Understanding the fundamentals of segment reporting, disclosures

The main objective of segment reporting is to enable stakeholders and users of an organisation’s financial statements to evaluate the nature and financial effects of its business activities and the economic environment in which it operates. IFRS 8, “Operating segments”, is the financial reporting standard on segment reporting and disclosures.

An operating segment is a component of an organisation that earns revenue and incurs expenses, whose results are reviewed regularly by the organisation’s chief operating decision maker (CODM) and for which discrete financial information is available.

The CODM identifies a function, not a title, and is often the CEO or COO and, in some instances, a group of executive directors responsible for assessing performance and allocating resources for operating segments.

The standard applies to the separate or consolidated financial statements of an organisation whose debt or equity securities are traded in a public market or an organisation that files or is filing its financial statements with a securities commission to issue any class of instruments in a public market.

There are two main steps involved in segment reporting. The first is for organisations to identify their operating segments, while the second involves determining their reportable segments.

A reportable segment is either a single operating segment or an aggregation of operating segments disclosed in the financial statements.

Aggregating one or more operating segments requires judgment. It is permitted if the segments share similar characteristics in areas such as products and services, production processes, type or class of customers, methods used to distribute products and services and the nature of the regulatory environment.

Information is required on a reportable segment if it meets any of the following quantitative thresholds; operating segment revenue or profit/loss or assets of 10 percent or more of total segments revenue or profit/loss or assets, respectively.

Organisations should include more reportable segments until the total revenue attributable to those segments amounts to at least 75 percent, even if the additional segments do not meet the 10 percent threshold.