IFRS 8-Operating Segments

Operating
Segments
IFRS 8
2024-08-03 By S.Sabawu
Segment reporting
Introduction
• 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.
Aggregation
• 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:
1. products and services

2. production processes
3. classes of customer
4. distribution methods.
Illustration- E-
Games
Solution
Solution
Continuation
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:
1. the combined reported profit of all operating segments that did not report a loss
and
2. 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.
Illustration –
Identifying
reportable
segments
Solution
Solution
Solution
Disclosing reportable segments
General information
IFRS 8 requires disclosure of the following:
1. Factors used to identify reportable segments
2. 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:
3. a measure of profit or loss
4. a measure of total assets.
Other information should be disclosed if regularly provided to the chief

operating
2024-08-03
decision maker. By S.Sabawu
• 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
Investor
perspective
Assessing segmental reporting
Segmental reports have some limitations:
1. Trading between segments may distort the results of each operating segment,
particularly if the transactions do not occur at fair value.
2. IFRS 8 states that segments should reflect the way in which the entity is managed. This
means that segments information is not useful for comparing the performance of
different entities.
3. 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.
4. Many entities over-aggregate segments, which reduces the level of detail reported to
stakeholders.
5. 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.
Summary
The End

IFRS 8-Operating Segments

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Operating

• IFRS 8 Operating Segments requires certain entities to disclose information

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

'that engages in business activities from which it may earn revenues

whose operating results are regularly reviewed by the entity’s chief

for which discrete financial information is available' (IFRS 8, para 5).

Corporate headquarters and other similar departments do not earn

1. products and services

• Information about other business activities and operating segments

Information about profit or loss and other segment items

Other information should be disclosed if regularly provided to the chief

• Therefore, an entity must provide explanations of the measurement of

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