instruments in a public market. [IFRS 8.2].
The Board has confirmed that for consolidated financial statements, the above test is
applied to the parent entity alone. [IFRS 8.BC23]. Therefore, IFRS 8 does not apply to a
group headed by a parent that has no listed financial instruments, even if the group
includes a subsidiary that has any of its equity or debt instruments traded in a public
market. The scope of IAS 33 – Earnings per Share – is similarly defined. [IFRS 8.BC23].
Of course, a subsidiary with publicly traded debt or equity instruments would be
required to provide segment information under IFRS 8 in its own financial statements
from its perspective as a reporting entity.
2.2.1
The meaning of ‘traded in a public market’
The Standard describes a ‘public market’ as including a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets, [IFRS 8.2],
but does not define what would make some markets ‘public’ and others not.
In our view, a market is ‘public’ when buyers and sellers (market participants) can
transact with one another (directly; through agents; or in a secondary market) at a price
determined in that market. A public market does not exist when the buyers and sellers
can transact only with the entity itself (or an agent acting on its behalf). The requirement
for an entity to list its securities on a stock exchange is not the sole factor determining
whether the entity is in the scope of IFRS 8. Its securities must be traded in a public
market meeting the criteria noted above.
Example 32.1: The meaning of ‘public market’ in the context of a fund
Many investment funds are listed on a public stock exchange for informational purposes, in particular to
facilitate the valuation of portfolios by investors or because it is a requirement for the fund to be listed on a
public stock exchange to make it eligible for investment by entities that are required to invest only in listed
securities. However, in spite of such a listing, subscriptions and redemptions are handled by a fund
administrator or a transfer agent (acting on behalf of the fund) and no transactions are undertaken on the
public stock exchange. In addition, the prices for those transactions are determined by the fund agreement,
such as on the basis of the fund’s Net Asset Value, rather than the price quoted on the public stock exchange
and determined by supply and demand.
In our view the debt or equity instruments of such entities are not traded in a public market and so the entity
would not fall within the scope of IFRS 8. Nevertheless, regulators can mandate that funds provide segment
information, or funds can voluntarily disclose segment information. In such cases, the funds need to comply
with the requirements of IFRS 8.
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Such ‘public markets’ would include exchange markets, dealer markets, brokered
markets, and principal-to-principal markets as described in IFRS 13 – Fair Value
Measurement – and listed in that Standard as examples of markets in which fair value
inputs might be observable (see Chapter 14 at 15.1). [IFRS 13.B34].
2.2.2
Consolidated financial statements presented with those of the parent
When both the consolidated financial statements and the parent’s separate or individual
financial statements are contained in the same financial report, segment information is
only required in the consolidated financial statements. [IFRS 8.4].
2.2.3
Entities providing segment information on a voluntary basis
Entities for which IFRS 8 is not mandatory might still want to provide information about their
business activities, for example about sales by segment, without triggering the need to comply
fully with the Standard. The Board concluded that this would be acceptable, provided that
such disclosure is not referred to as ‘segment information’. [IFRS 8.BC22]. Consequently, entities
giving information about segments on a voluntary basis cannot describe that information as
‘segment information’ unless it has been prepared in compliance with IFRS 8. [IFRS 8.3].
3
IDENTIFYING A SINGLE SET OF OPERATING SEGMENTS
IFRS 8 adopts a ‘bottom up’ approach to determining the level of detail required for
segment reporting in the notes to the financial statements. It requires the entity’s revenue
earning activities to be divided into operating segments (based on the same components
used by management to run the business) and only allows that information to be
aggregated for reporting purposes if specific criteria are met. This process can involve
considerable judgement, as it may not always be immediately clear what activities are
operating segments for the purposes of the Standard or which layer of the entity’s
organisational structure represents the level at which those activities are managed. This is
particularly the case when management information is presented in a number of different
ways (for example by product, by geographical market and by legal entity) or where
management structures distinguish operational, strategic and oversight responsibilities.
Notwithstanding such difficulties, the requirement is to identify a single set of
components as constituting the entity’s operating segments. [IFRS 8.8].
The process for determining operating segments is important not only to entities
applying IFRS 8 for external reporting purposes, but also to entities implementing the
requirements of IAS 36 – Impairment of Assets – for testing goodwill for impairment.
As such, the way that operating segments are defined and determined under IFRS 8 can
affect the financial statements of entities to which the disclosure requirements in IFRS 8
do not apply, such as those without traded equity or debt. This is because the Standard
on impairment, applicable to all entities, states that goodwill cannot be allocated to a
group of cash-generating units (CGUs) that is larger than an operating segment before
aggregation (as determined below). [IAS 36.80(b)]. See Chapter 20 at 8.1.4.
3.1
Definition of an operating segment
An operating segment is defined as a component of an entity:
Operating
segments
2853
(a) that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity);
(b) 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; and
(c) for which discrete financial information is available. [IFRS 8.5].
This means that the determination of an entity’s operating segments starts with the
smallest components of the business for which information about profit is presented for
use by the entity’s chief operating decision maker (sometimes referred to as ‘CODM’).
3.1.1
Revenue earning business activities
A significant feature of an operating segment is the potential for revenue generation
rather than actually earning revenues in the reporting period. Accordingly, a start-up
operation can be treated as an operating segment wh
ile it has yet to earn revenues.
[IFRS 8.5].
However, not every part of an entity is necessarily an operating segment. For example,
a corporate headquarters or a functional department (such as a centralised data
processing centre) that either does not earn revenues or for which revenues are only
incidental to the activities of the entity would not be an operating segment for the
purposes of IFRS 8. Similarly, an entity’s post-employment benefit plans would not be
regarded as operating segments. [IFRS 8.6].
3.1.2
‘Chief operating decision maker’ and ‘segment manager’
Arguably the most important judgements made in implementing IFRS 8 relate to the
identification of the entity’s chief operating decision maker. The nature of what is
ultimately disclosed in the financial statements about operating segments and the level
of detail (or segmentation) required is directly related to the information regularly
provided to the chief operating decision maker.
References in the standard to ‘chief operating decision maker’ are to the function of
allocating resources and assessing performance of the operating segments and not to a
manager with a specific title. Often the chief operating decision maker of an entity is its
chief executive officer or chief operating officer (i.e. an individual), but the term could
refer equally to a group of executive directors or others charged with that role. [IFRS 8.7].
In Extract 32.1 below, the Go-Ahead Group identifies its Group Chief Executive as the
chief operating decision maker:
Extract 32.1: The Go-Ahead Group plc (2017)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract]
4.
Segmental analysis [extract]
The information reported to the Group Chief Executive in his capacity as chief operating decision maker does not
include an analysis of assets and liabilities and accordingly IFRS 8 does not require this information to be presented.
2854 Chapter 32
The determination of chief operating decision maker will not be the same for all entities
applying IFRS 8 and will depend upon the particular facts and circumstances applying
to each entity, including the entity’s governance structure. However, in stating that the
term could apply to a group of executive directors or others, [IFRS 8.7], the Standard is
clear that the function of CODM is an executive role. The IFRS Interpretations
Committee confirmed this view in 2011. While it observed that in practice the functions
of CODM are sometimes carried out by multiple persons and that all such persons
involved in those activities would be part of the CODM group, the Committee noted
that the CODM would not normally include non-executive directors.2 For example, an
entity may have a single board of executive and non-executive directors which reviews
the performance of individual business units, makes decisions about the operating
budgets for those businesses and reviews significant applications for investment. In that
case, the full board could be identified as the chief operating decision maker. However,
if the entity also has a sub-committee of executive directors or another grouping of key
management personnel (sometimes referred to as an ‘operational board’), this smaller
group of executives would be identified as the chief operating decision maker.
Essentially, the chief operating decision maker is found at the most senior executive
decision-making level of an organisation and as such should be distinguished from
higher levels of management fulfilling primarily an oversight or approval role and who,
to reflect their non-executive function, are provided information at a more aggregated
level as a matter of course. For example, in some jurisdictions, supervisory bodies may
be part of an entity’s governance structure and be entrusted with significant oversight
responsibilities. This role may give the supervisory body significant veto rights and
rights of approval. However, that supervision will not typically represent the level of
decision-making implicit in the notion of the CODM.
In the extract below, Roche Group identifies as the CODM its Corporate Executive
Committee, a group of senior executives which is headed by the Chief Executive Officer
and is appointed by and reports to the Board of Directors.
Extract 32.2: Roche Holding Ltd (2017)
Notes to the Roche Group Consolidated Financial Statements [extract]
32. Significant accounting policies [extract]
Segment reporting [extract]
For the purpose of segment reporting the Group’s Corporate Executive Committee (CEC) is considered to be the
Group’s Chief Operating Decision Maker. The determination of the Group’s operating segments is based on the
organisation units for which information is reported to the CEC on a regular basis.
Another important distinction to be made is between chief operating decision maker
and the function of ‘segment manager’. The segment manager is accountable to and
maintains regular contact with the chief operating decision maker to discuss operating
activities, financial results, forecasts or plans for the segment. The chief operating
decision maker may also fulfil the role of segment manager for some operating segments
and a single segment manager may be responsible for more than one operating segment.
[IFRS 8.9]. For example, if the CODM is a group of executives, members of that group may
fulfil the role of segment manager for certain components of the entity.
Operating
segments
2855
Considerations of how components of the entity are managed are relevant to the
identification of an entity’s operating segments and not to how they might be reported
in the financial statements. Accordingly, separate operating segments which otherwise
meet the definition at 3.1 above are not aggregated into single reportable operating
segments simply because they have a common segment manager. The Standard is clear
that such segments are only aggregated into reportable operating segments if they
exhibit similar long-term economic characteristics and are similar in respect of the
qualitative criteria set out at 3.2.1 below. [IFRS 8.12]. In addition, because the oversight
role of the CODM is separate from the operational role of the segment manager, it is
possible that an entity could regard an investee accounted for by the equity method as
an operating segment (see 3.1.5 below).
In practice, judgement is required to determine whether the component(s) for which a
segment manager is held responsible represents one or more operating segments. For
example, if targets are set by the CODM for the entire area of one segment manager’s
responsibility and the remuneration of that segment manager is based on the
achievement of those targets, on an aggregated basis, this could support a determination
that the area of responsibility is one operating segment in the absence of other evidence
indicating that the CODM reviews the results of these components separately. Equally,
whilst IFRS 8 states that segment managers will generally exist, their existence is an
important indicator for identifying operating segments, but not a necessary condition.
The key determinant is based on the activity of the CODM with respect
to the internally
reported results of that component.
A common situation in practice is that detailed financial information is provided or
available to the chief operating decision maker on a regular basis about various levels of
management and operational activity within an entity. In these circumstances, the
interplay between the three criteria at 3.1 above becomes very important, as the
existence of more detailed internal reporting could otherwise lead to a determination
that there are more operating segments. If the three criteria apply to more than one set
of components of an entity, but there is only one set that has segment managers,
generally the set of components with segment managers constitutes the operating
segments. [IFRS 8.8].
Example 32.2: Identifying operating segments – CODM and segment manager
CODM
Clothing Division
Accessories Division
Sporting Goods
Segment Manager
Segment Manager
Segment Manager
Shoes
Trousers
Shirts
Watches
Equipment
Souvenirs
The diagram above sets out the internal reporting structure of Entity A. The CODM receives financial
information about the entity’s operations, the most detailed of which (including revenue and operating profit)
relates to the six business units (Shoes, Trousers, Shirts, Watches, Equipment and Souvenirs). However, these
units do not have their own segment manager. Instead, the six business units are grouped into three divisions
2856 Chapter 32
(Clothing, Accessories and Sporting Goods), each of which has a divisional manager who reports directly to
the CODM. The three divisions report financial information to the CODM who uses it to assess performance
and allocate resources.
Marketing strategies are determined by the CODM for each division, and each divisional manager is
responsible for their implementation at the business unit level. Also, quarterly financial information is
presented to the Board of directors and investors at the division level, which is consistent with the level at
which the CODM makes decisions. In addition, the company determines the following:
• Budgets and forecasts are prepared at the division level, and the CODM review budget-to-actual
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 568