IFRS 8 is an International Financial Reporting Standard that lays down the principles governing the disclosure of operating segments in the financial statements of enterprises. It requires entities to disclose segment information and internal management reports to cross-check decisions. It improves transparency and comparability to the stakeholders and investors. The definitions and guidance on the identification of segments, measures, and disclosures requirements can be found in the full text of IFRS 8. This article describes the scope of IFRS 8, the key principles of segment reporting and its disclosure requirements.
What is IFRS 8?
IFRS 8 operating segments is a standard developed by the International Accounting Standards Board (IASB) that guides how businesses report financial data about their segments. The standard requires external users to receive the same segmental data management used in making business decisions.
Under IFRS 8, management is to identify operating segments based on the internal view of the entity. It also ensures that segment reporting is aligned with decision-making in the business, thus providing better reporting in the financial statements. By enhancing financial transparency, this standard allows investors to assess a company’s performance and engage in informed investment decisions.
Scope of IFRS 8
IFRS 8 is applicable to listed and publicly traded companies on stock exchanges, public interest entities that prepare financial reporting and enterprises making financial reports by IFRS. Such powers have to be broken off from a company in order for investors to have a better understanding of how they are performing financially and how different business segments of the company affect its bottom line.
IFRS 8 excludes small businesses that have no public accountability as well as businesses that do not prepare consolidated financial statements. Since their financial activities are not complex and do not affect external parties much, these entities do not have to report segments. This exemption will lessen the reporting burden on smaller businesses.
Operating Segments
An operating segment in IFRS 8 is a company’s business segment that earns revenues and expenses. It should:
- Engage in business activities that generate income: An operating segment has to be involved in business activities that earn revenues from sales or services. It should also have expenses associated with its operations so financial performance is aptly evaluated.
- Have stand-alone financial data: Be able to financially segment each part of the company—make sure there’s stand-alone data on revenue, expenses, and clear profitability. This allows for precise tracking and reporting of the segment’s financial performance.
- Be regularly audited by management for decision making: Each segments financialtail must be reviewed by management to determine what the business can afford. Because these processes can be reviewed regularly, organisations can optimise their resources and grow.
Identifying Operating Segments
One of the key points under IFRS 8 is identifying operating segments by vis-a-vis business. Companies have to analyze to identify the operating segments:
- Internal management reports: Firms must thoroughly review internal financial reports the management uses to monitor performance. Such reports detail the revenue, expenditures and profitability by segment.
- Performance review meetings with senior executives: Rating of financial and operational performance of separate business units, senior executives regularly conduct performance review meetings. The decisions work to determine if the unit qualifies as an operating segment.
- How resources are allocated across business units: Management assesses the distribution of resources, such as capital, employees, and tangible assets, across its various business units. Allocation shows the meaning of each segment in the total business.
IFRS 8 Illustrative Example
A multinational enterprise must define its operating segments according to revenue generation and review by management. According to IFRS 8, only business segments with external transactions under regular review by management are considered operating segments. A multinational business firm has three divisions:
| Division | Business Activity | Management Review? | Operating Segment? |
| Retail | Sells consumer goods | Yes | Yes |
| Manufacturing | Produces industrial components | Yes | Yes |
| IT Support | Provides internal IT services only | No | No |
Reportable Segments
IFRS 8 mandates that an entity disclose financial and descriptive information, However, when both separate and consolidated financial statements for the parent are presented in a single financial report, segment information need be presented only on the basis of the consolidated financial statements regarding its reportable segments. Reportable segments are operating segments or aggregations of operating segments that fulfil particular criteria:
- Its reported revenue, both from external customers and intersegment sales or transfers, is 10 per cent or greater of the combined internal and external revenue of all operating segments.
- The total of its stated profit or loss is 10 per cent or more of the greater, in value, of (i) the aggregate stated profit of all operating segments which did not report a loss and (ii) the aggregate stated loss of all operating segments which reported a loss, or
- Its assets are 10 per cent or more of all operating segments’ total assets.
Two or more operating segments can be combined into a single operating segment if aggregation is in line with the fundamental principles of the standard; the segments have comparable economic characteristics and are comparable in some of the required respects.
Where the aggregate external revenue of operating segments accounted for less than 75 per cent of the entity’s revenue, other operating segments need to be recognised as reportable segments (though not meeting the numerical thresholds established above) until a minimum of 75 per cent of the entity’s revenue is covered under reportable segments.
Disclosure Requirements Under IFRS 8
An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. The disclosures enable investors and stakeholders to see how various business segments contribute to overall financial performance.
- General Information: Businesses must clarify how they determine operating segments and explain what products and services are available in each segment.
- Management judgments: Disclose any judgments made regarding aggregating two or more operating segments into a single reportable segment.
- Details of segment profit (or loss): Report profit or loss for each segment, aggregating key revenues and expenses, including external sales and inter-segment transactions; interest income and expense, depreciation, amortisation, and tax expenses.
- Assets and Liabilities Disclosure: Disclose total assets, total liabilities, investments in associates and joint ventures and capital expenditure for each segment.
- Measurement: Describe what the segment profit or loss, assets and liabilities measure and how they are calculated, including whether the measurements are per different accounting policies and how inter-segment transactions are recognised.
- Reconciliation of totals: Companies need to reconcile segment revenue, profit (or loss), assets and liabilities with totals in the financial statements.
- Entity-Level Disclosures: A company must disclose information regarding its goods and services and the sources of its revenue even if the company has only a single reportable segment.
- Geographical Revenue and Asset Breakdown: The breakdown of revenue from external clients and of the non-current assets is presented by the geographical location of clients and by the geographical location of assets. If material, disclose revenue from external clients and non-current assets by geographical location, including specific country information.
Relevance to ACCA Syllabus
IFRS 8 deals with segment reporting you will come across this topic in ACCA main syllabus IT is very crucial in Financial Reporting (FR) Strategic Business Reporting (SBR) exam. This gives students insight on how companies with multiple operating segments report financial data to achieve better transparency for investors and stakeholders.
IFRS 8 ACCA Questions
Q1: What is the main goal of IFRS 8?
B) Financial accounting and reporting for financial instruments
B) To guide segment reporting
C) For regulating the recognition of lease transactions
D) In order to decide how to tax multinational companies
Ans: B) * To guide segment reporting.
Q2: An operating segment is identified under IFRS 8 by:
A) The area of economic activity in which it does business
B) What products and services it provides
C) Internal reports and statements providing information to the chief operating decision-maker (CODM)
D) The size of the company
Ans: C) Internal reporting to the chief operating decision-maker (CODM)
Q3: All of the following are criteria for reportable an operating segment (IFRS 8) EXCEPT for?
A) The revenue represents 10% or more of the total company revenue
B) Profits or losses represent 10% or more of total company profits or losses
C) It is in a different country than parent company
D) 10% or more of total company assets are its assets
Ans: C) It is located in a country where the parent companydoes not operate
Q4: What is the requirement in respect of financial information about reportable segments under IFRS 8?
A) The annual salary of the chief executive officer (CEO)
B) Net gains or losses, over-all assets, and income
C) Number of users in each segment
D) Revenue from sales for each segment only
Ans: B) profit or loss, total assets and revenue
Q5: IFRS 8 mandates that segment information is:
A) For internal use only
B) As and when management decides to disclose
C) On the same basis of accounting as the consolidated financial statements
D) Only mentioned in the auditor’s report
Ans: C) Under the same accounting policies as for the consolidated financial statements
Relevance to US CMA Syllabus
IFRS 8 is important for CMA candidates in managerial decision-making and performance measurement. It explains how segment reporting affects various business units’ financial planning, budgeting, and performance assessment. Segment information is useful for CMAs in cost allocation and profit analysis.
IFRS 8 US CMA Questions
Q1: Why is IFRS 8 so relevant when we talk about managerial accounting?
A) It is useful in assessing and making segmental performance decisions
B) It brings uniformity in financial ratios to different Industries
C) There is no longer a need for financial reporting
D) Applies only to government actors
Ans: A) It is useful for performance evaluation and decision guidance per customer segment
Q2: A reportable segment is a segment that meets any one of the following criteria:
A) It generates < 10% of total company revenue
B) Geographic region
C) It is the most profitable segment
D) It creates foreign currency transactions
Ans: A) Its revenue is more than 10% of the total company revenue
Q3: What is the benefit of IFRS 8 to make financial decisions?
A) By providing transparency in business unit performance reporting
B) Because they require all companies to report segment cash flows
C) By preventing companies from announcing operating results
D) Through decreasing the necessity of management accounting
Ans: A ) So as to bring transparency in the reporting of business unit performance
Q4: What is the chief operating decision-maker (CODM) in segment reporting?
A) Assess whether an operating segment must be separately disclosed
B) Re approve out side audit report of the company
C) Allocates tax rates to all sections
D) Prepares Statements for Stockholders
Ans: A) Identifies operating segments that need to be disclosed separately
Q5: Why is segment reporting important for multinational corporations?
A) It contains in-depth information about various business segments
B) You do not have to do consolidated financial statements
C) It leads to the uniformity of financial statements across all the subsidiaries
D) It eliminates financial disclosure Requirements
Ans: A) A) It gives an in-depth view of various business segments
Relevance to US CPA Syllabus
US CPA examinees learning Financial Accounting and Reporting (FAR) need to know IFRS 8 because it is consistent with US GAAP’s ASC 280 (Segment Reporting). CPAs can prepare financial statements, evaluate business risks, and give corporate reporting transparency by understanding segment disclosure requirements.
IFRS 8 US CPA Questions
Q1: The segment disclosures of IFRS 8 are based on:
A) The organization’s geographical structure
B) Management reports internally used by decision maker
C) Industry-specific reporting standards
D) External auditor requirements
Ans: B) Used by decision-makers for internal management reports
Q2: What are the differences between IFRS 8 and US GAAP (ASC 280) for segment reporting?
A) IFRS 8 uses a risk-based approach whereas US GAAP does not
B) US GAAP is more permissive in segment identification
C) IFRS 8 report segments on a management approach as does US GAAP
D) IFRS 8 does not require segment disclosure for non-public companies
Ans: C) The management approach is used in segment identification as per IFRS 8 just like US GAAP
Q3: If an entity has more than one operating segment, which segments must be separately disclosed?
A) Profitable segments only
B) Just assets salvaged by the Financial Chief
C) Segments whose portion surpasses the quantitative thresholds set out in IFRS 8
D) All businesses, no matter the size
Ans: C) Segments which have met the quantitative thresholds defined in IFRS 8
Q4: What is the treatment of inter segment revenue in accordance with IFRS 8?
A) It must be disclosed separately
B) Ignore it in financial reporting
C) Reported A deduction from consolidated revenue
D) It will be classified as expense of the parent company
Ans: B) It has to be disclosed separately
Q5: Under IFRS 8, what information must be disclosed in segment reporting?
A) Each segment’s revenue(loss), assets, and liabilities
B) Ending records – Names of all Workforce in the segment
C) The number of complaints per segment
D) The compensation of the segment manager
Ans: A) Profit or loss, assets, and liabilities for each segment.
Relevance to CFA Syllabus
IFRS 8 is relevant to CFA candidates because financial statement analysis is central to the CFA curriculum. Segment reporting is critical in analysing corporate performance, risk exposure, and profitability at the segment level, which is critical for making investment decisions and valuing equity.
IFRS 8 CFA Questions
Q1: Why is it important for the financial analysts when IFRS 8 comes in?
A) It has the business unit performance data available which allows you to analyze how to invest
B) It removes the need for financial disclosures
C) It standardizes all financial statements and companies.
D) Year 2023 It applies only to government entities
Ans: A) To analyze investments in business units.
Q2: What are the implications of IFRS 8 for investment decision-making?
A) Segment Profitability and Risk Assessment
B) It restricts investors from analysing financial statements
C) It removes disclosures surrounding financial risks
D) It ensures uniform accounting policies across all segments
Ans: A) Provides insights into segment profitability and risks
Q3: When evaluating a company’s segment disclosures, analysts should focus on the following attributes:
A) Each segment’s revenue, profit, and assets
B) The CEO’s salary
C) The number of employees per segment
D) Marketing strategies for the segment
Ans : A) segment wise Revenue, profit, and assets
