IFRS 8 – Operating Segments

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Introduction
The objective of this standard is basically to provide guidance with regards to the disclosure requirements in relation to the entity’s different segments which may be based on different services, products and geographical areas. The purpose of all this is to assist the financial statement users and entity’s stakeholders in evaluating the performance entity and its different operating segments.

Scope
This standard is applicable with regards to:
(a) The separate financial statements of an entity that either has equity or debt instruments that are being traded/floated in a public market (a foreign exchange, domestic or regional markets) or is in the process of filing its separate financial statements with the relevant regulating authorities basically for the purpose of issuing different class of its instruments in a public market.

(b) The Consolidated financial reports with reference to a group which consists of a parent that either has equity or debt instruments that are being traded/floated in a public market (a foreign exchange, domestic or regional markets) or is in the process of filing its consolidated/group financial statements with the relevant regulating authorities basically for the of issuing different class of financial instruments of an entity in a public market.

If the financial reports of the entity includes both the individual and the consolidated financial reports with respect to the entity, then in that scenario the segment information should be disclosed and presented in the entity’s consolidated financial statements only.

Operating Segment
It is that component of the entity:

• That engages itself in business and economic activities which requires costs to be incurred on them, so that to generate revenue from the same business activities, these also includes revenue generated and costs incurred in relation to the transactions that occurred with the other business components of the entity,

• Whose operating and financial results are regularly monitored and reviewed by the entity’s CODM so that decisions can be made regarding the resources to be distributed/allocated by the entity to the segment and also for evaluating the performance of the same segment, and

• With regards to which discrete and absolute financial information is obtainable and accessible.

• A component of an entity may be treated as an operating segment even before it starts earning revenue from the business projects or activities in which it has engaged itself, for example, the entity can treat its new project or business activity as an operating segment (if it meets the criteria mentioned in IFRS 8) which is in its developmental phase and has yet to earn revenues.

• Not each and every component of an entity can be treated as a separate operating segment. There are parts of the entity which cannot earn revenues and there are some parts which may earn revenue but it is either a one-off arrangement or it is basically because of the other activities of the entity and therefore cannot be treated as separate operating segments. For example, an entity’s post-employment benefit plans are not treated as a separate segment.

• The chief operating decision maker (CODM) is a term which basically highlights a function, which involves the allocation of resources to and the assessment of the performance of the separate segments of an entity. The role of this function might be performed by a CEO, COO or a group of executive directors.

• The recognition and presentation of a component of an entity as a separate operating segment depends on a lot of factors like how the information is presented regarding the business activities in which that component of the entity is involved in, to the board of directors or CEO of the entity. A separate segment may be treated on services, products or region bases basically depending on the entity’s internal structure. An Operating segments may be identified on the basis of product, services or regions depending upon the internal reporting structure of the entity.

Reportable Segment
As per IFRS 8 the entity is required to differentiate between its different operating segments so as to determine which segment needs to be reported as the entity is required to separately disclose information regarding the reportable segment as per the requirements of IFRS 8. An entity is required to disclose and report a segment separately if that segment meets one of the following thresholds:

(a) The revenue reported by the separate operating segment (including revenue from the sale to external customers and as well as transfers and sales with the other segments of the entity), is either equivalent to 10 per cent or is more than 10 per cent of the entity’s total combined revenue from all its sources including the revenue from separate segments.

(b) The absolute amount of the profit or loss reported by the segment is either 10 per cent or is more than the greater of:

 (i) The total of the profit reported by all the profit-making segments of the entity

(ii) The Combined total of the loss reported by all the segments of the entity that were in loss at the end of the entity’s financial year.

(c) The amount of the assets of the segment is either 10 per cent or is more than 10 per cent of the total value of all the assets of the entity (including the assets of all the separate operating segments).

• If the revenue of all the segments (that are to be reported separately) of the entity is neither equivalent to 75 per cent nor is more than 75 per cent of the total of the entity’s external revenue, then in that case the entity should recognize some more segments as reportable segments (even if the segment does not fulfills the criteria or meets the thresholds mentioned by IFRS 8) unless 75 per cent of the entity’s revenue relates to the separately reportable segments.

• IFRS 8 gives right to an entity to combine information regarding different operating segments which do not fulfill or meet the quantitative thresholds mentioned in IFRS 8 so that to produce a single reportable segment only if they have similar economic characteristics and also have similar kind of attributes listed in the aggregation criteria mentioned below:

(a) Details about the nature of the services and products provided by the operating segments
(b) Details about the nature of the production policies and processes adopted by the segments
(c) Details about the markets or regions which the segment targets with reference to its services and products
(d) Details about the type and class of clients/customers the segments deal with in its normal course of business transactions
(e) Details about the methods adopted by the segments to distribute their goods or to provide services to their customers
(f) Details about the nature of the regulatory requirements and environment, if it is applicable towards the segments or the entity.

• If an entity’s management is of the opinion that a segment identified as a reportable segment in the preceding period contains information which can be of significant importance to the users and stakeholder that are interested in the entity’s financial statements. In such a scenario the entity should continue to recognize that segment as a reporting segment even if it does not meets the thresholds mentioned in IFRS 8 with reference to recognizing a reportable segment.

• If a segment does not meet any of the thresholds mentioned in IFRS 8, with respect to decide on whether a segment should be reported and presented separately by the entity, but if the entity’s management is of the opinion that the specific segment contains information that is important to be disclosed and presented separately then in that case the entity can classify that specific segment as a reportable segment.

• All the other segments of the entity that are not reported and presented separately by the entity will be classified by the entity under the head named all other segments.

Disclosures
IFRS 8 requires an entity to give the following disclosures with respect to a reportable segment in its financial statements:

• The information or the basis which the entity has used to identify different separately reportable operating segments.

• The revenue earned by the segment through external sources.

• The revenue earned by the segment from internal sources (other segments of the entity).

• The judgments or basis on which the entity has applied aggregation criteria (if the criteria has been used by the entity)

• The amount of amortization or depreciation charge with respect to the assets of the entity’s segments.

• Any kind of finance income and cost (if there is any) with respect to the entity’s separately reportable operating segments.

• The information regarding the investments which the segment has made and also hold till the reporting date.

• The amount and number of the assets possessed and owned by the separate segment.

• The nature and amount of all the liabilities which are related to the segments that the entity is required to report and disclosed separately as per the requirements of IFRS 8.

• If the main source of earning income for a segment is through interest income then in that scenario the income in form of interest should be reported separately from the expenses which the entity incurs in form of interest as the interest income and expenditure may be settled against each other which will not enable the user of the financial statements to properly analyze the performance of the entity and its segments.

• The method of measurement used by the entity to determine the segment’s profit or loss to be reported separately in the entity’s financial statements

• The basis criteria used for the apportionment of the entity’s common expenditure to the entity’s reportable operating segments

• The policies which the entity uses with reference to determining the values of the assets of the separate segments and if there is any kind of difference between the accounting policies and measurement methods adopted for the assets of the segments (that needs to be reported) and for the other assets of the entity

• Any kind of change that has occurred in the entity’s documented accounting policies during the current period when compared with the previous accounting period

• Reconciliations of the revenue, assets, liabilities and profit or loss with reference to the reportable segment, with the corresponding items that of the entity.

• Any kind of change in the entity’s structure that basically results in the criteria or basis for recognizing a reportable segment to be changed and in such a scenario the entity will be required to report and present information regarding both the old and new segments.

• IFRS 8 also requires some entity wide disclosures with respect to information regarding each service and product which the separate segment of the entity provides to its external customers

• The information regarding transactions with major clients or customers from which the segment earns major portion of its revenue.

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