Improvements to IFRS 8 – Operating Segments

Following the post-implementation review of IFRS 8, the International Accounting Standards Board (IASB) has released an exposure draft: Improvements in IFRS 8 Operating Segments.

The IASB is requesting comments on the proposed amendments to IFRS 8 and IAS 34 to be made by 31 July 2017. You can see more information or respond here.

Overview of proposed amendments

1. Clarification and amendment to the definition of ‘chief operating decision maker’ 

  • The definition is extended to clarify that the chief operating decision maker assesses the performance of the operating segments and makes operational decisions as well as decisions about the allocation of resources to those segments.
  • It is also clarified that the chief operating decision maker could either be an individual (such as the chief operating officer) or a group (such as the board of directors). Where a group includes individuals who do not participate in making decisions about operations (for example non-executive directors on the board of directors), the group as a whole could still be considered the chief operating decision maker.

2. Examples of the application of the 'similar economic characteristics' requirement when aggregating segments

The current standard gives “similar long-term average gross margins” as an indicator of “similar economic characteristics”.  However, feedback received during the post-implementation review suggested that this in isolation may not indicate “similar economic characteristics”.

The IASB proposes to address this by clarifying that operating segments with similar economic characteristics often exhibit similar long-term financial performance across a range of measures. Two further examples of such measures have been included ie similar long-term revenue growth and similar long-term return on assets; although these are not intended to be a definitive list. 

3. An additional disclosure to highlight different segmental reporting in the annual reporting pack

There is an expectation that the operating segments disclosed in accordance with IFRS 8 will be the same as the operating segments presented in other parts of the annual report.

The IASB have proposed an additional disclosure requiring entities to give an explanation of, and reasons for, any differences between the reported operating segments in the financial statements and the rest of the annual reporting pack. 

The annual reporting pack can include documents that:

  • are published at approximately the same time as the annual financial statements;
  • communicates the entity’s annual results to users of the financial statements; and
  • are publicly available, for example on the entity’s website or in its regulatory filings.

4. Clarification of explanations in respect of reconciling items

The IASB has proposed that all material reconciling items between segmental information and the financial statements should be separately identified and described in sufficient detail to allow the user of the financial statements to understand them.

Additional examples include:

  • differences in accounting policies between segmental information and the financial statements;
  • elimination of intersegmental amounts; and
  • amounts not specifically allocated to a reportable segment eg corporate expenses, pension costs, exchange differences.

5. Changes to IAS 34 Interim Financial Reporting

An amendment to IAS 34 has been proposed to state that where an entity’s reportable segments have changed in composition, the entity shall disclose that the change has occurred and restate and disclose the segmental information for each previously reported interim period in both the current and previous year. If the information is not available to meet this disclosure requirement, or the cost to prepare the information is excessive, then the information does not need to be disclosed. A statement as to whether or not the information presented for earlier periods has been restated should be disclosed. 

In practice, whilst this change will not alter the information ultimately presented in the interim financial statements, it will mean that the information is presented sooner than it would be currently.

For more information please contact Paul Merris.