IAS 14 Segment Reporting was replaced by IFRS 8 Operating Segments with effect from annual periods beginning on or after 1 January 2009. There are some theoretical differences between these two standards. However, the main differences between IAS 14 and IFRS 8 are given in below under seven highlighted points.
1: Basis For Identification Of Segments
Segments are identified based on the predominant sources of risks and returns. This may result in either a business or geographic basis for segment identification. Where this does not coincide with the basis on which the entity reports internally to senior management, the internally reported segment information is not used as the basis for external financial reporting. Rather, the internally reported information must be rearranged to meet the requirements of IAS 14.
Segments (called operating segments) must be determined based on the way information is reported internally to the chief operating decision maker (CODM). This may not coincide with the way information is reported externally and therefore may not agree with the entity’s statement of profit or loss and other comprehensive income and statement of financial position. Where this is the case, IFRS 8 requires reconciliations to be provided between the segment information (which will usually be in a note to the financial statements) and the statement of profit or loss and other comprehensive income and statement of financial position (IFRS 8 paragraph 28). Commentators on ED 8 were concerned that comparability between different companies is likely to be reduced as a result of the focus on internal reporting of IFRS 8 versus the focus on sources of risks and rewards of IAS 14. The reconciliation requirements in IFRS 8 are expected to counter some of the potential lack of comparability between segment reporting of different entities.
2: Primary and secondary segments
IAS 14 requires an entity to identify primary and secondary segments where IFRS 8 does not refer to primary or secondary segments.
3: Revenues from third parties as the basis for identifying reportable segments
IAS 14 requires that a business or geographical segment be identified as a reportable segment if a majority of its revenue is earned from sales to external customers and certain other conditions are met.
IFRS 8 does not distinguish between revenues and expenses from transactions with third parties and those from transactions within the group for the purposes of identifying operating segments. Therefore, in an entity with internal vertically integrated businesses, it is possible that such internal businesses might be identified as operating segments under IFRS 8. Under IAS 14, such internal businesses would not qualify as reportable segments.
4: Definitions of information to be reported for each reportable segment
IAS 14 defines ‘segment revenue’, ‘segment expense’, ‘segment result’, ‘segment assets’ and ‘segment liabilities’. This ensures consistency in the determination of amounts that are disclosed by different companies.
IFRS 8 requires disclosure of ‘a measure’ of profit or loss and total assets and ‘a measure’ of liabilities for each reportable segment if such amounts are regularly provided to the CODM. These amounts are not defined in IFRS 8. Thus, different judgments will likely be made by different entities based on what and how information is internally reported, potentially reducing comparability between entities. To counter this concern, IFRS 8 requires entities to explain how they measure segment profit or loss, segment assets and segment liabilities for each reportable segment.
5: Conformity with the entity’s accounting policies for preparing its financial statements
IAS 14 requires that segment information be prepared in conformity with the entity’s accounting policies for preparing and presenting its financial statements.
IFRS 8 requires that the amount of each segment item reported shall be the measure reported to the CODM for the purposes of making decisions about allocating resources to the segment and assessing its performance, even if this information is not prepared in accordance with the entity’s IFRS accounting policies. The reconciliations required by paragraph 28 are designed to allow users to assess the differences between management’s determination of segment measures and the accounting policies used in the financial statements. Note, however, that this is only required on an overall basis, not on a segment-by-segment basis.
IAS 14 specifies the disclosures required for each reportable segment. Therefore, all entities are required to report the same line items for each of their reportable segments.
IFRS 8 requires that ‘a measure’ of segment profit or loss be disclosed for each reportable segment. Other items, such as total assets, liabilities, interest revenue, interest expense, depreciation and amortization, revenues from external customers, inter-segment revenue and so on, are only required to be disclosed if they are provided to the CODM for that reportable segment. Therefore, the line items reported for each reportable segment will likely differ, not only between companies, but also within companies.
7: Reliance on major customers
IAS 14 requires disclosure of revenue from external customers but not about reliance on major customers.
IFRS 8 requires that, if revenues from transactions with a single external customer amount to 10% or more of the entity’s revenues, certain information be disclosed about the entity’s reliance on that single customer.