IFRS 8

Operating Segments

1Objective and scope

IFRS 8 requires an entity to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities it engages in, and the economic environments it operates in. It applies to entities whose debt or equity instruments are traded in a public market, or that file (or are in the process of filing) financial statements with a regulator for the purpose of issuing instruments in a public market.

2Key definitions

Operating segment

A component of an entity that engages in business activities from which it may earn revenue and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources and assess performance, and for which discrete financial information is available.

Chief operating decision maker (CODM)

A function (not necessarily a single person), such as a chief executive officer or a management committee, that allocates resources to and assesses the performance of an entity's operating segments.

3The management approach and reportable segments

IFRS 8 takes a 'management approach': segments are identified based on the internal reports the CODM actually reviews, rather than a prescribed set of industries or geographical areas defined by the standard itself. An operating segment becomes a REPORTABLE segment if it exceeds any one of three quantitative thresholds:

Its reported revenue, including sales to external customers and intersegment sales, is 10% or more of the combined revenue of all operating segments
The absolute amount of its reported profit or loss is 10% or more of the greater of the combined profit of all profitable segments, and the combined loss of all loss-making segments
Its assets are 10% or more of the combined assets of all operating segments

Two or more segments below these thresholds may still be combined and reported together if they share a majority of specified aggregation criteria (similar economic characteristics, similar products/services, production processes, customer types, distribution methods, and regulatory environment). If the total external revenue of reportable segments is less than 75% of the entity's total external revenue, additional segments must be identified as reportable (even if they do not meet the 10% thresholds) until that 75% test is met; anything left over is reported as an 'all other segments' category.

4Presentation and disclosure

General information: factors used to identify reportable segments, and the types of products and services each reportable segment derives revenue from
Segment profit or loss, and specified segment assets and liabilities, together with the basis of measurement
A reconciliation of the totals of segment revenue, profit or loss, assets and liabilities to the entity's corresponding consolidated amounts
Entity-wide disclosures (even for an entity with a single reportable segment): revenue from external customers for each product/service, revenue and non-current assets by geographical area, and information about any single external customer providing 10% or more of total revenue

5Examinable focus

What KASNEB tests

Applying the three 10% quantitative thresholds to a table of segment data to determine which segments must be separately reported, and then applying the 75% external revenue test to check whether additional segments must be added, is the standard numerical question.