Workbook on IFRS 8 Operating Segments

IFRS 8 Operating Segments - Student Handout 📊

Your complete guide to understanding segment reporting made simple

What is IFRS 8? 🎯

IFRS 8 requires companies to tell investors how different parts of their business are performing. Think of it as "showing the business through management's eyes."

Why Do We Need This?

Imagine you are investing in a company that makes both:

1. Luxury cars (high profit, low volume)
2. Budget phones (low profit, high volume)

Without segments: You only see total Revenue and profit . With segments: You see which business is doing well and which isn't

This helps you predict future cash flows and assess business risks.

How Tech Giants Use IFRS 8: Segment Reporting in Netflix, Amazon & Google

Who Must Apply IFRS 8? 🏢

MUST Apply (No Choice):

✅ Listed companies (shares traded on stock exchange)

✅ Companies filing to go public (preparing for IPO)

✅ Groups with listed parent/subsidiary

Don't Need to Apply:

❌ Private companies (not listed)

❌ Small and medium entities using IFRS for SMEs

Key Rule:

Only consolidated statements need segment disclosure (not individual subsidiary accounts)

The Three Key Steps to IFRS 8 📋

Step 1: Identify Operating Segments

Step 2: Determine Reportable Segments

Step 3: Prepare Required Disclosures

Step 1: What Are Operating Segments? 🔍

An operating segment is a part of the business that:

1. Earns Revenue and incurs expenses (makes money and spends money)
2. Is regularly reviewed by the CODM (Chief Operating Decision Maker)
3. Has separate financial information available

Who is the CODM?

The person (or group) who:

1. Allocates resources to different parts of the business
2. Reviews performance of business units
3. Makes strategic decisions

Usually: CEO, Board of Directors, Executive Committee

Real-World Examples:

🏭 Example 1: Global Manufacturing Company

1. Automotive Division (makes car parts)
2. Electronics Division (makes computer chips)
3. Aerospace Division (makes aircraft components)

🏪 Example 2: Retail Chain

1. North America Stores
2. Europe Stores
3. Asia-Pacific Stores

🏦 Example 3: Diversified Group

1. Banking (retail and commercial banking)
2. Insurance (life and general insurance)
3. Investment Management (asset management)

What's NOT an Operating Segment?

❌ Head office (doesn't earn external Revenue)

❌ HR department (supports other units)

❌ Pension fund (not a business activity)

❌ Start-up division (no revenue yet - but can still be a segment!)

Step 2: Which Segments Must Be Reported? 📊

The "10% Rule" (Any ONE of these):

A segment is reportable if it meets any of these tests:

Test 1: Revenue Test

10% or more of total company revenue

Segment Revenue ÷ Total Company Revenue ≥ 10%

Test 2: Profit/Loss Test

10% or more of the larger of:

1. Total profits of profitable segments
2. Total losses of loss-making segments

|Segment Profit/Loss| ÷ Larger of [Total Profits] or [Total Losses] ≥ 10%

Test 3: Assets Test

10% or more of total company assets

Segment Assets ÷ Total Company Assets ≥ 10%

The "75% Rule":

Reportable segments must cover at least 75% of external Revenue

If your reportable segments only cover 60% of Revenue, you must add more segments until you reach 75%.

Practical Example:

TechCorp has 5 business units:

Result: Report Software, Hardware, Services, and Other (covers 95% of Revenue ✅)

Can We Combine Segments? 🤝

Aggregation Criteria (Must Have ALL):

You can combine segments ONLY if they're similar in:

1. Products/services (both make phones vs one makes phones, one makes cars)
2. Production processes (both use assembly lines vs one uses assembly, one uses custom manufacturing)
3. Customer types (both sell to retailers vs one sells to retailers, one sells direct to consumers)
4. Distribution methods (both use online sales vs one online, one physical stores)
5. Regulatory environment (both face banking regulations vs one banking, one general business)

Examples:

✅ Can Combine:

1. UK Banking + US Banking (same regulations, customers, processes)
2. Luxury Cars + Luxury Motorcycles (similar customers, distribution, margins)

❌ Cannot Combine:

1. Retail Banking + Investment Banking (different regulations, risks)
2. Restaurants + Food Manufacturing (different customers, processes)

Step 3: What Must Be Disclosed? 📝

General Information Required:

1. How segments were identified (by geography, product, etc.)
2. Which segments were combined and why
3. Products/services each segment provides

Financial Information for Each Segment:

Always Required:

1. Segment profit/loss
2. Segment assets

Required IF Given to CODM:

1. Segment liabilities
2. Revenue from external customers
3. Revenue from other segments
4. Interest revenue/expense
5. Depreciation and amortization
6. Tax expense
7. Material non-cash items
8. Investments in associates/joint ventures
9. Capital expenditure

Reconciliations Required:

Must show how segment totals tie to company financial statements:

1. Total segment revenue → Company revenue
2. Total segment profit → Company profit before tax
3. Total segment assets → Company total assets
4. Total segment liabilities → Company total liabilities

Entity-Wide Disclosures (Even with One Segment):

1. Product/service information (Revenue by product line)
2. Geographic information (Revenue and assets by country)
3. Major customer information (if any customer = 10%+ of Revenue)

Common Exam Scenarios 🎓

Scenario 1: Listed vs Unlisted

Question: "Why do similar companies have different segment disclosures?" Answer: Only listed companies must provide segment information under IFRS 8

Scenario 2: Different Segment Bases

Question: "Company A segments by geography, Company B by product. Why?" Answer: Segments reflect how the CODM reviews the business - this varies by company

Scenario 3: Subsidiary Segments

Question: "Why don't subsidiary companies show segments?" Answer: Only consolidated statements need segment disclosure (unless subsidiary is also listed)

Measurement Rules 📏

Golden Rule:

Report segments the same way management sees them internally

This means:

• ✅ Use internal accounting policies (even if different from IFRS)
• ✅ Include internal transactions between segments
• ✅ Use management's allocation methods

Examples:

Internal vs IFRS Differences:

1. Management uses cash accounting for pension costs
2. IFRS requires accrual accounting for pension costs
3. Segment reporting: Use cash accounting (what management sees)
4. Reconciliation: Explain the difference

Internal Pricing:

1. Segment A sells to Segment B at cost + 15%
2. Segment reporting: Show this internal pricing
3. Consolidated statements: Eliminate internal transactions

Geographic and Customer Disclosures 🌍

Geographic Information:

Must disclose:

1. Home country revenue and assets
2. Foreign countries total Revenue and assets
3. Individual foreign countries if material

Example:

Revenue by Geography:

- United States (home): $600M

- Europe: $200M  

- Asia: $150M

- Other: $50M

Major Customer Information:

Must disclose if any customer = 10%+ of total Revenue:

• Total Revenue from that customer
• Which segments serve that customer
• Don't need to name the customer

Example:

"Revenue from one customer represents $120M of total Revenue,

primarily from our Software and Services segments."

Memory Aids & Tips 🧠

"PARS" for Operating Segments:

• Profit/loss reviewed by CODM
• Activities that earn Revenue
• Regular review by decision maker
• Separate financial information available

"10-10-10-75" Rule:

1. 10% revenue test
2. 10% profit/loss test
3. 10% assets test
4. 75% total coverage required

"Similar in 5" for Aggregation:

1. Products/services
2. Production processes
3. Customer types
4. Distribution methods
5. Regulatory environment

Quick Decision Tree:

Is the company listed?

├─ NO → No IFRS 8 required

└─ YES → Identify operating segments

           ↓

         Apply 10% tests

           ↓

         Check 75% coverage

           ↓

         Prepare disclosures

Common Mistakes to Avoid ⚠️

❌ Mistake 1: Applying to Private Companies

Wrong: "All IFRS companies need segment disclosure" Right: "Only listed companies must provide segments"

❌ Mistake 2: Using IFRS Measurements

Wrong: "Segments must follow IFRS accounting"

Right: "Use whatever management uses internally"

❌ Mistake 3: Ignoring Small Segments

Wrong: "Small segments don't matter" Right: "Must reach 75% coverage by adding more segments"

❌ Mistake 4: Combining Unlike Segments

Wrong: "Combine all segments below 10%" Right: "Only combine segments that are similar in all 5 criteria"

❌ Mistake 5: Forgetting Entity-Wide Disclosures

Wrong: "Single segment companies need no disclosures" Right: "Still need geographic and major customer information"

Exam Preparation Checklist ✅

Before the exam, make sure you can:

□ Identify who must apply IFRS 8 (listed companies)

□ Define operating segments using the 3 criteria

□ Apply the 10% quantitative tests

□ Explain the 75% coverage rule

□ List the 5 aggregation criteria

□ Describe required disclosures for segments

□ Explain why companies have different segment structures

□ Distinguish between segment measurements and IFRS measurements □ Identify what constitutes entity-wide disclosures

Key phrases to remember:

1. "Through the eyes of management"
2. "Chief Operating Decision Maker (CODM)"
3. "Material by nature" (wait, that's IAS 24!)
4. "Similar economic characteristics"

Quick Reference Summary 📋

💡 Remember: IFRS 8 is about transparency - helping investors see the business the same way management does. It'snot about perfect accounting; it's about useful information!

Need Help? 🤝

Study tip: Practice with real company annual reports! Find a listed company's segment note and see how they apply these concepts in practice.

Next steps: Try the practice questions in class and review past exam papers to see how these concepts are tested.