IFRS 8: Operating segments
The management approach, the 10% tests for reportable segments, the 75% check, and what to disclose.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: Listed companies must break their results down into segments, the parts of the business management looks at separately (for example, product lines or regions).
The key idea: use the management approach: segments are whatever the chief operating decision maker reviews. A segment must be reported if it passes any 10% test, and reported segments must cover at least 75% of external revenue.
History. IFRS 8 replaced IAS 14 Segment Reporting from 2009. IAS 14 used set “business” and “geographical” segments; IFRS 8 uses management’s own view.
Key words
- Operating segment
- A component that earns revenue and incurs expenses, whose results are regularly reviewed by the CODM, and for which discrete financial information is available.Example: The UK retail division.
- Chief operating decision maker (CODM)
- The function that allocates resources and assesses performance. Often the CEO or the board.Example: The executive board.
- Reportable segment
- An operating segment that must be disclosed separately, because it meets a quantitative threshold or is needed to reach 75%.Example: A segment with 12% of total revenue.
- Management approach
- Segments and their measures are based on the internal reports given to the CODM.Example: If the board reviews profit before head office costs, that is what is disclosed.
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Scope
Entities whose debt or equity is traded in a public market (or that are filing to issue it). Others may apply it voluntarily.
The 10% tests: report a segment if ANY is met
- Revenue (external and intersegment) is 10% or more of the combined revenue of all operating segments.
- The absolute profit or loss is 10% or more of the greater of: (a) combined profit of all segments that made a profit, and (b) combined loss of all segments that made a loss.
- Assets are 10% or more of the combined assets of all operating segments.
The 75% check. If the total external revenue of the reportable segments is less than 75% of the entity’s revenue, add more segments (even if below 10%) until it reaches 75%. Similar segments may be aggregated if they meet the aggregation criteria. Others are combined in “all other segments”.
Disclosures
- General information: how segments were identified, and the types of products and services.
- A measure of profit or loss for each segment, and assets and liabilities if regularly given to the CODM, plus revenue, interest, depreciation and other items included in that measure.
- Reconciliations of segment totals to the entity’s revenue, profit, assets and liabilities.
- Entity-wide: revenue by product or service, by geographical area (home country and abroad), and major customers: if one customer gives 10% or more of revenue, disclose that fact, the amount and the segment (but not the customer’s name).
Worked example
A company has five operating segments (£m):
| Segment | Revenue | Profit / (loss) | 10% revenue? | 10% profit? | Reportable? |
|---|---|---|---|---|---|
| A | 500 | 80 | Yes | Yes | Yes |
| B | 300 | 40 | Yes | Yes | Yes |
| C | 90 | 30 | No | Yes | Yes |
| D | 60 | (20) | No | Yes | Yes |
| E | 50 | (10) | No | No | No (unless needed for 75%) |
| Total | 1,000 |
Revenue test: 10% × 1,000 = 100. A and B pass.
Profit test: segments in profit total 80 + 40 + 30 = 150; in loss 20 + 10 = 30. The greater is 150, so the threshold is 15. C (30) and D (loss of 20) pass; E (10) does not.
75% check (all revenue here is external): A + B + C + D = 950 ÷ 1,000 = 95%, so no more segments are needed. E goes in “all other segments”.
Practice questions
Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.