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Chapter 39
OPERATING SEGMENTS (IFRS 8)
INTRODUCTION
The IASB issued IFRS 8, Operating Segments, in November 2006, effective for annual periods beginning on or after January 1, 2009. IAS 14, Segment Reporting,
was the previous standard on segment reporting that was issued by the International Accounting Standards Committee (IASC), the IASB’s predecessor.
Since its issuance in 2006, IFRS 8 has already been amended by the following three IFRS:
• IAS 1 (as revised in 2007), effective date January 1, 2009.
• IASB’s annual improvements standard, “Improvements to IFRS 2009,” effective date January 1, 2010.
• IAS 24, (as revised in 2009), effective date January 1, 2011 (with earlier application permitted).
As a result of the IASB’s joint short-term convergence project with the US Financial Accounting Standards Board (FASB), which project was launched with the
primary objective of reducing differences between IFRS and US GAAP, and based on research carried on by both standard setters, the IASB adopted the approach of
the US Standard on segmental reporting, namely, SFAS 131, Disclosures about Segments of an Enterprise and Related Information, and revised its previous Standard
on segment reporting.
The IASB believes that requiring entities to report segmental information using the approach prescribed by IFRS 8 (i.e., a “management approach”) allows the
financial statement user to review segmental information from the “eyes of the management” as opposed to a “risks and rewards” approach under its erstwhile standard
on segment reporting.
Furthermore, with the issuance of this standard on segment reporting, the emphasis has shifted to disclosing segmental information for external reporting purposes
based on internal reporting within the entity to its “chief operating decision maker.” Therefore the cost and time needed to produce such segmental information is
greatly reduced since most if not all of this information is already available with the entity, which in the case of public companies that are required to report on a
quarterly basis is a distinct advantage.
SCOPE
IFRS 8 applies to both the separate or individual financial statements of an entity and to consolidated financial statements of a group within which the entity is the
parent:
• Whose debt or equity instruments are publicly listed.
• That files, or is in the process of filing, its financial statements with a securities commission or other regulatory authority for the purpose of issuing any class of
instruments in a public market.
The Standard clarifies that when both the parent’s separate (stand-alone) financial statements and its consolidated financial statements are presented in the same
financial report, segment information as required by IFRS 8 needs to be presented only for the consolidated financial statements.
Upon first adoption of IFRS 8, “comparatives,” as reported under IAS 14, are required to be restated.
DEFINITIONS OF KEY TERMS
Operating segment. It is a component of the entity that engages in business activities from which it may or may not earn revenues and incur expenses and
whose results are regularly reviewed by the chief operating decision maker to make decisions about resource allocations to segments and assess their
performance and for which discrete financial information is available.
Reportable segment. Under IFRS 8 a publicly listed entity is required to report segmental information for an operating segment that has been identified by
IFRS 8 and which has exceeded the quantitative thresholds (such as 10% of its reported revenue).
Chief operating decision maker (CODM). The term “CODM” identifies a function as opposed to a person and that function is allocating the entity’s
resources and assessing the performance of the entity.
CORE PRINCIPLE
According to the “core principle” of IFRS 8, an entity should disclose information to enable users of its financial statements to evaluate the nature and financial
effects of the types of business activities in which it engages and the economic environments in which it operates.
CHIEF OPERATING DECISION MAKER
In some cases, the highest ranking individual in any organization may qualify as the Chief Operating Decision Maker (CODM). However, since the term CODM
does not always refer to an individual, but to a function, in the case of a complex organizational and reporting setup (where decision-making responsibilities are split