An entity is required to disclose an explanation that enables users to understand the basis on which segment information is measured. As a minimum, this should include:

• Description of the measurement basis for segment profit or loss and, if reported to the CODM, for each of segment assets and segment liabilities. Note that this would exclude interest, except where interest income and expenses is a key part of segment performance.

• The basis of accounting for transactions between reportable segments (inter-segment transactions). Such transactions might be, for example, based on market prices or, more unusually, at cost.
• The nature of any differences between the measurement of reportable segments’ profits or losses and the profit or loss before tax and discontinued operations that is reported in the entity’s income statement. This information is required only if it is not already apparent from the re-conciliations required by IFRS 8. The re-conciliations will pick up many of the numerical differences, so the explanation might focus on a description of other differences, such as differences in accounting policies and policies for allocating centrally incurred costs.
• Similar information to that in the previous bullet point, about differences between the segmental measures of assets and segmental liabilities (in both cases, if reported to the CODM) and the assets and liabilities reported in the entity’s balance sheet. Again, this would exclude differences that are apparent from the re-conciliations presented and would focus on differences in accounting policies and policies for allocating central assets or liabilities.
• The nature of any changes, from prior periods, in the measurement methods used and the effect of the changes.

• The nature and effect of any asymmetrical allocations to reportable segments. The standard gives the example of an entity that might allocate depreciation expense to a segment without allocating the related depreciable assets to the segment. Any such asymmetrical allocations should be explained.

Changes in accounting policies for segmental reporting Changes in accounting policies for segmental reporting that have a material effect on the measurement of segment information should be disclosed. An example of such a change might be a change in the basis of allocating revenues or expenses to segments. Whilst such a change will not change the entity’s aggregate financial information, it will change the segment information. As described in IFRS 8, details of any such change in the measurement basis should be given, together with the effect of the change on the measure of segment profit or loss. IFRS 8 does not require segment information to be restated for a change in the measure of segment profit or loss. Restatement is only required where there has been a change in the composition of the segments resulting from changes in the structure of the entity’s internal organisation. However, it is preferable to show all segment information on a comparable basis, if it is practicable to do so. Changes in other accounting policies, for matters other than segmental reporting, should be dealt with in accordance with IAS 8.

Reconciliations

An entity is required to present the following re-conciliations:

• Total reportable segments’ revenues to the entity’s revenue.
• Total reportable segments’ measures of profit or loss to the entity’s profit or loss before tax and discontinued operations. However, if an entity allocates items such as tax expense (tax income) to reportable segments, it could reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.
• Total reportable segments’ assets to the entity’s assets, but only if the amounts are regularly provided to the CODM.
• Total reportable segments’ liabilities to the entity’s liabilities, but only if the amounts are regularly provided to the CODM.
• Total reportable segments’ amounts for every other material item of information to the corresponding amount for the entity (for example, depreciation and amortisation).
• All material items should be separately identified and described. As an example of a reconciling item, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the entity’s profit or loss that arises from using different accounting policies for segment and entity profit or loss should be separately identified and described. This clarifies that the amount of each adjusting item should be disclosed as part of the reconciliation. It is not sufficient just to describe the types of reconciling item, without giving the actual amounts of each material adjustment.

Changes in policy and presentation

An entity should consider, at each reporting date, whether the current operating segment disclosure continues to be appropriate. If an entity changes its internal organisation, such that the composition of its reportable segments changes, it should restate the corresponding information for prior periods for each individual item of disclosure, including interim periods, unless the information is not available (for example, information might be available for revenue on the new basis, but not for the level of profit reported to the CODM) and the cost to develop it would be excessive. Operating segments should be identified based on the internal organisation at the balance sheet date. Following a change in the composition of its reportable segments, an entity should disclose whether or not it has restated corresponding amounts.

Management changes the internal organisation structure after the balance sheet date but before the financial statements are issued If management changes the structure of its internal organisation after the balance sheet date but before the financial statements are issued, the new segment structure should not be presented in the financial statements until operating results, managed on the basis of the new segment structure, are reported to the CODM.

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Composition of an entity’s segments changes in the interim period Where the composition of an entity’s operating segments changes in the interim period, and this new segment structure is reported to the CODM at the interim balance sheet date, the operating segment disclosure should reflect this reorganisation.

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Considerations for identifying changes in operating segments Determining operating segments is an area of significant judgement and scrutiny, so it is important that entities consider how internal organisational change will impact on identifying and measuring their operating segments. An entity should consider whether any of the following have changed, when determining its operating segments: ·        The CODM. ·        The reporting package reviewed by the CODM. ·        The organisational chart (for example, this might have changed due to business acquisitions and disposals). The person/people with whom the CODM meets. ·        The budgeting process, or level at which budgets are set. ·        Communications to external parties, such as investors, creditors and customers. Scenarios that might impact on identified operating segments include: entering a new line of business; a change in the internal reporting structure, from geographical reporting to product line reporting; and implementing a new system that enables the entity to report on and manage its business activities differently.

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What is the impact on segmental reporting of a change to internal reporting that responds to changes in economic conditions (for example, increased country risk)? ABC is a global manufacturing group with operations in three main territories: the US, China and Europe. The group’s executive committee is the chief operating decision-maker (CODM) as defined by IFRS 8, ‘Operating segments. The CODM monitors revenue and operating profit measures on a territory-by-territory basis, and so the group has three operating segments. In recent years, the group’s operation in China has accounted for around half of the total revenues and operating profits consistently, followed by the US with some 20% share of each measure. The remaining 30% is shared by the group’s European operations, mainly in countries in the Eurozone. The group therefore reported these three territories as reporting segments in its financial statements. Given changes in economic conditions in the Eurozone, the CODM requested changes to the internal management reporting to show separately the performance of each European country (Germany, Netherlands, Greece, Spain and Hungary). The determination of operating segments under IFRS 8 is based on how the CODM reviews performance and allocates resources. As a result of the alteration to the internal management reporting, the group’s operating segments have now changed. Management assessed which countries met the definition of reporting segments. It concluded that China and the US would exceed the quantitative thresholds as described IFRS 8, and therefore required separate disclosure in the financial statements. In respect of the European operating segments, although the requirement for segments to have similar economic characteristics might be difficult to overcome when combining individual countries, management was comfortable with the aggregation of operations in Germany and the Netherlands, on the basis that these countries have similar economic conditions, exchange control regulations and underlying currency. On the other hand, management concluded that it would not be appropriate to aggregate the operations of Greece, Spain and Hungary, because of their differing economic situations; it decided to disclose these countries as separate reporting segments. Management has also restated the comparative information.

If an entity changes the composition of its reportable segments, but does not restate corresponding amounts on the new basis for the above reasons, it should report segment information on both the old and the new bases of segmentation in the year in which it changes the composition of its segments. Whilst it does not alter the comparatives, it gives additional information in the current year, being segment information on the old basis as well as on the new basis.

Entity-wide disclosures

Entities that report in accordance with IFRS 8, including those entities with only one reportable segment, are required to make certain entity-wide disclosures (that is, disclosures for the entity as a whole rather than by segment). The reason for this additional information is that some entities’ business activities are not organised on the basis of differences in products and services, or differences in geographical areas of operations. For example, an entity might be organised around markets, and those markets might encompass different types of products or different geographical areas. Equally, several of the entity’s reportable segments might provide similar products and services (if the reportable segments are based on geographical areas), or several reportable segments might cover the same geographical areas (if the entity’s reportable segments are based on different products and services). Disclosures required by IFRS 8 are not required if they are otherwise provided as part of the IFRS reportable segment information.

Products and services

Entities whose reportable segments report revenues from a broad range of different products and services are required to disclose the revenues from external customers for each product and service or each group of similar products and services. In order to determine whether an entity’s individual segments contain different products and services, one reasonable approach would be to look at the aggregation criteria of IFRS 8. For example, if the products have similar production processes, classes of customers and economic characteristics (as evidenced by similar rates of profitability, similar degrees of risk, and similar opportunities for growth), it might be concluded that the products are essentially similar, and no additional disclosure would be required. Furthermore, where an entity is required to provide these additional disclosures, this approach would also be reasonable for determining groups of similar products and services for entities. Revenues should be based on the financial information used to produce the entity’s financial statements.

Geographical areas

Disclosure of revenue from external customers and certain non-current assets is required

(a) for the entity’s country of domicile, and

(b) in total for all other countries.

Allocating revenue to geographical areas IFRS 8 does not prescribe how revenue should be allocated to geographical areas. An entity could choose to allocate revenue on the basis of either the customer’s location, the location to which the product is shipped (which might differ from the location in which the customer resides) or the location in which the sale originated. An entity should disclose the basis that it has selected for attributing revenue to geographical areas.

Revenue from external customers and non-current assets attributed to an individual foreign country are disclosed separately, where they are material. IFRS 8 does not define the term ‘material’ for this purpose. The entity should consider materiality from both quantitative and qualitative perspectives. When considering quantitatively, IFRS 8 uses the threshold of 10% or more in determining whether an operating segment is a reportable segment or not, so it seems reasonable to apply the same test to determine whether an individual country’s revenue or assets are material, for the purpose of separate disclosure. We consider that the materiality test would be applied by comparing the country’s revenue or assets to total entity external revenue or assets (including the country of domicile). However, entities might determine materiality at a lower level.

Where information is not available and cost to develop would be excessive

The entity-wide disclosures of products and services and geographical information need not be given if they are unavailable and the cost to develop them would be excessive. However, because the information is on an entity-wide basis and is not required to be given by segment, which would involve much more detailed disclosure, it seems unlikely that this exemption will often need to be invoked. Most companies are likely to collect and retain information about their geographical operations and products and services.

Information about major customers

Disclosure of an entity’s reliance on its major customers is required. If revenues from transactions with a single customer amount to 10% or more of an entity’s revenues, the entity should disclose:

• The fact that revenue from a customer exceeds 10% or more of the entity’s revenues (if this applies to more than one customer, the number of customers should be given).
• The total amount of revenues from each such customer.
• The identity of the segment (or segments) that reports (or report) the revenues.

There is no need to disclose the identity of the customer or customers, or the amount of revenues that each segment reports from that customer or those customers.

For the purpose of disclosure, a group of entities that the entity knows to be under common control should be considered to be a single customer.

Judgement is required when determining whether a government (including government agencies and similar bodies, whether local, national or international) and entities that the reporting entity knows to be under the control of that government are considered to be a single customer. The extent of economic integration between the entities should be considered.

Segmental disclosures required/encouraged by other standards

IFRS 5

IFRS 5 sets out the disclosure requirements where a non-current asset (or disposal group) has either been classified as held for sale or sold. It requires disclosure, where applicable, of the reportable segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8.

IFRS 7

IFRS 7 requires disclosure of information about the entity’s exposure to credit risk, including concentrations of credit risk, insofar as they are material to the entity or reported internally to the entity’s key management personnel. This is in addition to the disclosure required by IFRS 8. IAS 7

IAS 7 encourages disclosure of the amount of cash flows arising from the operating, investing and financing activities of each reportable segment. Disclosure of financing activities might be less common, because financing is often managed on a central basis.

IAS 34

IAS 34 requires segmental disclosures in interim financial statements. The disclosure requirements in respect of segment information for interim accounts are listed in IAS 34. Entities should disclose this information, as a minimum, in the notes to their interim financial statements, if material and if not disclosed elsewhere in the interim financial report. The information should normally be on a year-to-date basis, but the entity should also disclose any events or transactions that are material to an understanding of the current interim period (for example, if an entity reports on a quarterly basis, the segment information for the second quarter should cover the six months of the financial year to date, but any significant events or transactions in the second quarter should be disclosed). The information is only required if IFRS 8 requires the entity to disclose segment information in the entity’s annual financial statements.

IAS 36

IAS 36 states that a cash generating unit to which goodwill acquired in a business combination is allocated for impairment testing purposes cannot be larger than an operating segment. This applies to all entities, irrespective of whether they are within IFRS 8’s scope or not.

• IAS 36 requires that, where an entity applies IFRS 8, it should disclose the following for each reportable segment:
• The amount of impairment losses recognised in profit or loss and comprehensive income during the period.
• The amount of reversals of impairment losses recognised in profit or loss and comprehensive income during the period.
• IAS 36 requires that, if an impairment loss on an individual asset is recognised or reversed in the period and is material to the entity’s financial statements as a whole, and the entity reports in accordance with IFRS 8, the entity should disclose the nature of the asset and the reportable segment to which the asset belongs.
• If the material impairment, or reversal of an impairment, relates to a cash generating unit, the financial statements should give a description of the unit (such as whether it is a product line, a plant, a business operation, a geographical area, or a reportable segment, as defined in IFRS 8). The entity should also disclose the amount of the impairment loss recognised or reversed, by class of assets and by reportable segment.

Voluntary disclosures

Additional voluntary disclosures might be permitted.

Additional voluntary segmental disclosures In addition to the required disclosures, many entities provide additional voluntary segmental disclosures. Sometimes, particularly in the case of non-financial disclosures, these are given in the management report rather than in the financial statements. Some of the types of additional disclosure are listed below: ·        Employees. ·        Sales orders. ·        Research and development. ·        Environmental expenditure, health and safety and another non-financial segment information.