IFRS 8 Operating Segments

On 30 November 2006, the International Accounting Standards Board issued IFRS 8
Operating Segments, which replaces IAS 14 Segment Reporting. IFRS 8 is mandatory for annual financial statements for periods beginning on or after 1 January 2009, although earlier application is permitted. Once IFRS 8 is effective, segment reporting under
International Financial Reporting Standards and US Generally Accepted Accounting
Principles will be converged except for some minor differences.

What has changed?

Identifying segments

Upon adoption of IFRS 8, the identification of an entity’s segments may or may not change, depending on how the entity has applied IAS 14 in the past. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the entity, that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. IAS 14 required an entity to identify two sets of segments (business and geographical), using a risks and rewards approach, with the entity’s “system of internal financial reporting to key management personnel” serving only as the starting point for the identification of such segments. One set of segments was regarded as primary and the other as secondary. If under IAS 14 an entity identified its primary segments on the basis of the reports provided to the person whom IFRS 8 regards as the chief operating decision maker, those might become the ‘operating segments’ for the purposes of IFRS 8.

IFRS 8 states that a component of an entity that sells primarily or exclusively to other operating segments of the entity will meet the definition of an operating segment if the entity is managed that way. IAS 14 limited reportable segments to those that earn a majority of their revenue from sales to