Operating segments (IFRS 8)

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IFRS 8 Operating segments aims to assist users to:

Understand past performance
Understand the risk and returns of each segment
Make better informed judgements

An operating segment is one whose results are regularly reviewed by the chief operating decision maker (CODM), thus giving the users of the accounts an internal view of the company and how the results are reviewed.

Disclosure

An operating segments results must be disclosed if:

Segment revenue is greater than or equal to 10% of the total revenue (internal and external)
Segment result is greater than or equal to 10% of greater of:
- Total profits of all segments in profit, and
- Total losses of all segments in loss.
Segment assets are greater than or equal to 10% of total assets

If the total reportable segment revenue does not make up at least 75% of external revenue then additional segment will need to be disclosed.

Match the answer to the verb. Identifying an operating segment turns on what the chief operating decision maker reviews; the 10% and 75% tests decide only which segments are reportable; and a question on usefulness to investors wants a balanced view of what the disclosure does and does not reveal. Reciting the thresholds elsewhere adds nothing.

Two or more operating segments may be combined if they have similar economic characteristics with regards to the following:

The nature of the products or services
The nature of the production process
The type or class of customer
The methods used to distribute the products/services
The nature of the regulatory environment

Each reportable segment should then decide what to disclose.

Segment revenue
Segment results – note that disclosure of this figure is compulsory
Segment assets
Segment liabilities
Capital expenditure
Depreciation/amortisation
Other non-cash expenses

General disclosures are:

How the operating segments have been identified
The products and services that the group provides
Reliance on major customers
Geographical information (limited to revenue and non-current assets)

Example 1 – Operating segments

Gulf is preparing is operating segment disclosure note for the first time following its listing on the local stock exchange during the year. Its chief operating decision maker (CODM) regularly reviews the results of its three separate divisions:

Domestic railway operations
International railway operations
Railway construction

Gulf is intending to report two operating segments in its disclosure note as opposed to the three reviewed by the CODM. The domestic and international operations are to be combined because it is felt that they have similar economic characteristics due to the services that they offer.

The domestic operations involve a competitive tender process to run the railway service, which is then awarded by the local transport authority. The local transport authority then sets the ticket prices and collects the fares which are then distributed amongst the various operators running the contracts.

The international operations’ ticket prices are set by Gulf, who collects the fares from the passengers directly.

Advise Gulf as to whether the proposed combination of the two operating segments is appropriate.

Example Answer 1 – Operating segments

An operating segment is one whose results are regularly reviewed by the chief operating decision maker (CODM). The three segments reviewed by the CODM are therefore three operating segments.

Two or more operating segments may be combined if they have similar economic characteristics. So to combine the domestic operations and the international operations the two segments would need to have similar levels of risk.

The biggest risk that is faced by Gulf within the two segments is the price risk. The revenue from the domestic railways is regulated by the transport authority, so is subject to a different risk from the international railways where it is determined by Gulf itself.

The other risk is from the offering of the contracts. The domestic railway contracts are awarded from the transport authority whereas the international railway contracts are not awarded by any authority and so both are subject to different levels of risk.

The operating segment disclosure note should therefore disclose the three segments separately within the notes to the accounts.