Module 5 Section 2

5.1 Operating Segments

Many multinational entities now operate in a variety of classes of business and/ or
in a number of different geographical locations. The availability of segment
information by product or service or geographical region is useful to both
management and investors.
IFRS 8 Operating Segments requires an entity to disclose information about each of its
‘operating segments’. The purpose of disclosure is to enable users of financial
statements to evaluate the nature and financial effects of the business activities in
which the entity engages and the economic environments in which it operates.
IFRS 8 Operating Segments applies to all entities whose ordinary shares are publicly
traded. Entities whose securities are not publicly traded are not required to disclose
information about each of their operating segments because, generally, they have a
smaller number of ordinary shareholders.

5.1.1 Definitions
Operating segment
An operating segment is 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
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.

Chief operating decision maker

This term identifies a function, not necessarily a manager, with a specific title. That
function is to allocate resources to and assess the performance of the operating
segments of an entity. Often the chief operating decision maker of an entity is its chief
executive officer or chief operating officer, but it may be a group of executive
directors or others.

5.1.2 Identifying Segments

IFRS 8 adopts a ‘management approach’ to identifying segments, whereby segments
should be consistent with the entity’s own internal management structure.
An operating segment may engage in business activities for which it has yet to earn
revenues – e.g. a start‐up operation. A segment that only sells goods to another
segment (i.e. no external sales) can also be classified as an operating segment.
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Not every part of an entity needs to be identified as an operating segment. For

example, corporate headquarters may not earn revenue and so would not be
classified as an operating segment.
A management approach highlights the risks and opportunities that management
believe are important to the business. It enables users to see the entity through the
eyes of management. Also, the cost of providing the information should be lower, as
it is already available.

Key Summary Point

A segment is a component of an entity engaged in business

activities. IFRS 8 adopts a management approach to identifying
segments.

Reportable segments
Entities must disclose separately information about each operating segment.

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

• nature of the products and services;

• nature of production processes;
• type or class of customer for their products or services;
• methods used to distribute their products or provide their services;
• nature of the regulatory environment (if applicable).
Quantitative thresholds
Entities must disclose separately information about each operating segment that
meets any of the following quantitative thresholds:

• its reported revenue (internal and external) is at least 10% of the combined
revenue of all operating segments;

• its reported profit or loss is at least 10% of the greater of the:

- combinedreportedprofit of alloperatingsegmentsthatdidnotreport a
loss, and
- combined reported loss of all operating segments that reported a loss; or

• its assets are at least 10% of the combined assets of all operating segments.
Operating segments not meeting quantitative thresholds
If an operating segment does not meet any of these quantitative thresholds, it still
may be treated as a separate reportable segment if management believes that
information about the segment would be useful to users of the financial statements.
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Alternatively, the entity may combine such segments with other segments that do
not meet the thresholds, but only with segments that have similar economic
characteristics and that share a majority of the aggregation criteria above.
At least 75% of an entity’s external revenue must be reported by operating segments.
If the 75% criterion is not met, the entity must identify additional segments (even if
they do not meet the quantitative thresholds) until at least 75% of the entity’s external
revenue is reported.
Other business activities and operating segments that are not reportable should be
combined and disclosed in an ‘all other segments’ category.

Example – identifying reportable segments

Silver Ltd manufactures and supplies bicycles and bicycle parts to a large
number of retail shops throughout the country and details of its different
business divisions are detailed below:
Profit Total
Revenue before tax assets
m m m

(A) Manufacture and sale of bicycles 332 92 136

(B) Manufacture & supply of bicycle parts
– to retail customers buying bicycles 88 48 24
– to other customers 20 12 4
(C) Supply of sports clothing 40 8 16
(D) Maintenance and repair of bicycles 120 40 40
Total 600 200 220
Divisions (A) and (D) are clearly reportable segments by virtue of their size.
Each activity exceeds all three quantitative thresholds.
Within Division (B), the supply of parts to other customers accounts for only 3%
of total revenue and 6% of total profit before tax. However, Silver Ltd may
combine the two segments within Division B as they have similar economic
activities and are likely to share a majority of the aggregation criteria. Overall, the
supply to retail and other customers accounts for more than 10% of revenue,
profits and assets.
At this point, at least 75% of the entity’s external revenue is now reported by
operating segments. As for Division C, it should be reported as a separate
segment if management treats it as a separate segment (even though it falls
below all three quantitative thresholds).

Key Summary Point

Entities must disclose separately information about each
operating segment subject to quantitative thresholds though
similar segments may be combined, and in certain
circumstances, segments not meeting quantitative thresholds
may require disclosure.
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Number of reportable segments

There may be a practical limit to the number of reportable segments, beyond which
the information becomes too detailed. The standard does not set out a precise limit,
but does encourage entities to consider whether a practical limit has been reached
when the number of reportable segments reaches ten.

5.1.3 Disclosure
IFRS 8 requires entities to 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 environments in which it operates.

General information
An entity must disclose the following general information:

• factors used to identify the entity’s reportable segments, including the basis of
organisation (e.g. products, services, geographical areas, regulatory
environments); and

• types of products and services from which each reportable segment derives its
revenues.

Information about profit or loss, assets and liabilities

An entity must report a measure of profit or loss for each reportable segment. A
measure for total assets and liabilities for each reportable segment must also be
reported if such amounts are regularly provided to the chief operating decision
maker.
An entity must disclose the following about each reportable segment if the specified
amounts are included in the measure of segment profit or loss reviewed by the chief
operating decision maker, or are otherwise provided to the chief operating decision
maker:

• revenues from external customers;

• revenues from transactions with other operating segments of the same entity;
• interest revenue;
• interest expense;
• depreciation and amortisation;
• material items of income and expense disclosed in accordance with IAS 1;
• the entity’s interest in the profit and loss of associates and joint ventures
accounted for by the equity method;

• income tax expense or income;

• material non‐cash items other than depreciation and amortisation.
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Key Summary Point

An entity must disclose the factors used to identify segments,

types of products/services which generate revenue and specific
information about profits or loss, assets and liabilities.

5.1.4 Measurement
The amount of each segment item reported must 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 the case, even if segment items are measured differently for the purposes of
preparing the entity’s financial statements.
This can arise, for example, in the case of a group which prepares its consolidated
financial statements using IFRSs but the internal information used for decision
making purposes within one or more of its subsidiaries may still follow local GAAP.
An entity must provide an explanation of the measurements of segment profit or
loss, segment assets and segment liabilities for each reportable segment. At a
minimum, an entity must disclose the following:

• the basis of accounting for transactions between reportable segments;

• the nature of any differences between the measurement of the reportable
segment’s profit/loss and the entity’s reported profit/loss (e.g. accounting
policies, policies for the allocation of jointly used assets);

• the nature of any differences between the measurement of the reportable

segment’s liabilities and the entity’s liabilities (e.g. accounting policies, policies
for the allocation of jointly utilised liabilities);

• the nature and effect of any changes from prior periods in the measurement
methods used to determine reported segment profit/loss;

• the nature and effect of any asymmetrical allocations to reportable segments

(e.g. depreciation allocated to a segment but not the related asset).

Reconciliations
An entity shall provide reconciliations of all of the following:

• the total of the reportable segments’ revenue to the entity’s revenue;

• the total of the reportable segments’ profit or loss to entity’s profit or loss;
• the total of the reportable segments’ assets to the entity’s assets (if reported
above);
• the total of the reportable segments’ liabilities to the entity’s liabilities (if
reported above); and

• the total of the reportable segments’ amounts for every other material item of
information disclosed to the corresponding amount for the entity.
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Key Summary Point

The amount of each segment reported must be the measure
reported to the chief operating decision maker even if this is
different from that used to prepare the accounts; in which case,
differences must be explained and reconciliations are required.

Restatement of previously reported information

If an entity changes the structure of its internal organisation in a manner that causes
the composition of the reportable segments to change, the corresponding information
for earlier periods must be restated unless the information is not available and the
cost to develop it would be excessive.
If segment information for earlier periods is not restated, the entity must disclose the
segment information for the current period on both the old basis and the new basis
of segmentation, unless the necessary information is not available and the cost to
develop it would be excessive.

Entity-wide disclosures
The following entity‐wide information must be disclosed:

• revenues from external customers for each product, service or groups of

similar products or services;

• revenues from external customers attributed to the entity’s country of domicile;

• revenues from external customers attributed to all foreign countries in total;
• non‐current assets located in the entity’s country of domicile;
• non‐current assets located in all foreign countries in total; and
• the total amount of revenue generated by an individual customer and the
related segment(s) where it is reported, where an individual customer
generates 10% or more of the total external revenue. Customers’ identities need
not be disclosed.

Key Summary Point

If composition of reportable segments changes, corresponding

information for earlier periods must be restated. There are also
specific requirements to disclose wider information.
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5.1.5 Self-Test Question

You are the financial controller of Sparks plc, a company listed on the London
Stock Exchange. You are currently preparing the consolidated financial statements
for the year ended 31 March 2020.
Each month the board of directors receives a report detailing the activities of the
five significant operational areas of the business. Relevant financial information
relating to the five operations for the year to 31 March 2020, and in respect of the
Head Office, is as follows:
Operational area Revenue Profit / (loss) Total assets
’000 ’000 ’000
A 57,500 7,500 20,000
B 45,000 5,000 15,000
C 10,000 (7,500) 12,500
D 2,500 375 1,250
E 7,500 1,125 1,000
122,500 6,500 49,750
Head office Nil Nil 15,000
Entity total 122,500 6,500 64,750
Requirement
a) How should the directors decide on what the operating segments should be?
b) Should the financial statements report segment information relating
to Head Office?
c) Which of the operational areas should report separate information? Operational
areas A, B and C exhibit very distinct economic characteristics but the economic
characteristics of operational areas D and E are very similar as they relate to the
same type pf product sold to wholesale and retail customers.
d) Why has IFRS 8 attracted such critical comment?

Solution

a) An operating segment is a component of a business:

• that engages in activities from which it may earn revenues and incur
expenses;

• whose operating results are regularly reviewed by the chief operating

decision‐maker;

• for which discrete financial information is available.

The term chief operating decision‐maker identifies a function, and not
necessarily a manager with a specific title. The key function is allocation of
resources and assessment of performance. The chief operating decision‐ maker
can be an individual or a group of directors. In this case, the board of directors
must decide on the operating segments.
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b) In order to be an operating segment a business unit must be able to produce

revenue. Therefore, despite the relative materiality of its assets to the assets of
the entire entity, Head Office is not an operating segment.
c) Once an operating segment is identified, it is necessary to report separate
information about the segment if it exceeds any one of three quantitative
thresholds:

• its reported revenue is at least 10% of the total revenue of all operating
segments;

• the absolute amount of its reported profit or loss is at least 10% of the greater,
in absolute amount, of (i) the combined reported profit of all operating
segments that did not report a loss and (ii) the combined reported loss of all
operating segments that reported a loss; or

• its assets are at least 10% of the combined assets of all operating segments.

If, having applied these tests to individual operating segments, the external
revenue of the reportable segments is less than 75% of the external revenue of
the combined entity more operating segments should be designated as
reportable until the 75% threshold is reached.
Segments A and B are separately reportable because in each case their revenue
is more than 10% of the total revenue of the business. There is no need for any
further consideration.
Segment C is reportable despite its revenue being less than 10% of the total
revenue. Its assets are more than 10% of the total of the assets of all operating
segments.
Segments D and E can be considered as a single segment. They fail both the
revenue and the assets tests but their profit (375 + 1125 = 1500) is more than
10% of the total profit of the segments that report a profit (7,500 + 5,000 +
1,500 = 14,000). As they exhibit similar economic characteristics (and are
likely to share a majority of the IFRS 8 aggregation criteria) they can probably
be aggregated. Therefore, we will consider areas D and E together for these
tests.
d) The reasons the standard has attracted such critical comment are:

• the identification of operating segments, and the segment information that

is provided, is based around the internal business organisation. Therefore,
the reports are potentially vulnerable to management discretion in terms of
what is reported and inter‐company comparison may be difficult or even
impossible;

• the standard was issued as part of the convergence project with the US FASB
and is based very much on the equivalent US standard. Some commentators
are concerned that the reason for the issue of the standard was based on
pragmatism, rather than on sound theoretical principles;

• the standard does not require entities to follow the measurement principles
of IFRS in its segment reports, but rather the measurement principles that
are used internally.
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Case Study 5
GetFit plc runs a network of family‐friendly fitness centres throughout the county,
providing three basic services: gym membership, crèche, and sports shop. The
financial statements for the year ended 31 December 2019 contain the following
summary information:
Statement of Financial Position m
Non‐current assets 4,989
Current assets 1,527
Total assets 6,516

Share capital 2,400

Retained earnings 3,117
Non‐current liabilities 420
Current liabilities 579
Total equity & liabilities 6,516

Statement of Profit or Loss and Other m

Comprehensive Income
Revenue 3,084
Cost of sales (2,052)
Gross profit 1,032
Administrative expenses (330)
Distribution costs (303)
Finance costs (42)
Net profit 357
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The following breakdown is provided of the company’s results across the three
divisions and head office:
Gym Creche Sports shop Head office
membership

m m m m
Non‐current assets 2,670 996 1,092 231
Current assets 909 297 285 36
Non‐current liabilities 300 – – 120
Current liabilities 198 120 168 93
Revenue 1,524 456 1,104 –
Cost of sales 948 243 861 –
Administrative expenses 129 42 114 45
Distribution costs 192 36 75 –
Finance costs 30 – – 12

Requirement
Module 5 Section 2
Prepare a segment report for GetFit plc in line with the requirements of
IFRS 8 Operating Segments, showing for each segment and the business
as a whole:

• revenue;
• profit;
• net assets.

Case Study 5 Solution

Segment report for GetFit plc
Gym Creche Sports Other Total
shop
m m m m m
Revenue 1,524 456 1,104 – 3,084
Interest expense (30) – – (12) (42)
Profit (W1) 225 135 54 (57) 357
Reportable segment assets (W2) 3,579 1,293 1,377 267 6,516
Reportable segment liabilities (W3) (498) (120) (168) (213) (999)
Working 1 – segment profit
Gym Creche Sports Other Total
shop
m m m m m
Revenue 1,524 456 1,104 – 3,084
Cost of sales (948) (243) (861) – (2,052)
Administration expenses (129) (42) (114) (45) (330)
Distribution costs (192) (36) (75) – (303)
Interest expense (30) – –
(12) (42) Profit
225 135 54 (57) 357

Working 2 – reportable segment assets

Gym Creche Sports Other Total
shop
m m m m m
Non‐current assets 2,670 996 1,092 231 4,989
Current assets 909 297 285 36 1,527
Reportable segment assets 3,579 1,293 1,377 267 6,516

Working 3 – reportable segment liabilities

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Gym Creche Sports Other Total
shop
m m m m m
Current liabilities 198 120 168 93 579
Non‐current liabilities 300 – – 120 420
Reportable segment liabilities 498 120 168 213 999