The aim of the IFRS8 is to give more information to the users of FS to make their economic decision.
Think about it in this way, if you have a company which is operating in many industries such as retail, mineral, financial services & education etc. If there’s a rise in price due to increase in transportation fees then which industry will be mostly affected?
Well to some extent, the retail industry will be mostly affected and the financial service and education will be least affected. So when investors try to invest their money into these industries they want to know these segments (companies in different industries) are operating effectively so we come to IFRS8.
Another example would be if a company has many subsidiaries all round the world such as in Asia, America, Canada, Singapore etc. and if you want to invest your money into these companies say in China and you want to know whether the company operating in China will be good and maybe you will then take into account of political reasons etc.
So IFRS8 here just gives us some guidance of when trying to show the results of different companies, how to do that?
Firstly, we should decide whether this is an operating segment?
An operating segment would have the following features:
- It has business activities earning revenue and incurring expenses.
- The operating results will be reviewed by CEO to make economic decisions.
- There’s separate financial information for each segments showing assets, liabilities, revenue, expenses and profits etc.
Secondly, once it fulfills the definition of operating segment then you will need to decide whether this would be reportable?
An operating segment would be reportable if:
- It’s more than 10%of revenue, profits or assets of all segments;
- If there’s a loss then we need to decide whether the loss is higher than the higher of total profits and loss and if no then it doesn’t fulfill this criteria.
Only one of the criteria needs to be fulfilled.
Thirdly, once the operating segments are classified but they do not add up to 75% in total then we need to break the other operating segments down in order to make the total up to 75%.
- If other operating segments doesn’t fulfill the definition of operating segement then we can bring them together if they have similar products/types of customers/distribution methods or regulatory environment.
Fourthly, we need to decide how to disclose the operating segements.
- Revenue, total assets&liabilities, interest income&expense, tax&depreciation should be disclosed.