IFRS 08 / SLFRS 08 Operating Segments

** Note : If you are reading this article using your mobile, pictuters attached might not be clerly visible. Just click on those pictures to view them clearly.

Welcome to AccountingKuppiya.com | Free Accounting and Finance Lessons Provider.

In a company which is having a diversified product portfolio like conglomerates, the decision making process cannot be effectively done if the financial statements are prepared to present only the aggregated results of its products or its subsidiaries.

Despite the financial reporting, management always demanded the segmental information to make effective decisions. As a development in International Financial reporting standards (IFRS), IASB introduced “IFRS 08 – Operating segments” to make segmental information available to external users.

Thus CA Sri Lanka adopted IFRS 08 as SLFRS 08 – Operating Segment in Sri Lanka. This is a disclosure standard.

Let’s discuss the standard in detail but in a logical flow.

Why IFRS 08 / SLFRS 08 was introduced?

To make information available to users of financial information about company’s operations in different business activities and environments to evaluate the nature and financial effects of its business activities.

What is the core principle of IFRS 08 / SLFRS 08 – Operating Segments?

“Disclosure of information that enables users of the financial statements to evaluate the nature and financial effects of the business activities in which the entity engages and the economic environment in which it operates” (IFRS 08)

Does it mandatory to disclose segmental information as per IFRS 08 / SLFRS 08?

As per the standard disclosure of segmental information is not mandatory to all companies.

If your company is having following criteria, then the presentation of segmental information is mandatory as per IFRS 08 / SLFRS 08

• Debt or equity instruments traded in a public market
• File or in process of filing financial statements for the purpose of issuing instruments in a public market

However the standard allows and promotes the voluntary disclosure of segmental reporting. Further if you apply the disclosures voluntarily, you need to apply the full standard rather than part of it.

In which financial statements Segmental information need to be disclosed?

For companies which need to mandatorily disclose segmental information and ops to disclose voluntarily, they have to disclose segmental information in all of following financial statements

• Consolidated financial statements
• Separate or individual financial statements
• If consolidated financial statements and parent’s separate financial statements are presented in a financial report, then segment disclosures are included only in consolidated financial statements

Please note that above financial statements refer to both interim and annual financial statements.

What are the main guidelines of IFRS 08 / SLFRS 08?

This is a quite simple standard where no much complexities involved. Due to the reason being simple people misuse the guidelines of the standard very often. So I will explain the whole standard in simple 5 steps which you can easily understand.

Above flow chart is the main steps you have to follow to apply IFRS 08 / SLFRS 08 Operating Segments standard effectively.

So I will take you through each Step in a summarized manner.

Step 01 - Identify the Chief Operating Decision Maker (CODM)

Rather than merely repeating the standard disclosure, I thought to provide the main points of CODM.

• CODM is a function and not a title
• CODM could be a body (e.g. board of directors) or a person (e.g. CEO)
• One CODM per reporting entity
• CODM is responsible for strategic decision making regarding the entity
• Normally CODM is the Highest level of management responsible for:
• Resource allocation
• Performance assessment

Step 02 - Identify the Operating Segments

As per the standard the next thing you have to do is identification of the operating segments of the company. IFRS 08 / SLFRS 08 gives 3 criteria to decide whether an segment is and operating segment which is explained in following flow chart.

You can realize that if a segment meet all three criteria above will be identified as operating segments.

Further as per the standard following might be included as operating segments;

• Startup Operations
• Vertically integrated operations
• Corporate activities (Eg: R&D)
• Jointly controlled entities and associates

Step 03 – Aggregate operating segments

After you identifying operating segments as per Step 2 , you will need to consider whether those operation segments need to be aggregated before determining whether those operating segments are qualifying as reportable segments which are disclosed separately in financial statements.

Decision of aggregation can be taken as follows.

The concept of “Similar economic characteristics” means if an operating segment having following Characteristics

• Long-term average gross margins
• Competitive / operating risks
• Currency risks
• Economic / political conditions   
• Sales metrics
• Trends in sales growth
• Return on assets
• Capital investment levels
• Operating cash flows

Step 4: Determining the reportable segments

So finally after you identifying operating segments in your company, you need to determine which operating segments need to be disclosed separately. That decision can be taken as follows;

Please note Information need to be disclosed separately about an operating segment if it meets any of the following quantitative thresholds.

So once you decide reportable segments as per the above flow chart, you will decide some operating segments will not meet those quantitative thresholds.

So what you can do for them as per the standard.

• Report separately if useful
• Additional aggregation opportunity:
• Similar economic characteristics
• Majority of aggregation criteria met
• All other remaining segments’ financials need to be disclosed under “All Other” Category

Step 5: Disclose of segment information

Following are the major disclosure requirements of the standard.

I hope you enjoyed reading my article on IFRS 08 / SLFRS 08 Operating Segments. Please give your comments below. It will help me to make improvements in future articles.

 ----------------------------------------------------------------

References and Sources used to Write the Article

IFRS 08 Operating Segments

SLFRS 08 Operating Segments

KPMG Insight into IFRS

----------------------------------------------------------------

Article Written By : H.Harshana Sameeraka ( Bsc Accounting (Special) First Class (Gold Medal Winner), CA Passed Finalist with pending Viva(Prize Winner), Reading For CIMA SCS, Audit Supervisor KPMG)

----------------------------------------------------------------