly to the chief operating decision maker
 Information about the following items if they are specified and included in the measure of segment
profit that is reported to the chief operating decision maker:
o revenues from external customers
o revenues from transactions with other operating segments of the same entity
o interest revenue
o interest expense
o depreciation and amortisation
o material items of income and expense in accordance with IAS 1
o the entity’s interest in the profit or loss of associates and joint ventures accounted for by the
equity method
o income tax expense or income
o material non-cash items other than depreciation and amortisation.
 the amount of investment in associates and joint ventures accounted for by the equity method and
the amounts of additions to non-current assets (excluding financial instruments, deferred tax assets,
post-employment benefit assets and rights arising under insurance contracts), provided that these
amounts are included in segment assets.

Additionally, the following reconciliations are required:

 Reconciliation of the totals of segment revenues to the entity’s revenue;

 Reconciliation of the total of reported segment profits or losses to the entity’s profit before tax and
discontinued operations;
 Reconciliation of the total of the assets of the reportable segments to the entity’s assets;
 Reconciliation of the total of the liabilities of the reportable segments to the entity’s liabilities (but
only if segment liabilities are reported); and
 Reconciliation of the total of the assets of the other material items to the entity’s corresponding
items.

Also, the factors used to identify the entity’s reportable segments, including the basis of organisation,
(i.e. whether the entity is organised around different products and services or geographical area), and
the types of products and service from which the reportable segments derive their income must all be
disclosed.
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Measurement

IFRS 8 requires that the amount of each segment item reported shall be the measure reported to the
chief operating decision maker for the purposes of making decisions about allocating resources to the
segment and assessing its performance. This is based on the internal structure of how division of the
entity report their results to the chief operating decision maker. Any adjustments and eliminations made
in preparing an entity’s financial statements shall be included in determining segment results only if they
are included in the measure of the segment’s results used by the chief operating decision maker.

The minimum amount the entity must disclose is:

 The basis of accounting for any transactions between reportable segments

 The nature of any differences between the measurement of the reportable segments’ profit or loss
before tax and the entity’s profit or loss, for example, the allocation of centrally incurred costs.
 The nature of any differences between the measurement of the reportable segments’ assets and the
assets of the entity.
 The nature of any differences between the measurement of the reportable segments’ liabilities and
the liabilities of the entity.
 The nature of any changes from prior periods in measurement methods used to determine segment
profit or loss and the effect on profit or loss from those changes.
 The nature of asymmetrical allocations to reportable segments. For example, a reportable segment
may be charged the depreciation expense for a particular asset but the related depreciable asset
might not have been allocated to the segment.

Entity wide disclosures

The reporting entity must also make the following disclosures in the financial statements, even if it only
has one reportable segment:

 Revenue from external customers for each product and service or each group of similar products
and services.
 Revenue from external customers attributed to the entity’s country of domicile and attributed to all
foreign countries in total where revenue is made.
 Non-current assets located in the country of domicile and located in all foreign countries in total
where the entity holds assets
 If revenue from any customer is more than 10% of total revenue then it must be disclosed along
with the total of revenues from these customers and the identity of the segment reporting the
revenue.

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Question 3:
SHAZAD INDUSTRIES LIMITED

Shazad Industries Ltd has recently acquired four large subsidiaries. These subsidiaries manufacture
products which are of different lines from those of the parent company. The parent company
manufactures plastics and related products whereas the subsidiaries manufacture the following:

Product Location

Subsidiary 1 Textiles Karachi

Subsidiary 2 Car products Lahore

Subsidiary 3 Fashion garments Peshawar

Subsidiary 4 Furniture items Multan

The directors have purchased these subsidiaries in order to diversify their product base but do not have
any knowledge of the information required in the financial statements regarding these subsidiaries
other than the statutory requirements.

Required

(a) Explain to the directors the purpose of segmental reporting of financial information.

(b) Explain to the directors the criteria which should be used to identify the separate reportable
segments. (You should illustrate your answer by reference to the above information)

(c) Critically evaluate IFRS 8, Operating segments, setting out any problems with the standard.

Answer:

SHAZAD INDUSTRIES LTD

(a) The purposes of segmental information are:

(i) to provide users of financial statements with sufficient details for them to be able to appreciate the
different rates of profitability, different opportunities for growth and different degrees of risk that apply
to an entity’s classes of business and various geographical locations.

(ii) to appreciate more thoroughly the results and financial position of the entity by permitting a better
understanding of the entity’s past performance and thus a better assessment of its future prospects.

(iii) to create awareness of the impact that changes in significant components of a business may have on
the business as a whole.

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b) IFRS 8 defines an operating segment as a component of an entity:

 that engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other components of the same entity).
 whose operating results are regularly reviewed by the entity’s chief operating decisionmaker to
make decisions about resources to be allocated to the segment and assess its performance.
 for which discrete financial information is available.

In order to identify the separate reportable segments, the following criteria should be adopted:

(i) The reported revenue of the segment in Shazad Industries Ltd, including both sales to external
customers and inter-segment sales, is ten percent or more of the combined revenue of its four
operating segments.

(ii) The Assets of the segment in Shazad Industries Ltd are ten percent or more of the combined assets of
its four operating segments.

(iii) The reported profit or loss of the segment in Shazad Industries Ltd should be ten percent or more of
the greater, in absolute amount, of:

 the combined reported profit of all its operating segments that did not report a loss and
 the combined reported loss of all operating segments that reported losses.

(c) IFRS 8 lays down some very broad and inclusive criteria for reporting segments. Unlike earlier
attempts to define segments in more quantitative terms, segments are defined largely in terms of the
breakdown and analysis used by management. This is, potentially, a very powerful method of ensuring
that preparers provide useful segmental information.

There will still be problems in deciding which segments to report, if only because management may still
attempt to reduce the amount of commercially sensitive information that they produce.

The growing use of executive information systems and data management within businesses makes it
easier to generate reports on an ad hoc basis. It would be relatively easy to provide management with a
very basic set of internal reports and analyses and leave the individual managers to prepare their own
more detailed information using the interrogation software provided by the system.

If such analyses become routine then they would be reportable under IFRS 8, but that would be very
difficult to check and audit.

There are problems in the measurement of segmental performance if the segments trade with each
other. Disclosure of details of inter-segment pricing policy is often considered to be detrimental to the
good of a company. There is little guidance on the policy for transfer pricing.

Different internal reporting structures could lead to inconsistent and incompatible segmental reports,
even from companies in the same industry.

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Question 4:
AZ
For enterprises that are engaged in different businesses with differing risks and opportunities, the
usefulness of financial information concerning these enterprises is greatly enhanced if it is
supplemented by information on individual business segments.

Required
(i) Explain why the information content of financial statements is improved by the inclusion of
segmental data on individual business segments.

(ii) Discuss how IFRS 8 requires that segments be analysed.

Answer:

AZ
(i) Usefulness of segmental data

Many entities carry out several classes of business and operate in a number of countries across the
world. Each of these businesses and geographical segments carries with it different opportunities for
growth, different rates of profit and varying degrees of risk. Some business segments may be strongly
influenced by the health of the economy whereas other segments may be unaffected by recession. One
country may be experiencing growth; another country may be less stable because of political events.
Awareness of these cultural and environmental differences is important to investors in order to allow
them to fully understand the performance and position of the entity over the past, its prospects for the
future and the risks that it faces.

IFRS 8 requires that segmental information should be provided to enable investors to understand the
impact that the different segments of a business may have on the business as a whole. If the user of
financial statements is only provided with figures for the entity as a whole, this might hide the risks and
problems or profits and opportunities of the underlying business segments. The disaggregated financial
information provided by segmental reporting allows for analytical review on a segment by segment
basis which will provide greater understanding of the entity’s position and performance and allow a
better assessment of its future.

(ii) Analysing segments

IFRS 8 defines an operating segment as a component of an entity that engages in business activities
from which it may earn revenues and incur expenses, whose operating results are reviewed regularly by
the chief operating decision maker in the entity and for which discrete financial information is available.

Not every part of a business is necessarily an operating segment or part of an operating segment. Head
office is an example, since head office does not usually earn revenues. Generally an operating segment
has a segment manager who is directly accountable to and maintains regular contact with the chief
operating decision-maker, to discuss the performance of the segment.

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IFRS 8 requires that entities should report information about each operating segment that is identified
and that exceeds certain quantitative thresholds for size of revenue, operating profit or loss or assets.
Financial information about operating segments with similar characteristics can be aggregated.

IFRS 8 sets out the information about each reportable operating segment that should be disclosed,
including total assets, profit or loss, revenue from external customers, revenue from sales to other
segments, interest income and expense, depreciation, material items of income or expense and tax. The
amount reported for each item should be the same measure that is reported for the segment to the
chief operating decision maker of the entity.

IFRS8 applies to quoted companies only.

Question 5:
GOHAR LIMITED

Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints and pharma
businesses. Results of each business segment for the year ended 31 March 2015 are as follows:

Business Sales Gross Operating Assets Liabilities

segments profit expenses
------------------------- Rs. in million -------------------------
Chemicals 1,790 1,101 63 637 442
Soda Ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98
Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and Rs. 10 million
respectively at a contribution margin of 30%.

Operating expenses include GL’s head office expenses amounting to Rs. 75 million which have not been
allocated to any segment. Furthermore, assets and liabilities amounting to Rs. 150 million and Rs. 27
million have not been reported in the assets and liabilities of any segment.

Required:

In accordance with the requirements of International Financial Reporting Standards:

(a) determine the reportable segments of Gohar Limited; and

(b) show how these reportable segments and the necessary reconciliation would be disclosed in

GL’s financial statements for the year ended 31 March 2015.

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Question 6:
JAY LIMITED

(a) Specify the criteria for identification of operating segments, in accordance with the International
Financial Reporting Standards.

(b) Jay Limited is an integrated manufacturing company with five operating segments.

Following information pertains to the year ended 31 March 2012:

Operating Internal External Total Profit / Assets Liabilities

segments revenue revenue revenue (loss)

------------------------- Rs. in million -------------------------

A 38 705 743 194 200 130

B - 82 82 (22) 44 40

C - 300 300 81 206 125

D 35 - 35 10 75 60

E 38 90 128 (63) 50 25

Total 111 1,177 1,288 200 575 380

Required:

In respect of each operating segment explain whether it is a reportable segment.

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