International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

  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