Introduction to Segment Reporting
Companies are often involved in a number of different industries or business activities. They often expand and diversify their operations across geographical areas.
As a result of this, their group is exposed to different rates of return, growth opportunities and risk for each ‘segment’ of their business.
Investors want information that highlights the performance of the various components of the organization.
This is where IFRS 8 Operating Segments steps in.
IFRS 8 specifies how an entity should report information about its operating segments.
It is based on the underlying principle that an entity should disclose information to allow users of the financial statements evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
Application
IFRS 8 applies to the financial statements of an entity or the consolidated financial statements of a group whose parent:
- Has debt or equity instruments traded in a public market (i.e. stock exchange), or
- Is in the process of listing its debt or equity on a stock exchange.
So if the parent company is a public company with quoted shares listed on a stock market, or is in the process of going public, it should provide details of its operating segments under IFRS 8.
Consolidated v Parent
If the parent company provides consolidated and separate financial statements, only the consolidated statements need to contain segment information.
Why report by segment?
IFRS 8 seeks to establish principles for reporting financial information in each operating segment to allow users of the financial statements:
- Better understand the entity’s financial position and performance
- Predict the future financial performance of the entity
- Better assess the entity’s risks and returns using ratio analysis and identifying trends, and
- Make better judgments about the entity as a whole.
Segmented information provides more information than aggregated information.
If no segmented information was provided, an underperforming segment could be hidden by the results in a successful segment.
Each segment will have its own risks and operating environment.
For example:
- Government influence
- Technological changes
- Foreign exchange influence
- Competition
By providing segmented information, a user of the financial statements can get a better understanding of the entity’s financial position and performance, and compare it to other entities.