Session 9

Question 1

What is the purpose of IFRS 8 Segment Reporting, and how do analysts evaluate firm performance based on it?

Answer 1

Analyst Focus by Industry:

• Banking: Risk management, regulatory compliance
• Retail: Scalability, logistics, customer engagement
• Manufacturing: Efficiency, cost control, supply chain stability

Analysts use segment reporting to understand why performance occurs, not just what happens.

IFRS 8 – Segment Reporting

Purpose: Enhance transparency by requiring firms to disclose data by operating segment

Required Segment Information:

• Products/services
• Geographic areas
• Major customers

Definition & Scope:

• A segment is defined economically, not legally
• Based on internal management structure and decision-making
• May align with divisions or business units but not legal entities
• A division can be a responsibility center covering multiple legal structures

Applicability: Applies to publicly traded firms (equity or debt)

Question 2

What defines an operating segment under IFRS 8, when must it be reported separately, and what are the key disclosure rules?

Answer 2

Definition of Operating Segment (IFRS 8):

• Engages in revenue-earning business activities
• Reviewed regularly by the Chief Operating Decision Maker (CODM)
• Has discrete financial info
• Defined economically, not legally
• CODM = decision-maker (e.g. CEO/Board), not a specific title

Link to Management:

• Segment view must reflect internal decision-making
• Non-revenue units (e.g. treasury) ≠ operating segments

Reportable Segment – 10% Thresholds (any one triggers disclosure):

• Revenue (external + intersegment) ≥ 10% of total
• Profit/loss ≥ 10% of total profit or total loss
• Assets ≥ 10% of total segment assets

Segments may be aggregated if they share similar economic characteristics.

Additional Disclosure Rules:

• If total disclosed segments < 75% of entity revenue → more must be reported
• Remaining segments grouped as “all other segments”
• If >10 reportable segments → aggregation allowed to simplify

Question 3

What general and financial disclosures are required under IFRS 8 Segment Reporting, and how is the segment report prepared?

Answer 3

General Disclosures:

• How reportable segments are identified
• Aggregation criteria (if segments are combined)
• Revenue-generating products/services

Per-Segment Financial Info:

• Profit/loss, assets, liabilities (per CODM basis)
• Revenue/expense breakdown (e.g. internal vs. external)
• Measurement basis (e.g. transfer pricing)
• Must reflect the view of internal management

Steps to Set Up Segment Report:

1. Aggregate managerial divisions into IFRS-compliant segments
2. Eliminate intersegment revenue in “Reconciliations”
3. Adjust for differences with consolidated accounts

Additional Disclosures:

Reconciliations:

• Total segment results must reconcile with consolidated financials
• Labeled “Eliminations and Adjustments”

Entity-Wide Disclosures:

• Products/services
• Geographic split: revenues + assets (home vs. foreign)
• Major customers

Goal of IFRS 8: Align external reporting with internal management view, improving transparency and consistency for investors

Question 4

How does IFRS 8 apply the management approach in segment reporting, and what adjustments are made between managerial and financial accounting?

Answer 4

• Segment metrics (e.g. profit, assets) must reflect those used by the Chief Operating Decision Maker (CODM)
• Adjustments (e.g. intercompany eliminations) only included if used by CODM
• Example: If CODM uses profit before depreciation → depreciation must be added for external consistency
• If multiple CODM metrics exist, report the one closest to consolidated accounts

Adjustments Between Managerial & Financial Accounting:

• Internal (managerial) vs. external (IFRS/GAAP) differences must be reconciled
• Shown in “Eliminations and Adjustments” / “Reconciliations” column

Common Adjustments Include:

• Capitalized R&D or brands (internally only)
• Fair value vs. historical cost
• Revenue timing differences
• Omitted hedge accounting
• Currency translation methods
• Smoothing income volatility in internal reports

Question 5

Why do firms use Non-GAAP metrics, and how do they differ from IFRS/GAAP metrics?

Answer 5

Purpose of Non-GAAP Metrics:

• Reflect internal decision-making (CODM view)
• Reduce adjustments to improve clarity for shareholders
• Often focus on performance by excluding:

1. One-time items
2. FX fluctuations
3. Scope or accounting policy changes

Risks:

• May enable earnings management
• Can overstate performance

Key Distinction:

• IFRS/GAAP: Standardized, for external decision-usefulness
• Non-GAAP: Tailored to internal performance views, less standardized

Standardization expected by 2027

Question 6

Why do analysts value segment reporting, and how does it impact investor trust and cost of capital?

Answer 6

Analyst Uses of Segment Reporting:

• Understand performance drivers across business lines
• Assess risk exposure and profitability by activity/geography
• Check alignment with company strategy
• Benchmark vs. industry peers

Features of High-Quality Segment Reporting:

• Matches internal (CODM) view
• Transparent in assumptions, adjustments, and measurement
• Detailed for valuation models
• Comparable across periods and standards

Impact on Cost of Capital:

• Reduces information asymmetry → builds trust
• Can lower cost of equity/debt if segment risks are clear
• Depends on credibility and usefulness of disclosures

Investor Relations – Best Practices:

• Voluntary detail (e.g., KPIs, margins, ESG targets)
• Forward-looking guidance & scenarios
• Reconciliation clarity between non-GAAP and IFRS
• Communicate with transparency, not just legal compliance