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IFRS 8 deals with the identification of operating segments of an organization. The underlying concept of IFRS 8 is that an organization should disclose information that allows readers of its financial statements to understand all the important information. This includes the nature and impact of the commercial operations in which the business engages as well as the environment at large in which it exists.
IAS 14 is replaced by IFRS 8. It is concerned with an entity’s preparation and presentation of segmental results. IFRS 8 is equivalent to FAS 131 in the United States. The goal of the Standard is to provide a balance between external financial reporting and internal reporting of the entity’s performance for management assessment reasons. As a result, the Standard requires organizations to publish information on “operational segments.”
Operating segments refer to components of a company for which distinct financial information is accessible and which are examined on a regular basis by the main operating decision-maker in choosing how to allocate resources and reviewing performance. In general, financial information must be disclosed on the same basis as is used internally to evaluate operating segment performance and for deciding how to allocate resources to operating segments.
This Accounting Standard states that businesses are to disclose segment results, including profit and loss statements, as well as segment assets. Furthermore, the Standard necessitates the disclosure of income from large geographical regions as well as major clients.
The primary difference between IAS 14 and IFRS 8 is that IFRS 8 falls in line with the segmentation adopted for internal reporting, more precisely. IAS 14 segmentation was done on the basis of goods and geographical areas – one considered as primary and the other as secondary. In IFRS 8, the differentiation between primary and secondary segments has been eliminated, and both the product as well as geographical segmentation is required.
IFRS 8 is applicable to the financial statements of any firm whose debt or equity instruments are exchanged on a public market or who wishes to issue any type of securities on a public market. Other companies that wish to report their segmental information should do so in accordance with IFRS 8 if they refer to the disclosures as ‘segment information.’
According to IFRS 8, an operating segment refers to a component of an entity:
This concept implies that not every portion of an entity is necessarily an operating segment. IFRS 8 uses the example of a company headquarters that may receive little or occasional revenues and hence is not an operational segment. Some observers have criticized the ‘management method’ for leaving the identification of operating segments too much to the discretion of the business, hence limiting comparison between financial statements of various organizations.
Once an operational segment has been determined, the company must disclose segment information if it fulfills any of the quantitative standards listed below. Hence, an operating segment shall become a reportable segment on fulfillment of the following conditions:
Two or more operating segments might be combined into a single operating segment provided the aggregation is compatible with the essential concepts of the standard, the segments have similar economic features, and the segments are similar in certain required aspects. In other words, if segments have comparable economic features, they can be aggregated into a single operating segment and considered collectively for determining the size requirement.
IFRS 8 further states that if the aggregate external turnover reported by operating segments, that are identified by the above criteria, constitutes less than 75% of the total company’s revenue, in that case, additional operating segments should be identified as reportable segments (even when they fail to meet the quantitative thresholds) until the point at least 75% of the company’s revenue gets covered in the reportable segments.
Current period and comparative segment information must be presented consistently under IFRS 8. This implies that if a segment is designated as reportable in the current period but was not so in the prior period, then the relevant comparative information should be reported unless obtaining it would be unreasonably expensive.
IFRS 8 allows organizations to report information about segments that do not fulfill the size criterion. Entities may report on such segments if management believes that information regarding the segment would be relevant to readers of the financial statements.
IFRS 8 offers a framework for the disclosures to be made by reportable operating segments. Entities are obliged to disclose basic information on topics such as how reportable segments are selected and the categories of items or services from which each reportable segment receives revenue.
For each reportable division, entities must report a profit or loss measure as well as total assets. Both of these must be based on data supplied to the main operating decision-maker. If the main operating decision-maker receives information on liabilities for the company’s operating segments on a regular basis, these liabilities should be presented on a segment basis as well.
IFRS 8 specifies that the following disclosures are needed regarding profit or loss and assets:
The measuring basis for each individually reported item should be the same as the one used in the information presented to the main operating decision-maker. The internal reporting system may employ more than one measure of an operational segment’s profit or loss, as well as assets and liabilities. In such cases, the measure used in the segment report should be the one that management considers is most consistent with the measures used to calculate the corresponding amounts in the entity’s financial statements.
Companies are also needed to give a variety of reconciliations, including the following:
Unless otherwise stated in the segment report, IFRS 8 encourages organizations to give information related to revenue on a geographical and ‘class of business’ basis. Organizations must also give information on non-current assets on a geographical basis, however not on a ‘class of business’ basis.
If sales from a single external client account for 10% or more of the entity’s combined revenue, the company must disclose that fact, as well as the total revenue from each customer (even though the name is not required) and the segment or segments reporting the revenues. These ‘entity-wide disclosures’ are required even if the business has just one operational segment and hence does not segment report effectively.
IFRS 8 on Operating Segments requires certain kinds of organizations (mostly those with publicly traded shares) to publish information about their operating segments, goods and services, geographical areas in which they operate, and key customers. This standard has become applicable to the financial statements beginning from 1st January 2009.