Identifying reportable segments

Reportable segments are those operating segments, or aggregations of operating segments, for which segment information should be separately reported. Aggregation of one or more operating segments into a single reportable segment is permitted (but not required) where certain conditions are met, the principal condition being that the operating segments should have similar economic characteristics. Once aggregation has been considered, single operating segments or aggregations of operating segments (where permitted) should be treated as reportable segments where they exceed certain quantitative thresholds that are based on a comparison of segment revenues, profit or loss and assets with the comparable figures for all segments. (An entity is allowed, however, to report segment information for smaller operating segments or aggregations of operating segments, if it wishes to do so.)

The process for determining reportable segments is a matter of judgement. The flow chart below has been taken from paragraph IG7 of IFRS 8, to assist entities in determining reporting segments.

Aggregation

Two or more operating segments could be aggregated if:

• aggregation is consistent with the core principle that the result is to provide information that enables users to evaluate the nature and financial effects of the business activities in which the entity engages and the economic environments in which it operates;
• the segments have similar economic characteristics; and
• the segments are similar in each of the following respects:
• the nature of products and services;
• the nature of production processes;
• the type or class of customer for the products and services;
• the methods used to distribute the products or provide the services; and
• where applicable, the nature of the regulatory environment, for example banking, insurance or public utilities.

Operating segments often show the same long-term financial performance if they have similar economic characteristics. Long-term average gross margins would be expected to be similar. IFRS 8 does not provide guidance on acceptable differences in long-term average gross margins, so any differences should be closely examined, because these might come under the scrutiny of regulators. In addition to long-term average gross margins, other economic factors (such as trends in the growth of products, and management’s long-term expectations for the product lines) might also be considered. Both historical and future expected financial performance should be considered, if such information is available.

The aggregation criteria are tests and not indicators. All of the criteria should be satisfied before operating segments can be aggregated.

Can a start-up entity be aggregated with a mature business? One might assume that a start-up entity could never be aggregated with a mature business, because the gross margins are not likely to be similar. However, to the extent that the expected future financial performance (including the competitive and operating risks) of the start-up business is expected to converge and be similar to that of the entity’s mature businesses, the economic characteristics requirement for aggregation would be satisfied and the operating segments could be aggregated. The standard does not specify the period over which the financial performance should converge, but we do not expect it to be in the long-term.

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Aggregating an entity’s segments where the management reporting is prepared on a geographical basis The criteria for aggregating an entity’s segments, whose management reporting is prepared on a geographical basis, are the same as the criteria in IFRS 8. However, in order to be aggregated, each of the individual country segments should possess the same economic characteristics. This might present a problem for combining individual countries since, in addition to assessing the financial performance and risks of the underlying products comprising the segment, an entity should consider the economic conditions, exchange control regulations and underlying currency risks associated with the countries when it is determining whether the economic characteristics are similar. Furthermore, even if individual countries were to be aggregated, the entity-wide disclosures required by IFRS 8 mean that revenues and assets are, in any event, required to be disclosed for each material foreign country. An example of issues that might arise when aggregating segments is considered below.  Example – Aggregating segments A retailer of women’s coats has the following operating segments: store label – wool coats; other designer brands – wool coats; and fur coats. The following table shows limited financial information for each segment: ‘Store label’ wool coats ‘Other designer brands’ wool coats Fur coats Average gross-margin percentage 25% 30% 33% Sales volume 500,000 units 375,000 units 20,000 units Average sales price 175 per unit 265 per unit 4,200 per unit Growth rate per year 3% (steady) 2% (steady) –5% (declining) The entity’s fur coats line of business has experienced sales decline in recent years, and the rate of decline is expected to continue. Management believes that the sales decrease is principally in response to the growing consumer focus on animal rights. Management expects that it can maintain the profit margin at 33% for at least the next three years. While management views the ‘fur coats’ line as still favourably contributing to its operations, it has indicated that, after a five-year period, it will consider whether to maintain the line. The wool for the ‘store label’ and ‘other designer brands’ segments is purchased from the same manufacturer. Average margins and gross sales of the two segments differ, but there are lines in the ‘other designer brands’ segment with margins and sales prices very similar to the ‘store label’ segment. The growth rates of the two segments have moved in tandem over the past 10 years, and management expects this to continue in the future. The ‘store label’ and ‘other designer brands’ segments possess similar economic characteristics, despite the difference in average gross margins. The ‘fur coats’ segment might be viewed as having different economic characteristics, because of the ongoing differences in growth and the operating risks, despite the similarity of its average gross margin to that of the ‘other designer brands’ segment. Certain regulators might challenge the conclusion above, due to the differences in gross margin between ‘store label’ and ‘other designer brands’. Caution should be exercised when aggregating operating segments with disparate gross margins, to ensure that they are economically similar despite the differences in margins. As long-term gross margins of operating segments become more divergent, we would expect it to become more difficult to support the assertion that the operating segments are economically similar.

Quantitative thresholds

Information about an operating segment, or a permitted aggregation of operating segments, is required to be reported where it meets one or more of the following quantitative thresholds:

• The operating segment’s reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments.

• The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:
• the combined reported profit of all operating segments that do not report a loss; and
• the combined reported loss of all operating segments that report a loss.

• Its assets are 10% or more of the combined assets of all operating segments.

Reportable segments: revenue threshold An entity has the following: Segment revenue External revenue Internal revenue Total revenue (including intersegment) Operating segment A 40 25 15 350 Operating segment A’s internal and external revenues exceed 10% of the total revenues, internal and external, of all operating segments (the first condition in para 18), and so it is a reportable segment.

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Reportable segments: revenue and results thresholds After the aggregation criteria have been applied to its operating segments, an entity has the following: Segment revenue Total revenue (including intersegment) Segment loss Total segment loss of lossmaking segments Total segment profit of profitmaking segments Operating segment A 40 500 10 90 200 Operating segment A’s assets are less than 10% of the total assets of all operating segments. In this case, segment A is not a reportable segment. It does not satisfy the revenue test, because its revenue, internal and external, is less than 10% of the aggregate internal and external revenues of all operating segments. Nor, as stated, does it satisfy the assets test. In relation to the profits test, although its losses of 10 are greater than 10% of the total of all operating segments in loss, they are less than 10% of the total of all segments in profit. The comparison required by the standard is with the total (profit or loss) that is greater in absolute terms. Segment A’s loss of 10 should be compared with the total for all operating segments in profit, which is 200. Because segment A’s result is less than 10% of the total of all operating segments on this basis, it does not meet the results test either, and so segment A is not a reportable segment. In this situation, the entity might treat the immaterial non-reportable segment in one of the following ways: ·        include the segment in an ‘all other’ category; ·        voluntarily report the segment separately; or ·        if applicable, aggregate the segment with other non-reportable segments in accordance with IFRS 8, which would make the combined segments reportable. This example illustrates the profits and losses test, and it highlights the fact that it might be necessary to compare segment losses with total profits, rather than merely with total losses, where total profits exceed total losses. This is because the figure for comparison purposes is the greater of total profits and losses.

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Reportable segments: all quantitative thresholds An entity has the following: Segment revenue Total revenue (including intersegment) Segment profit Total segment profits Segment assets Total segment assets Operating segment A 50 600 5 60 200 400 There are no loss-making operating segments. In this case, segment A is a reportable segment. This is because it satisfies the assets test, because its assets represent 10% or more of the total assets of all operating segments. This example illustrates the fact that an operating segment only has to satisfy one of the tests in order to be a reportable segment. Segment A does not satisfy the revenue test, because its internal and external revenue of 50 does not represent 10% or more of total segment revenue of 600. Nor does it satisfy the profits test, because its profit of 5 is less than 10% of the total profits of 60. However, it does satisfy the assets test.

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Reportable segments: quantitative thresholds for a number of segments Entity A has the operating segments A to F. The revenues (internal and external), profits and assets are set out in the table below. Entity A needs to determine how many reportable segments it has. The figures are in the same proportions as in the previous year. Segment Total revenue Profit/ (loss) Total assets ’000 ’000 ’000 A 11,000 2,000 25,000 B 7,500 1,000 15,500 C 3,000 (1,000) 10,500 D 3,500 (500) 7,000 E 4,000 600 7,000 F 1,500 400 3,500 30,500 2,500 68,500 In this example, segments A, B, D and E clearly satisfy the revenue and assets tests (so there is no need to consider the profits test in these cases), and so they are reportable segments. Segment C does not satisfy the revenue test, but it does satisfy the assets test (again, there is no need to consider the profits test), and so it is also a reportable segment. Segment F does not satisfy the revenue or the assets tests, but it does satisfy the profits test; this is because its profit of 400 is 10% of the greater of the absolute amount of losses of those segments in loss (1,500) and those which either break even or make a profit (including segment F, this is 4,000). Therefore, segment F is also a reportable segment. This example illustrates how to apply the thresholds to each of the relevant measures of revenue, profit and assets for a number of segments. It also illustrates the importance of other information required by the standard and for interpreting the segment information. Looking at the above figures, it would appear that segment C is the weakest. However, other information required by the standard would help to explain its significance to the entity. The standard requires inter-segment revenue, and the basis of intersegment pricing, to be reported. If, for example, segment C produced a vital raw material that was essential for the production processes carried out by other segments, and its sales were primarily made at cost to other segments, this could explain why its results were poor compared with the other segments.

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Reportable segments: level of profit or loss to be used in determining whether the quantitative thresholds have been met Although the terms ‘revenue’ and ‘assets’ are straightforward in the quantitative thresholds, some doubt might arise as to which level of profit or loss should be used in comparing profits and losses. Entities often report ‘operating profit’, and other measures of profit include ‘profit before tax’ and ‘profit for the period after tax’. Also, for the purpose of reporting segment information to the CODM, an entity might use a measure of profit adjusted to exclude certain unusual items. Because this latter figure (that is, the figure reported to the CODM) is the only profit figure that is likely to be identified for reporting of segment information, in our view this is the figure to be used to make the comparisons of profit or loss required in determining whether the quantitative thresholds have been met. This might seem counter-intuitive. However, IFRS 8 considers issues through the eyes of management, and all segment profits would be calculated on this basis. Some entities might use different profit measures for each segment, which causes difficulty when performing the 10% test in relation to profit. IFRS 8 does not contain any guidance in this area. Where operating segments have different profit measures, management should determine a reasonable and consistent basis to compare segments for the 10% profit test. The basis used by management should be considered in conjunction with the core principle in IFRS 8, to provide users with information that enables them to evaluate the nature and financial effects of the business activities. Example – Segments use different measures of profitability An entity has three operating segments, none of which can be combined under the aggregation criteria. The following is reported to the CODM: ·        Segment 1 measures profitability based on net profit, with pension amounts reported on the cash basis. (Segment 1 is the only segment for which pension expense is reported – that is, while the other segments do have pension expenses, allocations of pension amounts are not made to the other two segments.) Asset information is limited to the presentation of accounts receivable. ·        Segment 2 measures profitability based on pre-tax income, which includes an internal cost-of-capital amount charged by ‘corporate’ that is assessed to segment 2 only. Asset information includes only accounts receivable and fixed assets. ·        Segment 3 measures profitability based on post-tax income. Asset information is limited to accounts receivable. Management has concluded that the most appropriate measure for determining the 10% threshold is the lowest level of profitability reported to the CODM, which is the net profit of operating segment 1. This amount should be determined for the remaining segments for the purposes of the 10% profit test. Similarly, accounts receivable would be the most consistent measure of assets on which to perform the 10% test for assets.

 Quantitative thresholds are included in the standard so as to limit, to a reasonable level, the amount of disclosures about operating segments. However, IFRS 8 requires that external revenue of reportable segments should constitute at least 75% of total external entity revenue. If, after determining reportable segments, the total external revenue attributable to those segments amounts to less than 75% of the total consolidated or entity external revenue (depending on whether consolidated or entity financial statements are being prepared), additional segments should be identified as reportable segments, even if they do not meet the 10% thresholds described above, until at least 75% of the consolidated or entity external revenue is included in reportable segments. Consolidated revenue (for the purpose of this comparison) would, by definition, mean external revenue, because inter-segment revenue would be eliminated on consolidation. IFRS 8 does not prescribe which segments should be included to reach the 75% threshold. We would expect an entity to select the most significant operating segment, but there is no requirement to do so.

75% test for reportable segments An entity has identified three reportable segments. The total external revenues generated by these three segments represent only 68% of the entity’s total external revenues. The entity’s systems also provide for reports to be made to the financial controller on five other activities that are reported to the CODM. None of these five activities is individually large enough to constitute a reportable segment under IFRS 8. The largest such activity accounts for 8% of total entity external revenue. In accordance with the requirement of the standard, the entity designates this activity as a reportable segment, making the total external revenues attributable to reportable segments 76% of total entity revenues. The remaining four activities are aggregated into an ‘All other segments’ category.

Operating segments below the quantitative thresholds Designation of single segment as a reportable segment

As well as requiring operating segments that meet the quantitative thresholds to be treated as reportable segments, IFRS 8 allows any other operating segment to be treated as a reportable segment if management believes that information about that segment would be useful to users of the financial statements.

Why an entity might choose to treat an operating segment that does not meet the thresholds as a reportable segment One reason for treating an operating segment that does not meet the thresholds as a reportable segment might be that the performance of the segment depends more on market forces than all of the other segments and is highly volatile. Alternatively, the activity represented by the segment might be a new activity that the entity wishes to highlight, such as a start-up activity that incurs costs but does not yet generate much revenue. Examples of such activities include internet and digital television ventures.

Aggregation of segments with a majority of similar features and disclosure as a reportable segment

If an operating segment that does not meet the 10% criteria is not voluntarily designated as a reportable segment, it could be combined into a separately reportable segment with one or more other operating segments. This is acceptable, provided that those operating segments are also below all the 10% thresholds, have similar economic characteristics and share a majority of the aggregation criteria in paragraph 12 of IFRS 8.

For the purpose of combining segments in these circumstances, the segments need to be economically similar, and they need to satisfy only a majority of the aggregation criteria (not necessarily all of them). This is different from the aggregation of segments that might be done before the initial determination of reportable segments, where all of the criteria should be satisfied.

Distinction between the two stages of aggregation The distinction between the two stages of aggregation is important and is explained as follows: ·        In the first stage, the aggregation takes place before determining the reportable segments. Each of the aggregation criteria is considered to be significant and, for that reason, they all have to be satisfied. ·        In the second stage, the reportable segments have already been identified, and the segments that are being aggregated are those that do not meet the thresholds for treatment as reportable segments. Therefore, the aggregation criteria are less important. It would be useful, when describing the factors used to identify the entity’s reportable segments (a requirement of IFRS 8), to explain that the reportable segment formed as a result of the aggregation process described above is the result of the aggregation of segments that share only a majority of features in common.

Other segments that are not reportable segments

Information on other business activities and operating segments that are not reportable segments should be combined and disclosed under a heading ‘All other segments’. The ‘all other segments’ category should be shown separately from other reconciling items (such as elimination of inter-segment revenue and profits) in the re-conciliations to figures reported in the entity’s income statement and balance sheet (as required by IFRS 8). The standard requires a description of the sources of the revenue included in the ‘All other segments’ category.

Prior years

If a segment was a reportable segment in the prior period, because it met the relevant 10% thresholds, it should continue to be treated as a reportable segment in the current period (even if it no longer meets any of the 10% thresholds) if the entity’s management considers the segment to be of continuing significance. However, in the next period, as the comparative would not qualify as a separate segment, this segment would no longer be required to be reported in the current or the prior period, unless it qualified as a separate reportable segment again in the current period.

If a segment is identified as a reportable segment in the current accounting period, because it meets the relevant 10% thresholds, comparatives should be restated to show the newly reportable segment as a separate segment, even if that segment did not meet the 10% threshold in the comparative period. This comparative information should be given, unless the necessary information is not available and the cost to develop it would be excessive. However, given the management approach to segment identification, it would seem difficult to prove that the cost would be excessive.

Practical limits on number of reportable segments

There might be a practical limit to the number of reportable segments that an entity discloses, beyond which segment information might become too detailed. Where the number of segments that are reportable increases to above 10, the entity should consider whether a practical limit has been reached.

Entity has more than 10 reportable segments, but quantitative thresholds have not yet been met If an entity has more than 10 reportable segments, it cannot limit the number of operating segments that it discloses if all of the quantitative thresholds have not yet been met. IFRS 8 states that additional operating segments should be identified as reportable segments until at least 75% of the entity’s revenue is included in reportable segments. If an entity has 20 different operating segments, all of which are the same size (that is, each contributes 5% of revenue) and none of which are reportable segments or meet the aggregation criteria in IFRS 8, it would be expected to disclose at least 15 operating segments as reportable (that is, 75% of consolidated revenue, divided by 5% of revenue per segment, equals 15 segments).

Disclosure of information on reportable segments

An entity should disclose information about reportable segments, to enable users of the financial statements to evaluate the nature and financial effects of the business activities in which the entity engages and about the economic environments in which it operates.

Information to be disclosed about reportable segments falls into four categories:

• General information on how reportable segments are identified (IFRS 8).

• Detailed disclosures about measures of segment profit or loss, and about measures of assets and liabilities (if these are reported to the CODM).
• Disclosure of measurement basis. Re-conciliations of segment information to corresponding entity amounts (as reported in the financial statements).

• Balance sheet amounts are required to be reconciled for each date at which a balance sheet is presented.

Management accounts An entity’s management accounts might not be supported by the same robust internal processes and control systems as the external reporting systems. Management will need to ensure that there are relevant control systems in place to obtain information that is presented in the management accounts, and within the segment information. Furthermore, paragraph 28 of IFRS 8 requires reconciliation between amounts disclosed for reportable segments and the corresponding amounts in the financial statements.

Management might be concerned about whether IFRS 8 will require information that it considers commercially sensitive to be presented to the external market. IFRS 8 would potentially make more detailed disaggregated information provided to the CODM reportable, which some entities might regard as commercially sensitive. However, IFRS 8 does not include a ‘competitive harm’ exemption. So, information reported to the CODM will need to be disclosed.

The general information required by IFRS 8 includes:

• A description of the factors used to identify the entity’s reportable segments, which should include the basis of organisation (for example, whether the entity is organised around differences in products and services, geographical areas, regulatory environments or a combination of factors). The description should also disclose whether operating segments have been aggregated.

• The judgements made by management in applying the aggregation criteria. This includes a brief description of the operating segments that have been aggregated in this way and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics.

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

Management commentary and composition of segments In practice, many entities give considerable detail on how they are organised, and on the composition of segments, in a management commentary such as the ‘operating and financial review’ or ‘management discussion and analysis’. Therefore, the disclosures required in the financial statements will often be those that meet the minimum requirements above. In most cases, there should not be differences between the management commentary and the operating segment information.

Detailed disclosures of measures of profit and loss, assets and liabilities

Disclosure of the amount of each segment item that is reported should be based on the information provided to the CODM for the purpose of making decisions about allocation of resources to the segment and for assessing its performance. Disclosure is required of:

• A measure of profit or loss for each reportable segment.

• A measure of assets and a measure of liabilities for each reportable segment, if they are regularly provided to the CODM. Where certain specific asset balances are reviewed by the CODM, only the total of these balances is required to be disclosed as segment assets, and not the individual asset balances.
• Where the CODM only receives information with respect to an entity’s cash flows (that is, the CODM receives no profit or asset information), the entity should assume that the net cash flows reported are the measure of profit or loss. Cash flows that are reported as inflows only are likely to be representative of revenue, rather than of profit. Net cash flow would be expected in order to qualify as a measure of profit or loss. This cash flow information would need to be reconciled to the entity’s profit or loss.
• Specified amounts for each reportable segment, if they are either included in the measure of profit or loss that is reported to the CODM or they are otherwise provided to the CODM, even if they are not included in that measure of profit or loss. These amounts are:
• revenues from external customers;
• revenues from transactions with other operating segments of the same entity (inter-segment revenue);
• 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 or loss of associates and joint ventures accounted for by the equity method;
• income tax expense or income; and

• material non-cash items other than depreciation and amortisation (such as impairment, which is covered by IAS 36).

Disclosure of assets An entity reports the following discrete financial information to its CODM: cash, accounts receivable and inventory. No other information is reported to, or used by, the CODM in order to assess performance and allocate resources. In this case, the total of cash, accounts receivable and inventory would be disclosed as ‘segment assets. Note that the total of reported segment assets would have to be reconciled to total assets (either consolidated or entity, as appropriate). Significant reconciling items should be disclosed, and an explanation of the measurement of segment assets should also be provided.

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Voluntary disclosure of aggregated revenue streams Where various revenue streams within a segment are reported separately to the CODM, an entity is not required to report these revenue streams separately. IFRS 8 requires revenues from internal and external customers only to be reported separately. However, an entity could choose to voluntarily provide disclosure of the different revenue streams, as illustrated in the example below. Entity A is a magazine publisher of eight different magazines, all of which derive revenue from classified advertising, display advertising and subscriptions. Entity A manages its business by individual magazine. Separate reports for each magazine are provided to the CODM, and each revenue stream is separately identified in those reports. The magazines meet the aggregation criteria of IFRS 8. Entity A is deemed a one-segment entity. Entity A is not required to separately report each revenue stream, but it could choose to voluntarily provide disclosure of the different revenue streams.

In some entities, the information presented to the CODM might include ratios and percentages (for example, working capital or taxation as a percentage). When considering whether such percentages or ratios are required to be disclosed, management should keep in mind the core principle of IFRS 8. The standard requires disclosure of information that is used by the CODM to make decisions about the allocation of resources and assessment of performance.

Interest income should be reported separately from interest expense, unless a majority of the reportable segment’s revenues are from interest and the CODM relies primarily on the net interest figure in assessing the segment performance and in making decisions about resources to be allocated to the segment. Where this is the situation, an entity might report interest on a net basis, but it should disclose that it has done so.

Other balance sheet information should also be disclosed if the amounts are either included in the measure of segment assets reviewed by the CODM or they are otherwise provided regularly to the CODM, even if they are not included in the measure of segment assets. These amounts are:

• The amount of the investment in associates and joint ventures accounted for by the equity method.
• The amount of additions to non-current assets, other than financial instruments, deferred tax assets, post-employment benefit assets and rights arising under insurance contracts.

The term ‘non-current assets’, used above, includes both intangible and tangible assets. In developing IFRS 8, the IASB considered whether to require a subtotal for tangible non-current assets, but decided against doing so. However, entities could provide such a sub-total voluntarily if they so wished.

For entities that classify assets according to a liquidity presentation (such as many banks), non-current assets are those assets that include amounts expected to be recovered more than 12 months after the balance sheet date.

Measurement

The measure of each segment item that is required to be disclosed is the measure that is reported to the CODM. Adjustments and eliminations made in preparing the entity’s financial statements and allocations of revenues, expenses, gains and losses are included in determining reported segment profit or loss, but only if they are included in the measures used by the CODM. If amounts are allocated to reported segment profit or loss, assets or liabilities, those amounts should be allocated on a reasonable basis. Similarly, only those assets and liabilities that are included in the measures used by the CODM should be reported as segment assets and liabilities.

Determining how each segment item should be calculated and use of non-GAAP measures in segmental disclosure IFRS 8 is not prescriptive as to how each segment item measure should be calculated, nor does it require that the same accounting policies are used as those used in preparing the financial statements. However, differences between policies used for the entity financial statements and those used for measuring and presenting the segment disclosures should be explained. The measures used are not required to be in accordance with, or consistent with, a measure defined in IFRS. IFRS 8 does not establish any boundaries and would only consider whether the core principle of the standard was being followed with regard to the presentation. A non-GAAP presentation will be acceptable, provided that it is clear about what constitutes the non-GAAP measures and that there is a clear and detailed reconciliation of the disclosed measure to the respective IFRS amount reported in the financial statements. In practice, this means that there is inconsistency between the segment information reported by different entities, because they do not all report the same measure of profit to the CODM. Where a non-GAAP presentation is applied, it is likely that more reconciling items will have to be included in the reconciliation.

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Measures of profit for segmental reporting In practice, there is a wide range of profit measures used by CODMs. Management needs to identify the main elements that make up the profit or loss. In some cases, this leads to a focus on ‘normal trading’ or ‘underlying performance’. These measures sometimes exclude reorganisation costs and other items that might not occur regularly or which introduce volatility into the results (such as fair value movements in financial instruments). For this reason, the CODM might use profit figures that exclude certain elements such as these in assessing performance and making decisions on the allocation of resources. Management might also wish to review results on a basis that highlights more closely the cash flows of the segments and, therefore, it might monitor EBITDA. Some management bodies, on the other hand, take a less sophisticated view, and they use the same measures in their management of the business as they report in the financial statements. Disclosure of the other measures listed above should also be based on the actual amounts reported to the CODM.

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Currency and segmental reporting Where management information is reviewed in a currency other than the presentational currency of the financial statements, the segment disclosures should replicate management information. Presenting segment information in the currency in which the CODM reviews it follows the requirements of IFRS 8. But this approach is usually less convenient for users of the financial statements, and it requires reconciliation from the currency used by the CODM to that of the presentational currency. Alternative approaches, to enhance clarity of the translation to the presentational currency for users of the financial statements, are outlined below: ·        The information reported to the CODM is translated into the presentational currency of the financial statements in accordance with IAS 21. If translation results in a difference between the segment information and that presented in the financial statements, due to, for example, the underlying information being translated using different rates, a reconciliation from the segment information to the primary statements is required. Where translation using IAS 21 results in significant distortion of ratios and trends in the segment information presented, such that it would affect the decisions of either the users of the financial statements or those of the CODM, a convenience translation could be used. Such a translation would apply a single rate for all measures. An additional reconciling item should be disclosed to explain the difference from the primary financial statements arising from the use of such a different translation method. ·        Management information is sometimes reviewed at constant rates of exchange – for instance by reporting current year figures at prior year exchange rates (or by reporting prior year figures at current year exchange rates). In line with IFRS 8, the segment information reported in the financial statements should replicate the management information. In this case, the impact of the constant currency adjustments would be disclosed in the reconciliation to the amounts in the primary statements. Entities should consider the views of the relevant regulator in deciding how to present the segment information. For example, certain regulators may require segment data be presented in the same reporting currency as the consolidated financial statements, even if a different currency is used for internal management reporting; or that all price-level adjusted financial information is presented in equivalent purchasing power units of the reporting currency.

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Intra-group transactions and segmental reporting Typical adjustments that are included in preparing the entity financial statements would include the elimination of intra-group sales, profits and losses and intra-group receivables and payables. These would not normally be eliminated for the purpose of determining segment information, but instead an adjustment would be made in total, separately from the segment information, in order to reconcile the segment information with that reported for the consolidated entity as a whole.

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Centrally managed borrowings and segmental reporting Often, an entity manages its borrowings centrally and does not allocate them to individual segments. In this situation, the borrowings would not be included in segment liabilities. Similarly, many entities will not allocate interest cost when reporting the profit or loss of individual segments. For some entities, however, particularly financial institutions, interest income and expense are an integral part of business performance, and that type of business will normally include interest in segment profit or loss reported to the CODM.

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How the basis of allocation selected can affect the segmental results An illustration of how the basis of allocation selected for common costs or assets can affect the segmental results is given below.  Example – Allocation of common costs An entity has three distinct business segments: A, B and C. Before the allocation of any common costs to these segments, the financial information on these segments is as follows: A B C C’m C’m C’m Net assets 2,000 300 800 Turnover 5,000 2,000 3,000 Profit before common costs 200 40 100 On the assumption that the common costs total C100 million, the allocation of such costs, on the basis of the turnover of each segment as a percentage of total turnover, would lead to the following depiction of segment results: A B C C’m C’m C’m Profit before common costs 200 40 100 Allocation of common costs 50 20 30 Profit after common costs 150 20 70 This contrasts with the situation where common costs are allocated on the basis of the individual segment’s proportion of total net assets. In this instance, the results would be as follows: A B C C’m C’m C’m Profit before common costs 200 40 100 Allocation of common costs 64 10 26 Profit after common costs 136 30 74 Thus, the basis of allocation chosen could have a material effect on the segment result that is reported. However, assuming that both of the bases described in the example are ‘reasonable’, either could be used.

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Basis of allocation of pension costs and segmental reporting The choice of allocation basis of an entity’s pension expense could give a significantly different measure of segment profit or loss. Allocation could be made either on the basis of the number of employees in a segment or by reference to the total salary expense of each segment. An example of this is included as an appendix to the basis for conclusions on IFRS 8. It notes that both bases might be reasonable but that, for example, allocating pension expense to a segment that had no employees eligible for the pension plan would not seem to be ‘a reasonable basis’. The same could be said for the allocation of share-based payment expense relating to employee options.

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Issues with allocating costs, expenses and assets to segments IFRS 8 does not prescribe how segmental measures should be calculated, or how centrally incurred expenses and central assets should be allocated to segments – or, indeed, which (if any) of such types of costs or assets should be allocated. Instead, IFRS 8 requires that, where amounts are allocated, they are done so on a reasonable basis. Allocation of costs and expenses and assets to segments is an area in which the basis chosen by an entity can have a significant effect on the segment results. In practice, it might be possible to allocate some costs but not others. For instance, if a group bears the cost of managing properties centrally, it should be possible to allocate such costs reasonably to each segment on a basis that takes account of the type, age and value of properties used by each segment. Similarly, central administrative overheads in respect of personnel might be allocated on the basis of the number of employees in each segment. If different bases are appropriate for different types of common costs, it would be reasonable to apply the appropriate basis in allocating each of the types of cost. However, this is only applicable where the CODM requires such allocation in the segment information that is used to assess performance and make decisions on resource allocation.

IFRS 8 does not require a consistent basis for the allocation of costs, assets and liabilities to a segment. For example, an entity might allocate interest to segment profit or loss, but it does not have to allocate the related interest-bearing asset or liability to segment assets or liabilities. IFRS 8 calls this ‘asymmetrical allocation’. It is likely to be fairly uncommon, because it would be expected that the CODM would normally require information on profits and assets that was ‘symmetrical’. Instances of asymmetrical allocation should be disclosed.