Segmental information is essential for good management as it enables management to monitor performance within its specific business and geographical regions and to decide how best to allocate resources to segments.
The value of segmental information is not only limited to its application as an internal management tool. It also has an important role in external reporting, since by providing segmental information in financial statements, the entity's management can explain to investors and to the market many of the factors that contribute to the results for the year.
The core principle set out in IFRS 8 requires an entity to disclose information that enables users of the financial statements to evaluate the nature and financial effects of the business activities in which the entity engages and the economic environments in which it operates. This should be considered when an entity forms its judgements about how and what information should be disclosed.
IFRS 8 applies to:
Where an entity voluntarily applies this IFRS, the entity must comply with all the requirements in this IFRS. If the entity does not comply with all the requirements, such information cannot be disclosed as segment information.
If a financial report contains both the consolidated financial statements of a parent that is within the scope of this IFRS as well as the parent's separate financial statements, segment information is required only in the consolidated financial statements.
A regulatory requirement to file financial statements does not equate to financial statements linked to the process of issuing instruments to a public market. In such instances, the entity would not be subjected to the disclosure requirements of IFRS 8.
Chief operating decision maker. The term “chief operating decision maker” identifies a function, not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the operating segments of an entity. Often the chief operating decision maker of an entity is its chief executive officer or chief operating officer but, for example, it may be a group of executive directors or others. Deciding who the chief operating decision maker is can be difficult and judgement is needed to ensure that the right person or persons have been identified. Where the board of directors include non-executive directors, it may not be appropriate to classify the board as the chief operating decision maker. This is due to the fact that the non-executive directors are not usually involved in the day-to-day activities of the entity (and therefore the resource allocation decisions); their role is a governance one and not a management one.
Common costs. Operating expenses incurred by the enterprise for the benefit of more than one business segment.
Corporate assets. Assets maintained for general corporate purposes and not used in the operations of any business segment.
General corporate expenses. Expenses incurred for the benefit of the corporation as a whole, which cannot be reasonably allocated to any segment.
Identifiable assets. Those tangible and intangible assets used by a business segment, including those the segment uses exclusively, and an allocated portion of assets used jointly by more than one segment.
Intersegment sales. Transfers of products or services, similar to those sold to unaffiliated customers, between business segments or geographic areas of the entity.
Intrasegment sales. Transfers within a business segment or geographic area.
Operating activities. The principal revenue producing activities of an entity and other activities that are not investing or financing activities.
Operating profit or loss. A business segment's revenue minus all operating expenses, including an allocated portion of common costs.
Operating segment. A component of an entity:
Reportable segment. Operating segments that:
Segment accounting policies. The policies adopted for reporting the consolidated financial statements of the entity, as well as for segment reporting.
Segment assets. Operating assets employed by a segment in operating activities, whether directly attributable or reasonably allocable to the segment; these should exclude those generating revenues or expenses which are excluded from the definitions of segment revenue and segment expense.
Segment expense. Expense that is directly attributable to a segment, or the relevant portion of expense that can be allocated on a reasonable basis to a segment; it excludes interest expense, losses on sales of investments or extinguishment of debt, equity method losses of associates and joint ventures, income taxes and corporate expenses not identified with specific segments.
Segment revenue. Revenue that is directly attributable to a segment, or the relevant portion of revenue that can be allocated on a reasonable basis to a segment, and that is derived from transactions with parties outside the enterprise and from other segments of the same entity; it excludes interest and dividend income, and gains on sales of investments or extinguishment of debt.
Transfer pricing. The pricing of products or services between business segments or geographic areas.
Identification of operating segments within business organisations has grown in complexity over the years, and the conglomerate form of organisation (where unrelated or dissimilar operations are united within one reporting entity, sometimes to provide the overall entity with benefits of counter cyclicality among the constituent operations) has become normal practice, and it consequently has become necessary to concede that financial statements which present the full scope of an entity's operations on an aggregated basis declined markedly in usefulness without further relevant detail.
While it is certainly possible to assess the overall financial health of the reporting entity using such financial reports, it is much more difficult to evaluate management's operating and financial strategies, particularly with regard to its emphasis on specific lines of business or geographic spheres of operation. For example, the extent to which operating results for a given period are the consequence of the development of new products having greater potential for future growth, compared to more mature product lines which nonetheless still account for a majority of the entity's total sales, would tend to be masked in financial statements which did not present results by business segment.
IFRS 8 does not define, but requires an explanation of how segment profit or loss, segment assets and segment liabilities are determined and measured for each reportable segment. This standard also requires general and entity-wide disclosures, including information about products and services, geographical areas, major customers and important factors used to identify an entity's reportable segments.
IFRS 8 establishes how an entity is to report information about its operating segments in annual financial statements. Additionally, due to a consequential amendment made to IAS 34, entities are required to report selected information about their operating segments in interim financial reports, when interim reports are issued. IFRS 8 also sets out requirements for related disclosures about products and services, geographical areas and major customers.
IFRS 8 requires that an entity report financial and descriptive information about its reportable segments. Reportable segments are defined as operating segments or aggregations thereof that meet certain defined criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. This conforms to the objective of putting users in the “shoes of management” in their ability to evaluate management performance.
In the past, there had been debate over the value and validity of disclosing results of operations on a segmental basis. IFRS 8 requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires the reporting entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity's financial statements.
IFRS 8 also generally requires certain informational disclosures apart from any correspondence to information used in making management operating decisions. This includes information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets and about major customers. However, information that is not prepared for internal use need not be reported if the necessary information is not available and the cost to develop it would be excessive.
Descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity's financial statements, and changes in the measurement of segment amounts from period to period must also be provided in the notes to the financial statements. This information is necessary for users to meaningfully interpret the operating segment financial data, including making comparisons to prior periods.
IFRS 8 defines reportable segments as being a subset of operating segments. In other words, there may be certain operating segments that fail to meet the threshold test for being reportable under this standard. Therefore, an entity must first determine its operating segments and then identify which of those operating segments are reportable segments. In order to do this one must have a clear understanding of the definitions of an operating segment as opposed to a reportable segment.
An operating segment is a component of an entity:
Revenue generation is not an absolute threshold test for an operating segment. An operating segment may engage in business activities for which it has yet to earn revenues; for example, start-up operations may be operating segments before earning revenues.
By the same token, not every part of an entity is necessarily an operating segment or part of an operating segment. Thus, a corporate headquarters, as well as certain functional departments, may earn no revenues, or may generate revenues that are merely incidental to the activities of the entity as a whole. These would not be deemed to be operating segments under the definitions set forth under IFRS 8. For the purposes of IFRS 8, an entity's post-employment benefit plans are not operating segments either.
Start-up operations may be operating segments, even where the entity is not yet earning any revenues from its operations.
In situations where all of the segment's revenues and expenses are derived from intra-group transactions, these segments may still qualify as operating segments. Such a situation may occur in a vertically integrated operation. Vertically integrated operations are structures that combine many or all of the production and selling processes within one entity.
For many entities, the three characteristics of operating segments set forth above will serve to clearly identify its operating segments. In other situations, an entity may produce reports in which its business activities are presented in a variety of ways (particularly in so-called “matrix organisation” structures, where there are multiple and overlapping lines of reporting responsibilities). If the chief operating decision maker uses more than one set of segment information, other factors may be necessary to identify a single set of components as constituting an entity's operating segments, including the nature of the business activities of each component, the existence of managers responsible for them, and information presented to the board of directors. Of course, any such decision should be documented, and should be maintained over time, to the extent possible, in order to ensure comparability of disclosures. The chief operating decision maker should review segment definitions to ensure accuracy and consistency.
A discontinued operation can meet the definition of an operating segment, if it continues to engage in business activities, the operating results are regularly reviewed by the CODM and there is discrete financial information available to facilitate the review.
A practical example is where the company has a research and development division as well as a head office. The head office carries out support functions, such as accounting, treasury, information technology, legal, human resource, environmental and internal audit. Generally, the head office would not be considered to be an operating segment as its functions are only incidental to the entity's business. However, the research and development division may meet the definition of an operating segment as its activities may serve as an integral component of the entity's business.
In some instances, it may be difficult to determine the operating segments. Factors to consider when identifying the operating segments include:
The standard notes that the term “chief operating decision maker” does not necessarily refer to a person but rather to a function; the function being the ability to allocate resources to operating segments and assessing their performance.
Care should be taken when determining who the CODM is; generally, a board of directors that consist of both executive and non-executive directors cannot be seen as the CODM as the non-executive directors are not involved in the day-to-day operations, except at a very high level. Non-executive directors' role is generally that of a governance role rather than a management role.
Only reportable segments give rise to the financial statement disclosures set forth by IFRS 8. Reportable segments are operating segments as defined above, or aggregations of two or more such operating segments, that exceed the quantitative thresholds described below.
Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar. Two or more operating segments may optionally be aggregated into a single operating segment if aggregation is consistent with the core principle of IFRS 8, the segments have similar economic characteristics and segments are similar in each of the following respects:
It should be noted that the aggregation criteria are tests and not indicators and that all criteria must be satisfied before operating segments may be aggregated.
The process for determining reportable segments is not straightforward; IFRS 8 has a useful flowchart that can assist in the determination of reportable segments. This flowchart is summarised below:
Once it has been determined which operating segments may be aggregated, any one of the following quantitative thresholds must also be met when identifying reportable segments:
Furthermore, if the total external revenue reported by operating segments constitutes less than 75% of the entity's revenue, additional operating segments must be identified as reportable segments, even if they do not meet the criteria established under IFRS 8, until at least 75% of the entity's revenue is included in reportable segments.
A reporting entity may combine information about more than one operating segment that does not meet the quantitative thresholds to produce a reportable segment only if the operating segments have similar economic characteristics and share a majority of the aggregation criteria set forth above. Thus, a catch-all (“all other segments”) category should not be used, unless truly immaterial. The sources of the revenue included in the all other segments category must be described.
More segments may be optionally defined by management as being reportable, even if the foregoing criteria are not met. Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and separately disclosed, if management believes that information about the segment would be useful to users of the financial statements.
This may be particularly relevant if, for various reasons, an operating segment traditionally meeting the test as a reportable segment falls below each threshold in the current year, but management expects the segment to regain its former prominence within a relatively brief time. To ensure interperiod comparability, it may be maintained as a reportable segment notwithstanding its current diminished significance. If management judges that an operating segment identified as a reportable segment in the immediately preceding periods is of continuing significance, information about that segment must, per IFRS 8, continue to be reported separately in the current period even if it no longer meets the criteria for reportability.
It is important to note that the above is different from the aggregation of segments that may be done prior to the initial determination of reportable segments, where all of the criteria must be satisfied. The distinction between the two stages of aggregation is due to the following:
If an operating segment is identified as a reportable segment in the current period in accordance with the above-stated quantitative thresholds, segment data for a prior period presented for comparative purposes is to be restated to reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the criteria for reportability in the prior period, unless the necessary information is not available and the cost to develop it would be excessive.
The standard notes that there may be a practical limit to the number of reportable segments that an entity separately discloses beyond which segment information may become too detailed (the so-called information overload situation). Although no precise limit has been determined, as the number of segments that are reportable increases above 10, the entity should consider whether a practical limit has been reached. However, there is no absolute requirement to limit the number of segments.
A reporting entity is required 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.
The reporting entity is required to disclose the following for each period for which a statement of comprehensive income is presented:
An entity is to 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.
IFRS 8 dictates that all material reconciling items are to be separately identified and described. For example, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the entity's profit or loss arising from different accounting policies is required to be separately identified and described.
IFRS 8 also mandates that reconciliations of statements of financial position amounts for reportable segments to the entity's statement of financial position amounts be presented for each date at which a statement of financial position is presented. If, as is typical, comparative statements of financial position are presented, information for prior periods is to be presented.
If the reporting entity changes the structure of its internal organisation in a manner that causes the composition of its reportable segments to change, the corresponding information for earlier periods, including interim periods, is to be restated, unless the information is not available and the cost to develop it would be excessive. The determination of whether the information is not available and the cost to develop it would be excessive must be made separately for each individual item of disclosure—thus, a blanket conclusion regarding impracticability would normally not be appropriate. Following a change in the composition of its reportable segments, the entity discloses whether it has restated the corresponding items of segment information for earlier periods.
Furthermore, if the reporting entity has changed the structure of its internal organisation in a manner that causes the composition of its reportable segments to change, and if segment information for earlier periods, including interim periods, is not restated to reflect the change, it must disclose in the year in which the change occurs segment information for the current period on both the old basis and the new basis of segmentation, unless the necessary information is not available and the cost to develop it would be excessive. This requirement is expected to discourage frequent changes in structure affecting segment reporting.
IFRS 8 also mandates disclosures of certain entity-wide data. These disclosures are required regardless of whether the entity has multiple reportable segment disclosures to be made under this standard. These disclosures need not be provided, if already part of the reportable segment disclosures.
The amounts reported are to be based on the financial information that is used to produce the entity's financial statements. If the necessary information is not available and the cost to develop it would be excessive, that fact shall be disclosed. An entity may provide, in addition to the information required by this paragraph, subtotals of geographical information about groups of countries.
Roche Group
Annual report 201X
Notes to the Consolidated Financial Statements
Summary of significant accounting policies
6. Segment information
Management has determined the operating segments based on the reports regularly reviewed by the chief operating decision maker (“CODM”) in making strategic decisions. Each operating segment is managed separately by a dedicated Chief Executive Officer and management team allowing management to maintain and develop the specific identity of each Maison. These operating segments have been aggregated into four reportable segments as follows:
The entire product range of a particular Maison, which may include jewelry, watches, writing instruments and leather goods, is reflected in the sales and operating result for that segment. The non-separable costs of operating multibrand regional platforms are allocated to individual operating segments using allocation keys most relevant to the nature of the expense being allocated. Unallocated corporate costs represent the costs of the Group's corporate operations which are not attributed to the segments. Performance measurement is based on segment contribution before corporate costs, interest and tax, as management believes that such information is most relevant in evaluating the results of segments relative to other entities that operate within similar markets. Intersegment transactions between different fiscal entities are transacted at prices that reflect the risk and rewards transferred and are entered into under normal commercial terms and conditions. Intersegment transactions within the same fiscal entity are transacted at cost. All such transactions are eliminated in the reports reviewed by the CODM.
The segment results for the years ended March 31 are as follows:
201X | 201X-1 | |
€m | €m | |
External sales | ||
Jewelry Maisons | 4,590 | 3,479 |
Specialist Watchmakers | 2,323 | 1,774 |
Montblanc Maison | 723 | 672 |
Other | 1,231 | 967 |
8,867 | 6,892 | |
Operating result | ||
Jewelry Maisons | 1,510 | 1,062 |
Specialist Watchmakers | 539 | 379 |
Montblanc Maison | 119 | 109 |
Other | (35) | (34) |
Operating profit from reportable segments | 2,133 | 1,516 |
Unallocated corporate costs | (93) | (161) |
Consolidated operating profit before finance and tax | 2,040 | 1,355 |
Finance costs | (314) | (292) |
Finance income | 79 | 111 |
Share of post-tax results of associated undertakings | (1) | 101 |
Profit before taxation | 1,804 | 1,275 |
Taxation | (264) | (196) |
Profit for the year | 1,540 | 1,079 |
An impairment charge of €2 million is included within the Other reportable segment for 201X (201X-1: €1 million included within each of the Jewelry Maisons and the Other reportable segment). The segment assets which are reviewed by the CODM comprise inventories and trade debtors.
201X | 201X-1 | |
€m | €m | |
Segment assets | ||
Jewelry Maisons | 2,149 | 1,590 |
Specialist Watchmakers | 1,219 | 956 |
Montblanc Maison | 357 | 307 |
Other | 417 | 328 |
4,142 | 3,181 | |
Total assets for reportable segments | 4,142 | 3,181 |
Property, plant and equipment | 1,529 | 1,267 |
Goodwill | 479 | 441 |
Other intangible assets | 316 | 314 |
Investment property | 64 | – |
Investments in associated undertakings | 10 | 7 |
Deferred income tax assets | 443 | 349 |
Financial assets at fair value through profit or loss | 2,469 | 2,224 |
Other non-current assets | 248 | 211 |
Other receivables | 274 | 205 |
201X | 201X-1 | |
€m | €m | |
Derivative financial instruments | 27 | 148 |
Prepayments | 116 | 119 |
Cash at bank and on hand | 1,636 | 1,227 |
Total assets | 11,753 | 9,693 |
The CODM also reviews additions to property, plant and equipment, and other intangible assets as follows:
201X | 201X-1 | |
€m | €m | |
Additions to non-current assets: | ||
Property, plant and equipment, and other intangible assets | ||
Jewelry Maisons | 185 | 125 |
Specialist Watchmakers | 119 | 65 |
Montblanc Maison | 31 | 24 |
Other | 101 | 60 |
Unallocated | 81 | 34 |
517 | 308 |
Each reporting segment operates on a worldwide basis. External sales presented in the three main geographical areas where the Group's reportable segments operate are as follows:
201X | 201X-1 | |
€m | €m | |
Europe | 3,097 | 2,588 |
France | 669 | 551 |
Switzerland | 347 | 303 |
Germany, Italy and Spain | 670 | 606 |
Other Europe | 1,411 | 1,128 |
Asia | 4,517 | 3,306 |
China/Hong Kong | 2,412 | 1,645 |
Japan | 833 | 737 |
Other Asia | 1,272 | 924 |
Americas | 1,253 | 998 |
USA | 973 | 758 |
Other Americas | 280 | 240 |
8,867 | 6,892 |
Sales are allocated based on the location of the wholesale customer, the boutique or the shipping address for online transactions. The total non-current assets other than financial instruments and deferred tax assets located in Switzerland, the Company's domicile, and the rest of the world are as follows:
201X | 201X-1 | |
€m | €m | |
Switzerland | 1,217 | 1,056 |
Rest of the world | 1,331 | 1,104 |
2,548 | 2,160 |
Segment assets are allocated based on where the assets are located.
External sales by product are as follows:
201X | 201X-1 | |
€m | €m | |
Watches | 4,404 | 3,320 |
Jewelry | 2,248 | 1,685 |
Leather goods | 721 | 602 |
Writing instruments | 357 | 359 |
Clothing and other | 1,137 | 926 |
8,867 | 6,892 |
Sales to no single customer represented more than 10% of total revenue. Given the local nature of the luxury goods wholesale and retail businesses, there are no major customer relationships.
Hays plc
Financial Year 201X
1. Segmental Information
Adoption of IFRS 8, Operating Segments
The Group has adopted IFRS 8, Operating Segments, with effect from 1 July 2009. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to segments and to assess their performance.
As a result, the Group continues to segment the business into three regions, Asia Pacific, Continental Europe & Rest of World, and United Kingdom & Ireland.
The Group's continuing operations comprise one class of business, that of qualified, professional and skilled recruitment.
Net fees and operating profit from continuing operations
The Group's Management Board, which is regarded as the chief operating decision maker, uses net fees by segment as its measure of revenue in internal reports. This is because net fees exclude the remuneration of temporary workers, and payments to other recruitment agencies where the Group acts as principal, which are not considered relevant in allocating resources to segments. The Group's Management Board considers net fees for the purpose of making decisions about allocating resources. The reconciliation of turnover to net fees can be found in note 6.
(In € million) | 201X | 201X-1 |
Net fees from continuing operations | ||
Asia Pacific | 242.2 | 210.0 |
Continental Europe & Rest of World | 266.5 | 220.4 |
United Kingdom & Ireland | 225.3 | 241.7 |
734.0 | 672.1 |
(In € million) | 201X | 201X-1 Before exceptional items |
201X-1 Exceptional items |
201X-1 |
Operating profit from continuing operations | ||||
Asia Pacific | 90.9 | 78.1 | – | 78.1 |
Continental Europe & Rest of World | 43.7 | 32.4 | – | 32.4 |
United Kingdom & Ireland | (6.5) | 3.6 | 4.1 | 7.7 |
128.1 | 114.1 | 4.1 | 118.2 |
The Group does not report items below operating profit by segment in its internal management reporting. The full detail of these items can be seen in the Group Consolidated Income Statement on page 67.
There is no material difference between the segmentation of the Group's turnover by geographic origin and destination.
For the purpose of monitoring performance and allocating resources from a balance sheet perspective, the Group's Management Board monitors trade receivables net of provisions for impairments only on a segment by segment basis. These are monitored on a constant currency basis for comparability through the year. These are shown below and reconciled to the totals as shown in note 18.
(In € million) | As reported internally |
Foreign exchange |
201X | As reported internally |
Foreign exchange |
201X-1 |
Net trade receivables | ||||||
Asia Pacific | 76.1 | (1.7) | 74.4 | 59.9 | 9.9 | 69.8 |
Continental Europe & Rest of World | 157.3 | (17.4) | 139.9 | 104.7 | 10.6 | 115.3 |
United Kingdom & Ireland | 137.7 | (0.6) | 137.1 | 160.0 | 0.5 | 160.5 |
371.1 | (19.7) | 351.4 | 324.6 | 21.0 | 345.6 |
Included in turnover is an amount of approximately €587 million (201X-1: €540 million) which arose from sales to the Group's largest customer, which were generated within the United Kingdom & Ireland. This is the only customer to exceed 10% of the Group's turnover, however as it includes a significant element of remuneration of temporary workers and remuneration of other recruitment agencies, it represents less than 2% of the Group's net fees.
The IASB and FASB converged their segment reporting guidance in 2009. Consequently, the standards are nearly identical, with the following exceptions: