Revisiting segment disclosures: Key takeaways from IFRIC’s clarification

Revisiting segment disclosures: Key takeaways from IFRIC’s clarification

IFRS 8 Operating Segments (and its equivalent under Ind AS, viz., Ind AS 108 Operating Segments) requires an entity to disclose specific information about assets, liabilities and profit or loss by segment. Ind AS 108 paragraph 23 requires an entity to disclose certain specified items of profit or loss for each segment. It also requires disclosure of material items of income and expense for each segment. The standard requires such disclosure if (a) these are included in the measure of segment profit or loss reviewed by the chief operating decision maker (CODM), or (b) are otherwise regularly provided to the CODM, even if not include in the measure of segment profit or loss.

Paragraph 23 of IFRS 8 requires the following disclosures:

“An entity shall report a measure of profit or loss for each reportable segment. An entity shall report a measure of total assets and liabilities for each reportable segment if such amounts are regularly provided to the chief operating decision maker. An entity shall also disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the chief operating decision maker, or are otherwise regularly provided to the chief operating decision maker, even if not included in that measure of segment profit or loss:

• Revenues from external customers
• Revenues from transactions with other operating segments of the same entity
• Interest revenue
• Interest expense
• Depreciation and amortization
• Material items of income and expense disclosed in accordance with paragraph 97 of IAS 1 Presentation of Financial Statements
• The entity’s interest in the profit or loss of associates and joint ventures accounted for by the equity method
• Income tax expense or income and
• Material non-cash items other than depreciation and amortization

An entity shall report interest revenue separately from interest expense for each reportable segment unless a majority of the segment’s revenues are from interest and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segment and make decisions about resources to be allocated to the segment. In that situation, an entity may report that segment’s interest revenue net of its interest expense and disclose that it has done so.”

In July 2024, the IFRS Interpretations Committee (IFRIC) agenda decision clarified on two key issues relating to segment disclosures required under the above paragraph of IFRS 8. Two key questions were posed to the IFRIC in this regard:

• Whether an entity is required to disclose items as stated in paragraph 23 that are not separately reviewed by the CODM but that are included in the CODM’s measure of segment profit?
• How should an entity decide material items requiring to be disclosed under paragraph 23(f) of IFRS 8, which in turn refers to paragraph 97 of IAS 1?

With regard to the first issue, the IFRIC reiterated/ clarified that paragraph 23 of IFRS 8 requires an entity to report a measure of profit or loss for each reportable segment and to disclose specified amounts for each reportable segment. Paragraph 23 requires an entity to disclose the specified amounts for each reportable segment when those amounts are:

• Included in the measure of segment profit or loss reviewed by the CODM, even if they are not separately provided to or reviewed by the CODM
• Regularly provided to the CODM, even if they are not included in the measure of segment profit or loss

Consider following examples:

• An entity has three reportable segments, and it reports profit before tax as segment result for each segment of the CODM. In this case, segment wise depreciation/ amortization, interest expense and interest revenue are included in the measure of segment profit or loss reviewed by the CODM. Hence, the entity should disclose break up of segment wise depreciation/ amortization, interest expense and interest revenue in the segment information. This is despite the fact that segment wise depreciation/ amortization, interest expense and interest revenue is not otherwise reviewed by the CODM.
• An entity has three reportable segments, and it reports Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) as segment result for each segment of the CODM. In this case, segment wise depreciation/ amortization, interest expense and interest revenue are not included in the measure of segment profit or loss reviewed by the CODM. However, the entity otherwise provides segment wise depreciation/ amortization, interest expense and interest revenue to the CODM, and these measures are otherwise reviewed by the CODM. In this case also, the entity should disclose break up of segment wise depreciation/ amortization, interest expense and interest revenue, in the segment information.

With regard to the second issue, the IFRIC clarified that to identify material items of income and expense requiring disclosure in accordance paragraph 23(f) of IFRS 8, read with paragraph 97 of IAS 1, an entity:

• Applies paragraph 7 of IAS 1 and assesses whether information about an item of income and expense is material in the context of its financial statements taken as a whole
• Applies the requirements in paragraphs 30–31 of IAS 1 in considering how to aggregate information in its financial statements
• Considers the nature or magnitude of information—in other words, qualitative or quantitative factors—or both, in assessing whether information about an item of income and expense is material
• Considers circumstances including, but not limited to, those in paragraph 98 of IAS 1

The Committee further observed that paragraph 23(f) of IFRS 8 does not require an entity to disclose by a reportable segment each item of income and expense presented in its statement of profit or loss or disclosed in the notes. In determining information to disclose for each reportable segment, an entity applies judgement and considers the core principle of IFRS 8 – which requires an entity to disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

How we see it

We believe that IFRIC Agenda Decision will require entities to review presentation/ disclosure of segment information, particularly segment wise break-up of income and expense. In the past, some entities may have interpreted the requirement to disclose material income and expense items (if they were included within the measure of segment profit or loss) to only relate to exceptional or non-recurring items, such as material restructurings. It is obvious that such entities will need to revisit their segment information and may need to disclose segment wise break-up for more items of income of expense, if the specified amounts are included in the measure of segment profit or loss reviewed by the CODM, or are otherwise regularly provided to the CODM, even if not included in that measure of segment profit or loss.

The identification and determination of what is material to the financial statements (both quantitatively and qualitatively) has always been a highly judgemental area, and the segment note is no exception. Refer below scenarios on how entities may exercise such judgment.

Scenario 1: Segment disclosure for retail company

ABC Limited is a retail company having operations in various parts of the world. It discloses segment information by four geographical regions. It reports profit before tax as a segment result to the CODM. In arriving at profit before tax, the cost of goods sold is included as one major expense line item, and it is also the largest expense in the statement of profit and loss. Determination of profit before tax also includes depreciation/ amortization as well interest expense primarily for retail premises taken on lease. ABC did not have other expense items included in the profit before tax measure that were considered being material. In its financial statements for the year ended 31 March 2024, the cost of goods sold, depreciation/ amortization and interest expense were not reported by segment.

Issue

Should ABC report the cost of goods sold, depreciation/ amortization and interest expense by segment in its financial statements for the year ended 31 March 2025?

Response

Post IFRIC Agenda Decision, it appears likely that ABC will need to disclose cost of goods sold, depreciation/ amortization and interest expense by segment in the segment note for the year ended 31 March 2025 financial statements, for below reasons:

• As the single largest expense and key cost driver for ABC, providing the cost of goods sold information by segment would be expected to influence the decisions of financial statement users. Thus, this expense is material in the context of the financial statements as a whole.
• Paragraph 23 of IFRS 8 requires segment wise disclosure for depreciation/ amortization and interest expense.
• Segment wise cost of goods sold, depreciation/ amortization and interest expense are included in the measure of segment profit or loss reviewed by the CODM.

Scenario 2: A service company with significant employee costs

MNO Limited is a service company having operations in various parts of the world. It discloses segment information by four geographical regions. It reports EBITDA as segment result to the CODM. MNO has significant employee costs which are presented separately on the face of the statement of profit and loss. MNO did not have other expense items included in EBITDA that were considered to be material. The measurement of EBITDA does not include items such as depreciation/ amortization, interest expense and interest income. Nor segment wise break of these items is otherwise reviewed by the CODM. In its financial statements for the year ended 31 March 2024, MNO did not report segment wise employee costs.

Issue

Should MNO report disaggregated employee costs by segment in the segment note in its financial statements for the year ended 31 March 2025?

Response

We believe that IFRIC Agenda Decision will require MNO to disclose segment-wise break-up for employee costs in the segment note of its financial statements for the year ended 31 March 2025. This view can be supported by the below key reasons:

• Employee costs are material expense for MNO. It is expected that the information by segment will influence the decisions of the financial statement users.
• The magnitude of the item (both quantitatively and qualitatively) supports the conclusion that the employee cost expense line item is material in the context of the financial statements as a whole.

One may argue that components of the employee costs (for example, salaries, bonus, share-based payments and post employment benefits) can be aggregated as the nature of expense is similar and this disaggregated information is not material from a segment reporting perspective.

Segment wise depreciation/ amortization, interest expense and interest income are neither included in the measure of segment profit or loss reviewed by the CODM nor these are otherwise provided to or reviewed by the CODM. Hence, there is no need to disclose segment wise break-up of depreciation/ amortization, interest expense and interest income.

Impact on comparatives

Agenda decisions issued by the IFRS Interpretations Committee form an important source of guidance. The IFRIC has decided not to amend the standard as it is believed that the position is already clear from the IFRS Accounting Standards. Thus, relevant agenda decisions should be carefully considered and compliance ensured when selecting a suitable accounting policy for a transaction.

Agenda decisions, in many cases, include explanatory material. Explanatory material may provide additional insights that might change an entity’s understanding of the principles and requirements in IFRS Accounting Standards. Because of this, an entity might determine that it needs to change an accounting policy as a result of an agenda decision that has been published and when that change should be made. Changes in accounting policies as a result of agenda decisions are generally voluntary changes in accounting policies, unless an entity determines it relates to a correction of an error. Voluntary changes in accounting policies are applied retrospectively, except to the extent that it is impracticable. Impracticability is a very high threshold under IAS 8/ Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors and we expect that it is only in limited circumstances that it will be impracticable to apply a voluntary change in accounting policy retrospectively.

Generally, changes applied in response to an agenda decision result in voluntary accounting policy change in accordance with Ind AS 8 and need to be applied retrospectively.

There is no fixed time limit to apply IFRIC Agenda Decisions and entities are generally expected to apply the same as soon as possible and within a reasonable time. Entities will need to apply judgement to determine what sufficient time is in this context. We expect that, in most cases, sufficient time would only be a matter of months, but it is highly unlikely that it could extend for more than a year. Entities should also consider the views of regulators.

When management has concluded that a change in an accounting policy is required as a result of an agenda decision but that change has not been made yet, they should consider providing disclosures similar to those provided about forthcoming standards in accordance with paragraphs 30 and 31 of Ind AS 8.

We believe that IFRIC Agenda Decision only clarifies the requirements which are already existing in IFRS Accounting Standards as well as Ind ASs. Hence, it will also apply under Ind AS.

Conclusion

The IFRIC agenda decision reinforces the need for greater transparency and consistency in segment reporting, which is vital for providing stakeholders with a clearer understanding of an entity’s financial performance. The clarity provided by the Agenda Decision is expected to help entities eliminate ambiguity and ensure that material income and expense items are consistently disclosed.