Segment reporting p2

Defining reportable segments





Segmental reports are designed to reveal significant information that might otherwise be hidden by the process of presenting a single statement of profit or loss and other comprehensive income and statement of financial position for an entity.


IFRS 8 Operating Segments requires certain entities to disclose information about each of its operating segments that will enable users of the 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.


IFRS 8 applies to entities which trade debt or equity instruments in a public market.


An operating segment is defined as a component of an entity:


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


  • 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


  • for which discrete financial information is available’ (IFRS 8, para 5).


How to define reportable segments


Under IFRS 8, an operating segment is a component whose results are regularly reviewed by the entity’s chief operating decision maker. This means that the segments reported in the financial statements are the same as those that are disclosed and reviewed in internal management reports.


Management may use more than one set of segment information. For example, they might analyse information by classes of business (different products or services) and by geographical areas. If this is the case then management must identify a single set of components on which to base the segmental disclosures. The basis of reporting information should be the one that best enables users to understand the business and the environment in which it operates.


Not every part of an entity is necessarily an operating segment or part of an operating segment:


  • Corporate headquarters and other similar departments do not earn revenue and are therefore not operating segments.


  • An entity’s pension plan is not an operating segment.


IFRS 8 says that two or more operating segments can be aggregated and reported as a single operating segment provided that they have similar economic characteristics, and are similar in the following respects:


  • products and services


  • production processes


  • classes of customer


  • distribution methods.


Test your understanding 1 – E–Games


E-Games is a UK based company that sells computer games and hardware. Sales are made through the E-Games website as well as through high street stores. The products sold online and in the stores are the same. E-Games sells new releases for $40 in its stores, but for $30 online.


Internal reports used by the chief operating decision maker show the results of the online business separately from the stores. However, they will be aggregated together for disclosure in the financial statements.




Should the online business and the high street stores be aggregated into a single segment in the operating segments disclosure?




Quantitative thresholds


An entity must separately report information about an operating segment that meets any of the following quantitative thresholds:


  • ‘its reported revenue, including both sales to external customers and inter-segment sales, is ten per cent or more of the combined revenue of all operating segments


  • its reported profit or loss is ten per cent or more of the greater, in absolute amount, of:


the combined reported profit of all operating segments that did not report a loss and


the combined reported loss of all operating segments that reported a loss.


  • its assets are ten per cent or more of the combined assets of all operating segments’ (IFRS 8, para 13).


At least 75% of the entity’s external revenue must be included in reportable segments. Other segments should be identified as reportable segments until 75% of external revenue is reported.


Information about other business activities and operating segments that are not reportable are combined into an ‘all other segments’ category.


Test your understanding 2 – Identifying reportable segments


The management of a company have identified operating segments based on geographical location. Information for these segments is provided below:


Total External Internal Profit/ Assets
Segment revenue revenue revenue (loss)
$000 $000 $000 $000 $000
Europe 260 140 120 98 3,400
Middle East 78 33 45 (26) 345
Asia 150 150 47 995
North America 330 195 135 121 3,800
Central America 85 40 45 (15) 580
South America 97 54 43 12 880
––––– ––––– ––––– ––––– –––––
1,000 612 388 237 10,000
––––– ––––– ––––– ––––– –––––




According to IFRS 8, which segments must be reported?




2 Disclosing reportable segments


General information


IFRS 8 requires disclosure of the following:


  • Factors used to identify reportable segments


  • The types of products and services sold by each reportable segment.


Information about profit or loss and other segment items


For each reportable segment an entity should report:


  • a measure of profit or loss


  • a measure of total assets.


Other information should be disclosed if regularly provided to the chief operating decision maker.


IFRS 8 requires segmental reports to be based on the information reported to and used by management, even where this is prepared on a different basis from the rest of the financial statements. Therefore, an entity must provide explanations of the measurement of segment profit or loss, segment assets and segment liabilities.


Example of a segmental report


Segment Segment Segment All Totals
A B C other
Revenues from $000 $000 $000 $000 $000
external customers 5,000 9,500 12,000 80027,300
Revenues from inter-
segment transactions 3,000 1,500 4,500
Interest revenue 800 1,000 1,500 3,300
Interest expense 600 700 1,100 2,400
Depreciation and
amortisation 100 50 1,500 1,650
Exceptional costs 200 200
Segment profit 70 900 2,300 100 3,370
Impairment of assets 200 200
Segment assets 5,000 3,000 12,000 40020,400
Additions to non- 700 500 800 2,000
current assets
Segment liabilities 3,000 1,800 8,000 –12,800




  • The ‘all other’ column shows amounts relating to segments that fall below the quantitative thresholds.


  • Impairment of assets is disclosed as a material non-cash item.


  • Comparatives should be provided. These should be restated if an entity changes the structure of its internal organisation so that its reportable segments change, unless the information is not available and the cost of preparing it would be excessive.


3 Problem areas in segmental reporting



Problems with IFRS 8


Segmental reports provide useful information, but they also have limitations.


  • Trading between segments may distort the results of each operating segment, particularly if the transactions do not occur at fair value.


  • IFRS 8 states that segments should reflect the way in which the entity is managed. This means that segments information is only useful for comparing the performance of the same entity over time, not for comparing the performance of different entities.


  • The segmentation process is based on management’s perspective, and some users lack trust in management’s intentions. For example, management may attempt to conceal loss-making areas of the business within a larger, profitable reportable segment.


  • The guidance around the aggregation of segments is vague, and may lead to entities over-aggregating segments to reduce the level of detail that they are required to report.


  • Common costs may be allocated to different segments on whatever basis the directors believe is reasonable. This can lead to arbitrary allocation of these costs.

Test your understanding 1 – E–Games


IFRS 8 says that two or more operating segments may be aggregated into a single segment if they have similar economic characteristics and the segments are similar in the following respects:


  • The nature of products or services.


  • The types of customer.


  • Distribution methods.


The standard says that segments with similar economic characteristics would have similar long-term gross margins.


The E-Games stores and online business sell the same types of product, and there are likely to be no major differences in the types of customer (individual consumers). Therefore, in these respects, the segments are similar.


However, customers will collect their goods from the stores, but E-Games will deliver the products sold online. This means that distribution methods are different.


Moreover, there are different sales prices between the stores and the online business, giving rise to significant differences in gross margin. This suggests dissimilarity in terms of economic characteristics.


This means that it might be more appropriate to disclose these two segments separately.




There is no ‘right’ or ‘wrong’ answer here. There are numerous retailers who do not disclose their online operations as a separate segment. However, the International Accounting Standards Board notes in its post-implementation review of IFRS 8 that many companies are over-aggregating segments. For exam purposes, it is important to state the relevant recognition criteria and then to apply these to the information given in the question.


Test your understanding 2 – Identifying reportable segments


The 10% tests
Segment 10% total 10% results 10% assets Report?
revenue (W1) test (W2) (W3)
Europe Y Y Y Y
Middle East N N N N
Asia Y Y N Y
North America Y Y Y Y
Central America N N N N
South America N N N N


Based on the 10% tests, Europe, Asia and North America are reportable. However, we must check whether they comprise at least 75% of the company’s external revenue.


The 75% test
External revenue
Europe 140
Asia 150
North America 195
Total –––––


The external revenue of reportable segments is 79% ($485,000/ $612,000) of total external revenue. The 75% test is met and no other segments need to be reported.




The reportable segments are Europe, Asia and North America.


(W1) 10% of total sales


10% × $1m = $100,000.


All segments whose total sales exceed $100,000 are reportable.


(W2) 10% of results


10% of profit making segments:


10% × ($98,000 + $47,000 + $121,000 + $12,000) = $27,800


10% of loss making segments:


10% × ($26,000 + $15,000) = $4,100


Therefore, all segments which make a profit or a loss of greater than $27,800 are reportable.


(W3) 10% of total assets


10% × $10m = $1m.


All segments whose assets exceed $1m are reportable.

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