Cash flows, segments, and discontinued operations - Operatin...

Learning Outcomes

After reading this article, you will be able to describe the purpose of IFRS 8 Operating Segments, identify and define operating segments, determine which segments are reportable, and explain the key disclosure requirements. You will also be able to apply these principles to practice-style questions on segment reporting, as relevant to the ACCA Strategic Business Reporting (SBR) exam.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand the importance of segment reporting for users of financial statements, and to apply IFRS 8 in identifying, measuring, and disclosing operating segments. Focus your revision on:

• The objectives and scope of IFRS 8 Operating Segments
• The criteria for identifying operating segments
• Quantitative thresholds for reportable segments
• Aggregation of operating segments
• Key disclosure requirements for segment reporting
• The relationship of segment reporting to stakeholders’ information needs
• Common exam pitfalls when applying IFRS 8

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is NOT a requirement for a reportable segment under IFRS 8?
   1. 10% of total external revenue
   2. 10% of combined reported profit or loss
   3. 10% of combined assets
   4. 10% of total liabilities

2. True or False? Operating segments must be determined based on the way management monitors the business, not by products and services listed in published accounts.

3. Company Z has six operating segments. Only two individually exceed the 10% thresholds, but together they cover 68% of external revenue. What additional requirement must Z consider regarding reportable segments?

4. Briefly explain the difference between operating segments and reportable segments under IFRS 8.

Introduction

Segment reporting is governed by IFRS 8 Operating Segments, which requires certain entities to provide detailed information about their significant business components. Segmental information is a fundamental tool for investors and analysts, revealing patterns and risks that aggregated financial data can obscure. The standard ensures that users of financial statements receive meaningful information about the different areas in which an entity operates and their specific financial performance.

IFRS 8 applies to entities whose shares or debt are publicly traded. Segmental disclosures must reflect the internal reports reviewed by the chief operating decision maker (CODM), ensuring alignment between internal management information and published financial statements.

Key Term: Operating segment
A component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose results are regularly reviewed by the chief operating decision maker, and for which discrete financial information is available.

IDENTIFYING OPERATING SEGMENTS

IFRS 8 requires that operating segments are determined based on internal management reports. You must base the identification on the way senior management monitors business components, which may be product lines, geographic areas, or another structure.

Key Term: Reportable segment
An operating segment or aggregation of segments that meets quantitative thresholds set out in IFRS 8 and is required to be separately disclosed.

Segments not regularly reviewed by management (such as corporate head office results) are excluded from segment reporting.

Aggregating Segments

Entities may aggregate two or more operating segments into a single reportable segment only if they have similar economic characteristics and are similar in areas such as products, processes, customers, and regulatory environment.

Worked Example 1.1

An entity operates in three countries: A, B, and C. Management reviews internal reports based on these geographies. Sales in Country B and C are to similar customers and have similar margins, while Country A is distinctly different.

Question: Can the results for Countries B and C be aggregated for segment reporting purposes?

Answer:
Yes, provided Countries B and C display similar economic characteristics and satisfy IFRS 8’s aggregation criteria. Country A must be reported separately.

REPORTABLE SEGMENTS AND THRESHOLDS

Segments become reportable if they meet any of the following for the period:

• Revenue (external + intersegment) is at least 10% of the total for all operating segments;
• Its profit or loss is at least 10% of the greater (in absolute terms) of combined segment profit or combined segment loss;
• Its assets are at least 10% of total segment assets.

At least 75% of external revenue must be included in reportable segments. If not, more segments must be disclosed until this threshold is met.

Key Term: Quantitative thresholds
The 10% and 75% limits used by IFRS 8 to determine which operating segments must be reported separately.

Worked Example 1.2

A company has the following segments:

Question: Which segments are reportable?

Answer:
Revenue threshold: 10% × 340 = 34.
X and Y exceed this, Z does not.
Asset threshold: 10% × 3,000 = 300.
X, Y, and Z all exceed this.
Profit threshold: Profitable segments combine to 90, so 10% = 9. X and Z exceed, Y does not (but may be considered based on loss—if greater than 10% of total loss).
Report as separate segments: X, Y, Z.

75% External Revenue Rule

If reportable segments account for less than 75% of external revenue, further segments are disclosed in order of descending size until the threshold is reached.

SEGMENT DISCLOSURES REQUIRED BY IFRS 8

For each reportable segment, an entity must disclose:

• Revenue from external customers and from other segments
• Profit or loss
• Total assets and liabilities (if reviewed by the CODM)
• Other specified items (e.g., interest, depreciation) if included in internal reports

A reconciliation between totals for reportable segments and the group totals as per the financial statements is required.

Key Term: Chief operating decision maker (CODM)
The function or individual responsible for allocating resources and assessing performance of segments, such as the CEO or a dedicated committee.

Entities must describe how segments are identified, the products and services offered, measurement bases, and any differences from the main financial statements.

Worked Example 1.3

A listed company provides financial statements with three segment lines—Products A and B and a single line “Other.” Segment liabilities are not disclosed, as the CODM reviews only asset and profitability figures.

Question: Is the omission of segmental liabilities acceptable under IFRS 8?

Answer:
Yes. IFRS 8 requires disclosure only for amounts reviewed by the CODM. If segment liabilities are not regularly provided, omission is permitted.

Exam Warning

In exams, do not automatically assume that segmental assets or liabilities must be disclosed. Only amounts regularly reviewed by the chief operating decision maker are required as per IFRS 8.

USER NEEDS AND SEGMENT REPORTING

Segmental reporting is designed to help users evaluate the risks and returns of different business activities or geographical areas. Analysts use segments to forecast future earnings and assess risk exposures.

Well-defined segments allow for focused questions on low-performing operations and highlight where most capital is employed. However, management may combine segments to minimize exposure of poor-performing areas, a common exam discussion point.

Revision Tip

Remember: Operating segments must reflect internal reporting—do not invent your own segmentation for exam scenarios.

Summary

IFRS 8 requires entities to disclose information about reportable operating segments based on internal management reports. Segments must be disclosed if they meet quantitative thresholds for revenue, profit or loss, or assets, and enough disclosure must be made to cover at least 75% of external revenue. Segment information helps users evaluate the entity’s performance, risks, and prospects. Only information provided to the chief operating decision maker is required for disclosure.

Key Point Checklist

This article has covered the following key knowledge points:

• Define operating segments and reportable segments under IFRS 8
• Identify the role of the chief operating decision maker (CODM)
• Apply 10% and 75% quantitative thresholds to determine reportable segments
• Explain when and how operating segments may be aggregated
• Describe required segment disclosures for ACCA SBR
• Recognize common mistakes in segment reporting in SBR exam questions

Key Terms and Concepts

• Operating segment
• Reportable segment
• Quantitative thresholds
• Chief operating decision maker (CODM)