A high-quality set of management accounts is essential for entities operating in various business classes, geographies, regulatory or economic environments or markets. Business and market strategies can be devised using these metrics. According to IFRS 8 ‘Operating Segments,’ a substantial amount of a public listed entity’s management information must be released to the public for financial analysts, investors and other users to be able to examine its operations as it does.
Aims of IFRS 8
The core principle of IFRS 8 sets out its objective. Users of an entity’s financial statements should evaluate the nature and financial effects of the business activities in which they engage and the economic environment they operate in by disclosing relevant information.
Operating segments are determined according to an organization’s structure and how management receives information. Information to be disclosed under IFRS 8 is not measured. Information presented to management determines a lot of the amounts declared. Alternatively, this is referred to as observing things through management’s eyes.
The management approach
Management approaches were adopted by the IASB because:
Users can see how the entity is structured to reflect the risks and opportunities management believes are important, and there is consistency between what is reported to them and what is reported internally to management
Users can more accurately predict the actions and reactions of management that will affect future cash flow prospects when segment information is consistent with data reported elsewhere in the annual report, such as management commentary. Based on information already provided to management, segment information has a lower incremental cost.
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Scope of IFRS 8
FRS 8 only requires disclosures from entities that fall within its scope. Nevertheless, other entities may require the identification of operating segments following IFRS 8 to comply with different standards.
Identifying entities within IFRS 8’s scope
Entities preparing financial statements are subject to IFRS 8
Stocks or bonds that are publicly traded
Securities commissions or other regulatory organizations that file or are in the process of filing financial statements regarding the issuance of any instrument in the public market. The same applies to consolidated financial statements of a group with a parent company and separate financial statements of a specific company.
According to IFRS 8, a ‘public’ market includes over-the-counter markets. It also states that IFRS 8 does not apply to parent entities that do not have publicly traded securities, even if they invest in another entity that has issued listed securities. According to IFRS 8, segment information is only required in the consolidated financial statements of a parent company covered by IFRS 8.
The segment information may be disclosed by entities outside the mandatory scope of IFRS 8. The entity must not refer to this information as segment information if it reveals segments that do not comply fully with IFRS 8. The disclosures should have a different heading.
IFRS 8 impacts entities in and outside the scope of the standard
The guidance states that even though entities outside of the scope of IFRS 8 are not subject to its disclosure requirements, they must still identify operating segments to allocate goodwill or mineral exploration and evaluation assets to cash-generating units (CGUs) or groups of CGUs.
IFRS 8 describes how segments are identified or identified per other standards. Certain entities covered by IFRS 8 may not need additional disclosures relating to elements. Components are also included in different standards in certain situations, even for entities outside IFRS 8.
As part of a future article, we will look at the interaction between IFRS 8 and other standards and the additional requirements of other IFRS for entities covered by IFRS 8.
The information in this article may be helpful to you to gain a better understanding of IFRS 8. Any questions related to this post can be addressed via your Audit Firms in Dubai contact.
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Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.